Canadian Decommissioning Liability Estimates and CPAB’s Concerns
Auditing decommissioning liabilities in Canada’s oil and gas sector is a complex but critical process, and the Canadian Public Accountability Board (CPAB) has raised significant concerns about the accuracy and rigor of these audits.
Independent auditors of Canadian oil and gas companies are tasked with verifying decommissioning liabilities, also known as asset retirement obligations. These represent the estimated costs of safely decommissioning oil and gas wells, facilities, and pipelines at the end of their productive life. As these liabilities carry significant weight in financial statements, the Canadian Public Accountability Board (CPAB) has expressed concerns about how auditors handle them and the implications for material disclosures by public issuers.
KEY CONCEPTS
CPAB’s Concerns on Auditing Decommissioning Liabilities
Complexity and Estimation Uncertainty
Decommissioning liabilities involve significant complexity and uncertainty. Auditors must evaluate assumptions such as inflation rates, discount rates, and future environmental compliance costs. CPAB has noted instances where auditors failed to adequately challenge or test these assumptions.
Lack of Expertise
Like auditing reserves reports, assessing decommissioning liabilities requires specialized knowledge in environmental regulations, cost estimation, and engineering. CPAB has observed cases where auditors lacked the necessary expertise to effectively evaluate these estimates.
Inadequate Verification of Future Obligations
CPAB has criticized auditors for relying too heavily on management’s estimates or third-party engineering reports without thoroughly verifying the assumptions. Auditors must properly evaluate and test future obligations, including the timing and costs of decommissioning, to meet CPAB’s expectations.
Alignment with Environmental and Regulatory Standards
Decommissioning liabilities must be calculated in compliance with current and anticipated environmental laws and safety regulations. CPAB has emphasized the importance of auditors staying informed about changing regulatory environments that could affect timing and costs.
Impact on Financial Statements
Decommissioning liabilities can significantly affect a company’s financial position, particularly during periods of declining oil prices or operational shifts. CPAB expects auditors to assess how these liabilities interact with metrics like asset impairments or reserve reductions and ensure their proper reflection in financial statements.
Meeting CPAB’s Expectations
To address these concerns, auditors must take the following steps:
Scrutinize Assumptions: Apply greater skepticism when reviewing management estimates, ensuring assumptions are backed by reliable data.
Engage Specialists: Work with environmental and cost-estimation experts to evaluate the complexities of decommissioning liabilities effectively.
Document Thoroughly: Maintain robust documentation of the audit process, including the testing of estimates and risk assessments.
CPAB has been critical of insufficient audit work surrounding decommissioning liabilities, urging auditors to adopt a more thorough and critical approach to ensure the accuracy and completeness of these estimates.