The costs of an outside audit of a proposed Exhibit to a company’s annual report disclosing payments to governments related to the commercial development of oil, natural gas, or minerals would outweigh the benefits, in the view of Ernst & Young. In a letter commenting on the SEC’s proposal to implement this disclosure requirement of the Dodd-Frank Act, E&Y said that significant effort would be required to audit the Exhibit, regardless of whether the information is disclosed on a cash or accrual basis since auditors would not be able to rely on the procedures performed in auditing the financial statement. The firm also noted that Dodd-Frank does not require the audit of such information.
Section 1504 of Dodd-Frank directs the SEC to issue rules requiring all resource extraction issuers to provide a report annually disclosing payments made to the U.S. or a foreign government related to the commercial development of oil, natural gas, or minerals. The SEC proposes to require issuers to "furnish" that report, rather than "file" it with the Commission. This wording is critical because furnished reports do not have to meet the same high standards as filed reports, and their disclosure obligations can be enforced only by the SEC rather than by a private right of action.
While E&Y fundamentally believes that independent assurance would add value by increasing reliability and enhancing public confidence in the completeness and accuracy of the information in the Exhibit, the firm is concerned that the cost and time required to obtain such assurance might outweigh the benefits to users
The payment information, which would be furnished in an Exhibit to the annual report, would not be covered by the auditors’ opinion on the issuer’s annual financial statement. The scope of the auditors’ work on the financial statements is designed to express an opinion on those statements taken as a whole, noted the firm, and the scope of the audit is not designed to provide assurance on the fair presentation of any information underlying those financial statements. Moreover, because the information in the Exhibit is not derived directly from a specific account appearing in the financial statements, auditors would not be able to rely on the procedures performed for that audit to provide limited assurance on the Exhibit, such as they now do on financial statement schedules filed with the annual report.
If an audit of the Exhibit were required, said E&Y, auditors would have to develop specific additional procedures to be able to provide assurance over the completeness and accuracy of the information provided. In addition, audit procedures would have to be designed to provide assurance over the accuracy of the categorization of the payments. Given the de minimis disclosure threshold in the proposed rule, an audit of the Exhibit also would require more extensive procedures than those based on the materiality thresholds established for the financial statement audit.
Further, as proposed, the information in the Exhibit would be presented on a cash basis. However, the financial statements are prepared on an accrual basis. Therefore, the procedures performed to provide assurance over the completeness and accuracy of the information in the Exhibit would be different from those performed for the overall financial statement audit.