BBB Oil and Gas Enterprises - An Auditing Case

• In Event: Session A: Teaching, Learning & Curriculum V

Abstract

Jeff Kimble, the partner on the BBB Oil and Gas engagement, had only the opinion left to write on the engagement. Unfortunately, the type of opinion to issue was not clear cut in this case.
The major issue in the engagement was whether BBB was a legally separate entity of the Oklahoma Indian Tribe under GASB. This determination also affected the status of BBB Marketing (BBBM), a corporation formed to trade the oil and gas for BBB.

Jeff became convinced that BBB was indeed a legally separate entity. However the management of BBB, their outside legal counsel and prior auditors had all asserted that it was not a separate legal entity. The recording of $5 million in losses incurred by BBBM was at stake in the argument.

If BBB is a legally separate entity, it will be a component unit of the Oklahoma Indian Tribe. If that happens, BBBM will be a component until of BBB and, as a result, BBB will show the losses of BBBM in the BBB financials. If it is not a legally separate entity, then the investment in BBBM on BBB’s books will be recorded under the equity method. The equity method writes down an investment to zero, but anything below zero is not shown. Therefore the $5 million in losses would not be shown on BBB’s statements.

After contentious discussions with the board and management, Jeff began to communicate with the risk management group of his firm. The group, while agreeing to back up Jeff in a standoff with management if he wanted to pursue his stance on the issue, recommended that Jeff allow BBB to file their statements as if it were not a separate legal entity and sign a clean opinion on the stand alone financial statements of both BBB and BBBM. They cited the lack of legal exposure on the engagement as well as a possible breach of contract lawsuit which would be heard in tribal court.

Authors

• Russell Calk, New Mexico State University

• Cindy Seipel, New Mexico State University