L 700.3 161a 2008 c.1
.sloners of the Land Office
INTERNAL AUDIT REPORT
Oil & Gas Lease Sale
The purpose of this audit was to evaluate the effectiveness of the internal controls and
procedures for the sale of oil and gas leases and the accuracy and adequacy of accounting
records and reports. The audit also evaluated compliance with the requirements pertain-ing
to these sales, Oklahoma State Statute 64, and procedures of the Commissioners of
the Land Office's "Rules and Regulations Governing the Sale and Operation of Oil & Gas
The scope of the audit covered the oil and gas mining lease sales for the last year ending
with the January 16, 2008 auction. There were six auctions during this period. The audi-tor
observed the activities and procedures during the oil and gas lease sale on January 16,
2008. The CLO leased 139 tracts, 8,423 net acres, by sealed bids in its January 16, 2008
sales for a total of $5,402,897.13 in bonuses and delayed rentals. Details of the account-ing
and lease records covering the sale of oil and gas leases on January 16, 2008 were
examined and the audit was expanded to the prior five auctions and the March 26, 2008
The Minerals Management Division (MMD) conducts oil and gas mining lease sales by
sealed bids every other month. They are responsible for leasing and managing approxi-mately
1,108,202 mineral acres scattered throughout the state of Oklahoma in 74 of the
77 counties, for the state school trusts. As of the date of this audit, 499,291 net acres are
leased, equaling forty-five percent of the total acreage owned by the Commissioner of the
Land Office (CLO). Presently, MMD is managing 6,415 leases with approximately
5,112 oil and gas wells on the leases. This includes approximately 1,180 unitized wells
in secondary recovery (waterfloods).
The CLO leased 1,088 tracts, 54,859 net acres, by sealed bids in 2007 and received
$42,910,662.75 in bonuses and delay rentals. The CLO has leased a total of302 tracts,
26,502 net acres, by sealed bids through May 2008, for this calendar year, and has re-ceived
$20,829,535 in bonuses and delay rentals.
When someone wants to lease the CLO's oil and gas minerals, they request a mineral
tract to be advertised for bids. The CLO determines whether the tract or a portion of the
mineral estate (formation) is leased. If the tract or formation is not leased, it is placed on
the "Notice of Oil and Gas Lease Sale by Sealed Bids" and mailed to subscribers and
posted on the CLO's website. It is also advertised thirty days prior to the auction in two
newspapers as required by Oklahoma Statute. The sealed bids are accepted and opened
at the CLO in the presence of bidders at 11:00 a.m. on the day of the sale. After all bids
are recorded, a "Tabulation of Bids for the Oil and Gas Lease Sale" showing all the bid-ders
and the amount of their bid for the tract is posted on the CLO web page. A hard
copy is also mailed to subscribers immediately after the sale. The Director of Minerals
Management, Dave Shipman, evaluates and appraises each tract for fair market value.
He then makes recommendations for acceptance or rejection of each bid to the Secretary
of the CLO, who awards the leases to winning bidders. Once the Secretary awards the
leases and they are ratified by the Commissioners, an "Awards of Oil and Gas Mining
Lease Sale" showing the name of the bidders who were awarded a lease is posted on the
CLO's web page and a copy is mailed to anyone requesting it.
SUMMARY OF FINDINGS, RECOMMENDATIONS & CORRECTIVE ACTION
The review found the CLO's oil and gas lease sale activities are in compliance with the
Oklahoma State Statutes and the Commissioners of the Land Office's "Rules and Regula-tions
Governing the Sale and Operation of Oil & Gas Leases." The review revealed that
the accounting and lease records are accurate and the internal controls and procedures are
effective and efficient, except for the following:
1. Lack of Control over Amount of Lease Bonus Mandatory Deposit.
When the bidder prepares a sealed bid they write the bonus amount on the sealed bid and
calculate 25% of the bonus bid as a deposit and records the amount on the bid form. The
sealed bid is submitted to the CLO with a check for the 25% required deposit. The CLO
opens the bids and records the bonus amount and sends the winning bidder's 25% deposit
check to the cashier. The Minerals Management Division and Cashier accept the deposit,
as 25% of the bonus, without verifying that the deposited amount is calculated and paid
correctly. An examination of all deposits for the past year, six auctions, revealed all the
deposits were for the correct amount.
Risk: Incorrect payment of 25% deposit and the possibility of loss of revenue.
For control, the Information Systems Division has installed a program that compares the
25% of the accepted bid to the 25% deposit to verify the amount is correct and generates
a report "Sale Payment Report After 25% Entry" to show any differences.
2. Lack of Accounting Control over Remaining Amount of Lease Bonus Payment.
The winning bidder is invoiced for advertising costs, delay rentals and the remaining 75%
of the bonus. The invoice does not show the total amount of the bonus and the initial
25% down payment. The invoice shows the amount of the delay rental, advertising cost
and the balance of the bonus. The "balance of bonus" on the invoice is calculated by
multiplying the total bonus by 75%. Therefore, the 25% deposited is not subtracted from
the total amount of the bid to get the amount due on the invoice.
The Accounting Division accounts only for the "balance of the bonus" on the invoice
when they receive a check. If Accounting Division does not receive a check they do not
account for the "balance of the bonus." There is no accounts receivable report for the to-tal
bonus, plus expenses, less the deposit and payments.
An examination of the total amount received for the balance of the bonus was found to be
correct for the past year.
Risk: Incorrect invoicing, payment and financial reporting, and loss of revenue.
The Information Systems Division has installed a "Sales Payment Total Received" report
that accounts the balance due for financial control of the mineral lease auction bonuses.
3. Advertising Cost Calculated Incorrectly
Examinations of the newspaper advertising costs for the last six auctions were examined.
The advertising costs for the auctions in 2007 were invoiced correctly until the November
7,2007 auction. The examination showed something happened to the computer program
for calculating advertising costs from the November 7 auction that caused a problem of
incorrect invoicing. In the November auction, lessees were invoiced $16.28 above CLO's
advertising costs. Again, in the January 16, 2008 auction, $538.80 in CLO's advertising
costs were not invoiced to the Lessees.
Risk: Incorrect invoicing causing loss offunds.
The Information Systems Division Programmer said this part of the minerals program has
been corrected to produce the proper advertising costs. A review of the March 26, 2008
auction confirmed the program was working correctly.
4. Reports Not Correct.
a. "Total Bonus by Fiscal Year" report, June 30th through June 30th is the same as
"Total Bonus by Calendar Year" Report, which reports January through Decem-ber.
b. "Total Advertisement Cost - By County" report shows advertising costs to be
$2,944.60, which is $10.80 over actual cost.
Risk: Incorrect financial reporting.
Information Systems Division Programmer said this part of the minerals program has
been corrected. A review of recent reports verified the reports are correct.
5. Bonus Payments Separately Posted to Two Data Bases
The review of the procedures revealed that the Accounting Division posts the receipts
from bonuses to the accounting. data base and forwards a copy of the receipt notice con-taining
the information to the Minerals Management Division, who then posts the receipt
to the minerals data base (separate from the accounting data base).
Problem: Duplication of work.
The Information Systems Division Programmer said he would link the accounting data
base to mineral data base so when Accounting posts to their data base it is automatically
posted to Mineral's data base.
!f.1;G,Wr Ro E. Coope ~ A
Chief Internal Auditor
Brad Henry, Governor
Jari Askins, Lt. Governor
Sandy Garrett, State Superintendent of Public Instruction
Terry Peach, President of State Board of Agriculture
Clifton H. Scott, Secretary
John C. Rahhal, Business Manager / Assistant Secretary
Dave Shipman, Minerals Management Division Director
Brian Heanue, Accounting Division Director
Trey Ramsey, Information System Network Administrator
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