Independence in Complex Estimates: The Estimation and Audit

of Oil and Gas Reserves

Karen Hennes* Associate Professor of Accounting

University of Oklahoma

Terry L. Crain Associate Professor of Accounting

University of Oklahoma

Dipankar Ghosh Professor of Accounting University of Oklahoma

October 2015

*Corresponding author: khennes@ou.edu. We appreciate helpful discussions with members of the OU Price College of Business Energy Institute Board of Advisors and comments from workshop participants at Oregon State University and University of Oklahoma.

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Independence in Complex Estimates: The Estimation and Audit

of Oil and Gas Reserves

Abstract

Estimates of hydrocarbon reserves are a key disclosure for oil and gas firms. In this study,

we examine the extent to which firms voluntarily elect to engage a third-party specialist to

estimate or audit these reserve disclosures. We find that nearly all sample firms use a third-party

engineering firm in some capacity. Firms with technically challenging offshore operations are

more likely to engage a third-party engineering firm in an original estimation role, but larger

firms (in both assets and geography) and firms with Big N financial auditors are more likely to

engage an engineering specialist in an assurance role. We provide evidence that the market

places a valuation premium on proved reserves that receive an outside audit, suggesting that the

two-step approach (internal estimate, and then external verification) offers more credibility than

one (independent or not) original estimation. The valuation premium for third-party assurance of

internally generated estimates appears to be driven by audits from top tier engineering firms, and

we find preliminary evidence that the estimates from this subsample may be more reliable.

Overall, this study provides evidence on the existing role of third-party specialist assessments

for a complex but highly material estimate.

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1. Introduction

Producible quantities of oil and gas are the primary asset of oil and gas firms, but these

assets are generally not readily observable. Estimation of oil and gas assets in the ground is thus

a complex but critical process for oil and gas firms. In the US, public firms with material oil and

gas operations must provide a range of supplemental disclosures with reserve quantity estimates

under various assumptions. These key disclosures are outside both the defined scope of the

financial audit and the expertise of traditional accounting firms. Under existing US reporting

standards, independent evaluation or assurance of the reserve disclosures is not required, but

many US oil and gas firms voluntarily choose to involve a third-party petroleum engineering

firm in the reserve reporting in either an estimation or assurance role. As the PCAOB (2015)

considers the increasing (but often undisclosed) role of third-party specialists within the

financial audit, oil and gas reserves offer a setting where we can observe the use of third-party

specialists in different roles in support of a complex but key estimate.

In this study, we explore the extent to which oil and gas firms’ reserve quantities are

prepared in-house, prepared externally, or audited externally. We find that nearly all sample

firms voluntarily use a third-party engineering firm in some capacity, so the bulk of a firm’s

proved reserves estimates are either prepared externally or are prepared internally but then

audited by an outside engineering firm. Overall, the almost universal voluntarily involvement of

a third-party specialist in this industry speaks to the demand for independent assessments of

complex but highly material estimates. The mix of original estimation and subsequent assurance

roles observed, however, suggests that the optimal role of the outside expert varies by firm.

Exploring firms’ decision to employ a third-party specialist, we find that firms with

technically challenging offshore operations are more likely to engage a third-party engineering

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firm in an original estimation role, but larger firms (in both assets and geography) and firms with

Big N financial auditors are more likely to engage an engineering specialist in an assurance role.

We explore whether a two-step approach (internal estimate and then external

verification) offers more credibility than one independent original estimation, and we find that

the market places a valuation premium on proved reserves that have received an outside audit

(controlling for the firm’s voluntary preparation/audit choice). The valuation premium appears to

be driven by reserve audits from the market-leading engineering firms, and we provide limited

evidence that estimates from this subsample (internally generated but subsequently audited by a

top tier engineering firm) experience smaller periodic revisions.

The oil and gas industry has considerable economic and geopolitical importance both

domestically and globally. This study contributes to the stream of literature on the valuation of

firms in oil and gas and suggests possible costs and benefits of mandating reserves audits for

public oil and gas firms. More broadly, this study also adds to the more limited existing work on

the value of assurance (and specialist assurance) for nonfinancial disclosures. In our setting,

firms choose the stage at which to incorporate outside assessments into a complex estimate.

Understanding the determinants of this choice and the differential perceived credibility of third-

party estimates in this setting may offer inferences that can be applied to other settings where the

role of the independent specialist in preparing or assuring financial estimates is still developing.

2. Background and Related Literature

Reporting of Oil and Gas Reserves

The exploration and production sector (alternatively known as the upstream sector) of the

oil and gas industry searches for and extracts oil and gas volumes to be refined and processed by

others. Existing, producible oil and gas deposits are thus the key asset for an exploration and

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production firm. These oil and gas properties appear on the balance sheet at some measure of

capitalized costs (varying with the firm’s selection of the full cost or successful efforts

accounting method), which are amortized as production proceeds. The amortized cost values are

subject to assorted impairment tests, but the book value of assets does not perfectly reflect the

fair value of the properties and/or the underlying oil and gas volumes.

SFAS 69 (now part of ASC 932) thus requires fairly extensive supplemental disclosures

for oil and gas firms, including a three-year reconciliation of proved reserves. “Reserves” are

estimated physical quantities (in barrels of oil or cubic feet of natural gas) extractable from the

firm’s properties. “Proved Reserves” are those quantities of oil and gas estimated with a high

degree of certainty (generally at least 90% confidence) to be producible at the balance sheet date

under certain (geological, technological, political, and economic) assumptions.1 Despite the

inherent imprecision in such a complex estimate, these disclosures are closely watched by

stakeholders. In the background materials for a predecessor industry standard (SFAS 19), the

FASB noted that many constituents believe “that reserve information is the single most

important type of disclosure that could be required of an oil and gas producing company” (1977,

p. 74). The basis for conclusions for SFAS 69 reiterates that stakeholders view reserve quantities

and changes in reserve quantities as “key indicators of success” (1982, p. 29) for firms in this

industry. All SFAS 69 supplemental disclosures, including proved reserve quantities (the focus

of this study), must be filed at least annually with the SEC and are generally included in the

10-K as an unaudited (from the financial auditor’s perspective) footnote.

The FASB’s deliberation and eventual enactment of SFAS 69 spurred a stream of

academic research on the value relevance of assorted reserve information for oil and gas firms,

                                                                                                               1 “Probable” (at least 50% likelihood of recovery) and “Possible” (at least 10% likelihood of recovery) reserve categories also exist for reporting more uncertain quantities, but these are rarely disclosed (Nichols 2012).

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including Harris and Ohlson (1987), Doran, Collins, and Dhaliwal (1988), and Ghicas and

Pastena (1989). Alciatore (1990) provides a review of this literature. Although specific

disclosures may vary in importance, the overarching conclusion from prior work is that oil and

gas properties and their associated reserves are a key asset of firms in this industry that is clearly

relevant to stakeholders.

These disclosed reserve quantity estimates may be prepared internally by the firm’s own

reservoir engineers, or the company can hire an external petroleum engineering firm to prepare

the reserve estimates. Firms may select different preparation sources for different properties

resulting in a mix of internal and external estimates in the total reserves. All or some of these

reserve estimates can also be audited by another external petroleum engineering firm. Oil and

gas firms thus face choices about the extent to which they involve an outside expert in either an

estimation or assurance role.

Value of Assurance

The longstanding requirement that public firms have an external audit of their financial

statements speaks to regulators’ belief in the value of outside assurance, and Chow (1982) and

Watts and Zimmerman (1983) provide evidence that external audits were voluntarily used to

manage agency costs in periods where audits were not required. Using more recent data from

private UK firms, Lennox and Pittman (2011) find that voluntary financial audits offer a stronger

signal than mandated audits.

Despite the documented positive benefits of an external financial audit, not all firms elect

an audit in voluntary regimes. Allee and Yohn (2009) and Hope, Thomas, and Vyas (2011), for

example, note that many private firms choose not to have an external financial audit. Carey,

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Simnett, and Tanewski (2000) similarly report that less than half of their sample of family

businesses engages an external auditor. For quarterly financial statements, external assurance in

the form of interim reviews is mandated for public firms in the US but is voluntary in other

markets. Using a Canadian sample, Bédard and Courteau (2015) report that only 59% of their

public sample voluntarily elects reviews of the quarterly financial statements, and the authors

question whether the costs and benefits justify even that level of interim reviews. Even for

financial reports, external assurance is not necessarily a cost-effective choice for all firms.

Although the reserve estimates are closely tied to the financial status of an oil and gas

firm, the reserve quantities are not financial items themselves, so an engineering reserves audit is

not completely analogous to an external financial audit. The existing literature offers some

evidence on the value of assurance by non-accountants and/or for non-financial measures.

Coram, Monroe, and Woodliff (2009), for example, find in an experimental setting that

voluntary assurance of nonfinancial performance measures improves the perceived credibility of

positive indicators but does not affect the perception of negative indicators. The authors

conclude that the perceived benefit of assurance of nonfinancial information is dependent on

context-specific incentives of the disclosing firm. In experiments about perceptions of corporate

social responsibility reports, both Pflugrath, Roebuck and Simnett (2011) and Cheng, Green and

Ko (2015) find that assurance increases the credibility of corporate social responsibility

disclosures but that this effect is context-specific.

More closely related to the type of nonfinancial measure in our oil and gas setting,

Ferguson and Pündrich (2015) examine the reserve news announcements for a sample of

Australian mining firms where an assurance report on mineral deposits prepared by a qualified

geologist (who may be an employee) is required for all firms. Ferguson and Pündrich find

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limited evidence (certain subsamples only) that the market responds more strongly to reports

issued by “Big N” mining consultants than to reports issued by smaller mining consultants or

internal employees. The authors conclude that their weak results for specialist assurance may be

driven by low litigation risk in their setting. In addition to the litigiousness of the business

environment, the Australian mining industry differs from the US oil and gas industry in both the

continuous reporting (where any material mineral reserves changes must be reported promptly

throughout the year) and the assurance requirement. US oil and gas firms are required to disclose

detailed proved reserve quantity information to the SEC only annually, and additional technical

certification of those estimates is not required. The mining setting, however, is similar to the oil

and gas setting in that geological mineral deposit assessments represent estimated non-financial

information that is highly relevant to firm valuation.

Estimation and Assurance of Oil and Gas Reserves

SFAS 19 (1977), the first major financial reporting standard for the oil and gas industry,

originally called for reserve quantity disclosures as part of the primary (and thus audited)

financial statements. Many aspects of SFAS 19 were extremely controversial, and SFAS 19 was

superseded by SFAS 25 (1979) before ever becoming effective. In addition to suspending many

aspects of SFAS 19, SFAS 25 allowed reserve quantity disclosures to be supplemental to the

financial statements and thus outside the conventional financial audit domain. The SEC

continued to pursue the possibility of requiring the reserves disclosures to be audited for several

additional years but dropped this proposal with the adoption of the expanded supplemental

disclosure requirements prescribed in SFAS 69 (1982).  

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In 2004, Royal Dutch Shell made headlines by restating their proved reserve quantities

downward by roughly 20%. This drew political attention back to the lack of regulations around

the personnel qualifications and process of preparing reserve estimates as well as to the lack of

an assurance requirement or a standardized process or report for such assurance.2 In a

presentation to the US House Committee on Financial Services, Dharan (2004) advocated

requiring a relevant professional certification for reservoir engineers preparing proved reserve

disclosures as well as a requiring an independent third-party audit. Newman and Burk (2005)

and Mitra and Crumbley (2006) similarly call for a formal requirement that the reserve estimates

are prepared by an appropriately certified engineer. Mitra and Crumbley (2006) argue that an

independent process review or full reserves audit should also be required, but Newman and Burk

(2005) assert that focusing on the competency of the preparer is sufficient and audits should

remain voluntary. Nichols (2013) also advocates some sort of licensing or certification system

for engineers performing reserve audits but cautions that mandating reserve audits would be very

costly.

Despite these long-standing debates, there are currently no requirements for public

companies regarding the minimum qualifications of the personnel involved in the estimation of

proved reserves and no requirement that an independent petroleum engineering specialist

participate in the estimation or attest to internally prepared figures. Many US oil and gas firms

do, however, voluntarily choose to involve an outside engineering specialist in either an original

estimation or assurance role.3

                                                                                                               2 The Society for Petroleum Engineers (SPE) has standards for reserves estimation and audit procedures that should affect member engineers. There is no requirement, however, that public companies use only SPE engineers, and the SPE does not have an exam or licensing system that ensures members are knowledgeable about these standards. 3 In contrast to the sustainability report setting where voluntary assurance of nonfinancial measures is provided by a mix of traditional accounting firms and specialized consulting firms (Simnett, Vanstraelen, and Chua 2009; Cohen and Simnet 2015), we do not observe any observations in our setting where the outside specialist is a traditional accounting firm.

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Anecdotally, there is some indication that different market participants consider the mix

of internally versus externally prepared estimates and/or the use of an external audit of reserves

when evaluating a US oil and gas firm. In a 2012 Wall Street Journal article (Gilbert 2012),

analysts and industry executives criticized Chesapeake Energy (one of the largest natural gas

producers in the US) for the low percentage of its reserves that were subject to an external audit.

One analyst expressed the view that reserve quantities are as important as the financial

statements for exploration and production firms, so an audit of the reserves is essential. A

spokesman for Chesapeake countered that the company uses an independent engineering firm to

prepare the majority of its reserve estimates rather than an in-house team, and that this process is

more rigorous than an external audit of internally prepared numbers.

Consistent with Chesapeake’s arguments, Ron Harrell, a long-time reservoir engineer

and the former CEO of Ryder Scott (one of the largest global petroleum engineering firms

engaged in reserve estimation and assurance), argues in an executive editorial that the pressure

to please the oil and gas firm is inherently stronger for an internal engineer with direct

employment consequences than for an outside engineering consultant (Harrell 2005). This

implies that external estimates may be more accurate, at least when it comes to revealing bad

news. Consistent with the conjecture but using a different industry setting, Dietrich, Harris, and

Muller (2001) examine the fair value reporting of UK investment property and find that external

appraisals of real estate are more accurate (lower variance) than internally generated appraisals.

In our oil and gas setting, we do note that internal reservoir engineers have considerable

familiarity with firm projects, some of which may be complex and idiosyncratic. Studying the

effectiveness of outside directors, Duchin, Matsusaka, and Ozbas (2010) conclude that the value

of independence is decreasing in information asymmetry (and the costs of acquiring information

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to reduce that asymmetry). In our context, the value of outside involvement in the reserve

estimation process will be limited by the outside engineers’ relevant expertise and ability to

obtain the complete information set (legal, financial, and geological) available on a specific oil

and gas property. Under the existing SEC rules (2008) for oil and gas firms, firms cannot report

proved reserve quantities unless they have both some certainty about the physical existence of

the hydrocarbons and about the feasibility of production in a timely manner (generally less than

five years). Both internal and external engineering specialists are likely familiar with current

drilling and production technologies and prevailing prices, but the internal engineer may have

better insight into the possible effect of the firm’s capital budget and development priorities on

reportable reserves quantities.

Internal preparation of reserve estimates with a subsequent outside audit of those

estimates would be consistent with the financial assurance scheme in the US where the

preparation of financial statements can be completed in-house or outsourced but is separate from

the independent audit process. A two-step approach with an original internal estimation followed

by a subsequent external audit could make use of both in-house expertise and outside

verification, providing two assessments instead of one. Even if the external audit occurs in

conjunction with the internal estimation, evidence from joint financial audit regimes (Francis,

Richard, and Vanstraelen 2009) or joint financial audit engagement partners (Ittonen and

Trønnes 2015) suggests that there are incremental quality benefits from “four eyes” in some

assurance settings.

Most external reserve audits actually involve a complete re-estimation of the reserve

quantities for major properties by the outside firm. This new estimate is then compared to the

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internal estimate to assess reasonableness.4 This type of external audit thus doubles as an

external preparation step if the new estimates are truly prepared independently. Church et al.

(2015) provide a review of the experimental and archival research on the benefits of and barriers

to auditor independence in the financial context, and all of these same issues can apply in our

nonfinancial assurance setting. In particular, it is possible that the external engineering firm will

anchor on the reserve estimates (or underlying methods and assumptions) prepared by the oil and

gas company, making the external audit less independent than an external preparation

engagement. The existing literature, in sum, does not offer a consensus on the optimal role of the

third-party specialist in our setting.

3. Hypothesis Development

The purpose of this study is to investigate the determinants of firms’ decisions to

voluntarily involve an outside expert in the reserve disclosures in either an initial estimation or

subsequent assurance role and to explore if the market differentially values proved reserve

quantities as the nature of any independent evaluation varies. Our first hypothesis, stated in the

alternative form, is thus:

H1: The use of an outside engineering firm in an original estimation versus subsequent assurance role is related to firm characteristics.

More specifically, we explore the relation between the voluntary use of an outside specialist in

an estimation or assurance role and firm size, stakeholder presence, and project difficulty:

H1a: The use of an outside engineering firm in an original estimation versus subsequent assurance role is related to firm size.

H1b: The use of an outside engineering firm in an original estimation versus subsequent

assurance role is related to the presence of other stakeholders in the reporting process.                                                                                                                4 96% of the reserve audits in our sample involve a re-estimation of the reserves quantities for comparison purposes, so this appears to be the norm. The few remaining ‘audits’ are explicitly process reviews only.

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H1c: The use of an outside engineering firm in an original estimation versus subsequent

assurance role is related to the technical difficulty of the firm’s drilling operations.

H1a explores how the involvement of the outside engineering specialist varies with firm

size. Prior research in financial audit settings has found that firm size is a significant predictor of

voluntary financial audits (Chow 1982; Carey, Simnett, and Tanewski 2000; Hay and Davis

2004). Boritz et al. (2014) survey auditors and specialists about what factors influence the use of

a specialist within the financial audit, and risk factors, size, and complexity were common

responses. We thus expect that the size of the firm and the size of the property portfolio could

affect the firm’s likelihood of using of the engineering specialist for estimation or assurance.

H1b considers whether the voluntary use of an outside engineering specialist is

influenced by other parties. Chow (1982); Carey, Simnett, and Tanewski (2000); and Hay and

Davis (2004) find that firm leverage affects the likelihood of a voluntary external audit, so we

explore how debtholders affect the use of an outside engineering firm in our setting. As debt

levels increase, firms may be enticed by creditors into providing additional certification of key

reserve numbers to mitigate the rising riskiness (and associated costs) of debt. We also consider

the potential influence of the firm’s financial auditor. Although the financial auditor does not

audit the reserve quantity disclosures, the financial auditor may influence the estimation and

assurance choices made for this key asset. Although the financial auditor is not responsible for

the reserve estimates themselves, auditing standards (AU Section 9558) do require the financial

auditor to make inquiries of management to ensure that supplemental oil and gas disclosures are

prepared by qualified personnel, conform to applicable guidelines, and plausibly map to the

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related financial accounts that do fall under the financial auditor’s domain.5 As the financial

auditor is not entirely exempt from all responsibility for the reserve disclosures, it is possible

that they influence preparation choices at least indirectly.

H1c considers the technical complexity of a firm’s drilling operations. The regulatory

debates surrounding oil and gas reserves disclosures focus both on the lack of assurance

requirement and on the lack of standards regarding the qualifications of the preparer. Although

the technical qualifications of reservoir engineers likely varies across firms, we consider whether

the firm is more likely to rely on an outside opinion when the projects are more technically

difficult.

Proved reserves are a key value relevant asset for oil and gas firms, so we expect

perceptions about the quality of the reserves estimation to affect valuation. If the voluntary use

of an independent engineering firm in an estimation or assurance role improves the credibility of

the reserves quantity disclosures, then we expect the firm’s valuation to vary accordingly. Our

second hypothesis is thus:

H2: The use of an outside engineering firm in an original estimation versus subsequent assurance role affects the market’s valuation of an oil and gas firm.

4. Data

We gather information from the 2009–2013 financial statements of oil and gas

companies. This period begins after the effective date of the SEC’s Modernization of Oil and

Gas Reporting (2008) so the reporting environment is consistent throughout. We begin with an

initial sample of 630 firms on Compustat during this time period with a 1311 SIC code (oil and

gas extraction and production). We focus only on exploration and production firms to

                                                                                                               5 Depreciation, depletion, and amortization (DD&A), for example, is a prominent material expense for most exploration and production firms that should articulate with reserve quantity disclosures.

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deliberately exclude integrated firms (such as Exxon Mobil) where much of the firm value is

attributable to refining and retailing operations rather than physical hydrocarbon reserves. To

align market commodity prices across balance sheet dates, we eliminate 124 non-calendar-year

firms. To minimize valuation differences unrelated to our research question, we further eliminate

234 companies that report primarily in a foreign currency (mostly Canadian dollars) and 46

companies structured as partnerships rather than corporations.6 Requiring balance sheet data,

stock price, and non-zero proved reserve data reduces the sample to 122 firms (487 firm-years).

Financial statement information and closing stock price at fiscal year end are obtained

from Compustat when available and supplemented with data collected directly from the firms’

filings on EDGAR. Oil and gas variables are all collected directly from firms’ filings on

EDGAR, including the identity of any third-party engaged for reserves estimation or assurance.7

All variable definitions are provided in the Appendix, and basic descriptive statistics for sample

firm-years are provided in Table 1.

Focusing on our particular variables of interest, the percentage of reserves that are

externally estimated or audited, we find that on average 73% of proved reserves estimates are

prepared externally in our sample (OUT_PREP_%) and 22% of proved reserve estimates are

audited by an outside engineering firm (OUT_AUD_%). The means are somewhat misleading,

however, as the distribution shows that there are actually very few observations near these mean

values. Instead, most observations have values for OUT_PREP_% and OUT_AUD_% that are

(or are very close to) either 0% or 100%. Firms appear to use outside estimation or outside audit                                                                                                                6 The US oil and gas industry contains a number of publicly traded Master Limited Partnerships (MLPs), but Shaw and Weir (1993) find that oil and gas MLPs differ from oil and gas corporations in both operational and valuation dimensions. 7 Public companies reporting proved reserves in the 10-K must describe their internal controls for the reserves estimation process and the qualifications of the individual or entity supervising the estimation. Public companies are not required to employ a third-party engineering firm, but if they do disclose third-party involvement then a report from the engineering firm must also be filed. This attached report allows us to capture the identity and exact role of the engineering firm for all observations.

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for none of their reserves or for all or nearly all of their reserves. For simplification, we thus

focus on dichotomous measures of outside preparation (OUT_PREP) and outside audit

(OUT_AUD) which take the value of one if the majority of a firm’s reserve estimates are

prepared (OUT_PREP) or audited (OUT_AUD) by an external engineering firm. We also

measure the total percentage of proved reserves with either outside preparation or outside audit

for each firm (OUT_ALL_%). The very high mean value of 0.95 for OUT_ALL_% suggests that

most firms involve an external engineering firm in some manner (estimation or assurance) for

the bulk of their reserves. Even though an independent estimation or audit of the reserve

quantities is not required in the US, the percentage of reserve estimates in our sample that are

based solely on internal estimation (without outside assurance) is very small.

Table 2 provides a 2x2 frequency table illustrating the use of primarily outside prep

(OUT_PREP) versus primarily outside audit (OUT_AUD) for firm-years in our sample. We note

that there are only two firm-year observations (one firm for only a portion of the sample period)

in the entire sample where the firm has externally prepared reserve estimates re-audited by

another outside specialist, so outside preparation and outside audit are essentially mutually

exclusive.8 This result is somewhat similar to Carey, Simnett, and Tanewski’s (2000) finding

that in private family firms the outsourcing of internal audit is negatively correlated with the

engagement of an external auditor. Carey, Simnett, and Tanewski conclude that the involvement

of an outside auditor in one capacity (outsourced internal audit) substitutes for the other (external

audit). In our setting, the use of an outside engineering firm in the estimation stage appears to

substitute for or otherwise preclude the use of another outside engineering firm to audit those

estimates. Given the very strong negative correlation between external preparation of reserves

and external audit of reserves (-0.914, p-value < 0.0001), we include only one measure                                                                                                                8 All tests are insensitive to the exclusion of these two observations.

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(OUT_AUD) in subsequent analyses.9 We also reiterate that some form of outside evaluation

appears to be the norm, as only 14 firm-year observations (representing four firms) do not have

the majority of their reserve estimates either originally prepared or subsequently audited by an

outside firm.10 This does limit our conclusions to the choice between the estimation or assurance

role of the engineering specialist rather than the decision to involve a third-party at all.

5. Analysis

Determinants

To analyze our first hypothesis, we estimate the following probit model predicting a

firm’s choice to have an outside audit for the majority of its proved reserve estimates:

OUT_AUD = f(α0 + β1 LN_AT_SE + β2 LN_AT_FC + β3 FOREIGN_RESERVES + β4 LEV_SE + β5 LEV_FC + β6 FIN_BIG_N + β7 OFFSHORE_OPS (1)

+ β8 ROA_SE + β9 ROA_FC + ε)

We include log of total assets and foreign operations as two different size variables (H1a).

Log of total assets captures a traditional dollar value size measure, and the existence of foreign

reserves captures a more geographic size measure. We measure assets separately for firms using

either the successful efforts method (LN_AT_SE) or full cost method (LN_AT_FC) as the

distribution of balance sheet values (including capitalized oil and gas assets) differs for the two

accounting methods. FOREIGN_RESERVES is an indicator variable set equal to one if any of

the firm’s proved properties at the balance sheet date are located outside of North America and

set equal to zero if the firm’s existing proved reserves are all located in North America (where

                                                                                                               9 Inferences are consistent (with coefficients loading in the opposite direction) if we focus on OUT_PREP rather than OUT_AUD as the measure of the firm reporting choice. 10 There are no obvious common characteristics of these four firms as they vary considerably in size, profitability, and reserve levels. All tests are insensitive to the exclusion of these observations.

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“North America” includes offshore properties in the Gulf of Mexico as well as onshore

properties in the United States, Canada, and Mexico).

For H1b, we use leverage (split by accounting method into LEV_SE and LEV_FC) to

capture the influence of debtholders on the firm’s decision and FIN_BIG_N as an indicator

variable for the size of the firm’s financial external auditor. For H1c, we include

OFFSHORE_OPS to capture a major physical aspect of project complexity. Although all oil and

gas operations vary in complexity by geology, hydrocarbon form, and extraction methods, the

onshore or offshore nature of the property provides a simple first cut on the technical difficulty

of the project. Underwater drilling offshore is inherently complex operationally (Wright and

Gallun 2008; Brady et al. 2011), and the high costs and slow timelines of these projects make the

economic viability assessments necessary to qualify as reportable “proved” reserves more

difficult (Russell and Lyon 1999). OFFSHORE_OPS is an indicator variable set equal to one if

any of the firm’s proved properties are offshore sites (worldwide) and set equal to zero if all of

the firm’s existing proved properties are onshore. Lastly, ROA (split by accounting method into

ROA_SE and ROA_FC) is included as a control variable for firm performance.

Table 3 reports the results of estimating Equation 1 with the full sample pooled across all

years (with clustered standard errors by firm). Untabulated results with separate regressions by

accounting method (full cost versus successful efforts) or with method as a predictive variable

are comparable to those presented. Untabulated year-by-year regressions or a pooled sample

with only one randomly selected observation per firm all yield comparable inferences, although

the significance level for some variables varies with the random sample draw. We present only

one variation for simplicity.

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The coefficients on total assets (LN_AT_SE and LN_AT_FC) are positive and significant

for both full cost and successful efforts firms, indicating that larger firms are more likely to have

an outside audit of their reserve quantities. This suggests a larger demand for assurance for

larger firms or an increased ability to do the original estimation internally as firm size increases.

We also find that firms are more likely to employ a reserve audit if they operate in foreign

locales. This could be interpreted as another size effect in that firms with larger or more

geographically dispersed operations are more likely to have a voluntary external reserves audit.

The existence of foreign reserves may also capture other elevated risk factors, as prior research

on the oil and gas industry (e.g., Erb, Harvey, and Viskanta 1996; Johnston 2000; Joyce 2002;

and Thibadoux and Scheidt 2013) has repeatedly noted that the political risks and business

environments of exploration and production vary widely across countries. Overall, the evidence

for H1a is consistent with firm size being positively related to the likelihood of engaging an

outside specialist in an assurance role (rather than in a preparation role).

H1b concerns other stakeholders in the financial reporting process. The insignificant

coefficients on our leverage variables (LEV_SE and LEV_FC) fail to provide any evidence that

the choice of a reserves audit is driven by debtholder pressure.11 We do, however, find a positive

coefficient on concurrent usage of a Big N external auditor for financial reporting purposes. This

positive relation could be another aspect of size, a signal of the firm’s desire to use outside

assurance as fully as possible on all channels to enhance credibility, or an indicator that Big N

auditors encourage secondary assurance of reserve data. In untabulated analyses, we explore the

possibility of differential association with reserves audit for Big N, Tier 2, and Tier 3 financial

auditors, but only Big N or not is a significant predictor of an outside reserve audit.

                                                                                                               11 Our primary leverage measure is liabilities/equity. Coefficients are similarly insignificant if we use liabilities/assets, maturing debt/assets, or Altman Z as alternative measures of debtholder concern.

19

Regarding H1c, we also find that firms are less likely to employ a reserve audit if they

operate offshore. As Table 2 indicated, the alternative to an outside audit is essentially original

outside preparation of reserve information, so the negative coefficient on OFFSHORE_OPS

could indicate that firms rely on outside experts to prepare the original estimates for the most

technically complex (e.g., deep sea) projects. If these estimates are the most difficult to prepare

(and hence more costly in terms of labor or expertise needed), then the duplicative nature of the

reserves audit on top of internal estimation may be cost prohibitive.

In summary, the results in Table 3 indicate that larger firms (with higher total assets or

foreign operations) and firms with Big N financial auditors are more likely to elect to prepare

their own reserves estimates internally but then engage an external expert to audit those

estimates. Firms with technically complex offshore operations, in contrast, are more likely to

engage the outside engineering expert to prepare the original estimates in lieu of relying on

internal staff.

Valuation Effects

Returning to our hypothesis (H2) that the outside preparation or outside audit of oil and

gas reserve quantities affects a firm’s valuation, we begin with the following equation (based on

the standard accounting equation: Equity = Assets – Liabilities):

MVE = (MV O&G assets + MV other assets) – MV Liabilities (2)

Consistent with Harris and Ohlson (1987) and Shaw and Weir (1993), we use the book value of

non-oil-and-gas assets and of liabilities to proxy for the market value of those components:

MVE = MV O&G assets + BV other assets – BV liabilities (3)

20

To mitigate size effects, we divide all variables in Equation 3 by common shares outstanding.

We then substitute the total ending proved reserves quantities as our measure of oil and gas

assets so that the regression coefficient on proved reserves will reflect the market’s valuation

multiplier. This yields the following regression equation:

PRICE = α0 + β1 PR_PS + β2 NON_OG_ASSETS_PS + β3 LIAB_PS + ε (4)

PRICE is the stock price at the end of the fiscal year, NON_OG_ASSETS_PS is a firm’s

net assets per share excluding the book value of oil and gas properties, and LIAB_PS is total

liabilities per share. PR_PS measures the firm’s oil and gas assets as the ending proved reserves

per share at the end of each fiscal year. Proved reserves are measured in barrels of oil

equivalents (BOEs).12

To provide a baseline result, we estimate OLS regressions for Equation 4 by year

(untabulated). As expected, the coefficient on PR_PS is positive and significant in all years.

Column 1 of Table 4 reports similar results for the full sample (all years pooled, with clustered

standard errors by firm) with additional control variables for the market prices of oil

(PRICE_OIL) and gas (PRICE_GAS) at the appropriate balance sheet dates. As expected, the

coefficient on PR_PS is positive and significant (p-value < 0.0001), consistent with proved

reserves being an important component of the market value of an oil and gas firm.

To test our hypothesis that proved reserves are valued differently if the reserve quantities

reflect an external audit rather than original external estimation, we amend our model to include

the interaction term PR_PS*OUT_AUD, where OUT_AUD equals one if the majority of the

firm’s reserves are audited by an outside engineering firm (but prepared internally) and zero

                                                                                                               12 If the firm does not report total BOEs, we combine disclosed gas reserves and oil reserves using the industry standard energy equivalency of one barrel of oil to six thousand cubic feet of natural gas (1 Bbl = 6 Mcf).

21

otherwise. Column 2 of Table 4 reports the results including the interaction term.13 The

coefficient on the interaction terms is positive and significant (p-value = 0.0243), suggesting that

there is valuation premium for reserve amounts that were audited by an outside firm.

Untabulated regressions by year offer consistent inferences.

Neither outside preparation nor outside audit of reserve estimates is required in the

United States, so the observed preparation and assurance levels reflect firms’ own choices. We

must then consider the possibility that the observed valuation premium reflects underlying firm

characteristics associated with the choice rather than the value of the assurance itself. Column 3

of Table 4 repeats our pooled valuation model with the inclusion of the inverse Mills ratio (IMR)

from our estimation of Equation 1. Untabulated year-by-year results are comparable. The

coefficient on the interaction term PR_PS*OUT_AUD remains positive and significant (p-value

= 0.0422), suggesting that there is a valuation premium for externally audited proved reserve

quantities above the value of externally prepared proved reserve quantities even after controlling

for the firm’s self-selection.

6. Additional Analyses

“Big N” Engineering Specialists

Petroleum engineering consulting firms vary by reputation and market share. There are

international, national, and regional firms and/or Tier 1 (“Big N”), Tier 2, and Tier 3 firms in

this industry just as there are in the US financial audit market. Informal interviews with multiple

reservoir engineers suggest that there are three dominant Tier 1 petroleum engineering firms

serving the US market: Netherland Sewell, Ryder Scott, and DeGolyer and MacNaughton.

                                                                                                               13 Our primary valuation model does not suggest a main intercept effect for OUT_AUD alone, but we do test a hierarchical model in untabulated analyses. The interaction term remains positive (albeit weaker), but the standalone OUT_AUD is not significant.

22

Frequency counts in our sample (presented in Table 5) support that these three firms are market

leaders in reserve audits for US public firms.14

Analogous to the financial audit market, the larger scope (broader resources, increased

experience, etc.) of Tier 1 engineering firms could improve the actual or perceived quality of

their services. We split our outside audit indicator variable (OUT_AUD) into two, distinguishing

between reserve audits by top tier engineering firms (OUT_AUD_TIER_1) or by all other

engineering firms (OUT_AUD_OTHER). Table 6 presents the results of this modified version of

Equation 4. The coefficient on PR_PS*OUT_AUD_TIER_1 is positive and significant (p-value =

0.0070), consistent with our earlier results, but the interaction with OUT_AUD_OTHER is

insignificant. Table 4 indicated that firms electing an outside reserve audit receive a valuation

premium, but Table 6 suggests that this effect is driven by outside reserve audits provided by the

largest engineering firms. Similar to the financial audit market, there appears to be a differential

credibility boost when assurance is provided by the Tier 1 (“Big N”) engineering firms, but we

acknowledge that conclusions about the reputation effect of non-Tier 1 engineering firms’ audits

are limited by the relevant sample size (40 firm-years).

Reserve Revisions

In addition to disclosing the ending balance of proved reserves, public oil and gas firms

must reconcile the beginning and ending balance of reserve quantities in the disclosures for oil

and gas activities. ASC 932-235-50-5 (from SFAS 69) identifies six specific types of changes to

proved reserves possible during a period: (1) revisions of previous estimates, (2) improved

recovery, (3) purchases of minerals in place, (4) extensions and discoveries, (5) production, and

                                                                                                               14 Although minimally represented in our US sample, GLJ (Canada) and Gaffney Cline (UK) are important firms in non-US markets. Given the small number of relevant observations in our sample, our results are not affected by the classification of those two firms, but we acknowledge their Tier 1 vs. Tier 2 classification is debatable.

23

(6) sales of minerals in place. Restatements of reserve quantities are fairly rare (which made the

2004 Shell restatements that much more shocking), but oil and gas firms do report revisions of

previous estimates nearly every period. Revisions are expected as production proceeds

(providing new information about a property) and as economic conditions change, but previous

research (e.g., Kahn, Krausz, Schiff 1983; Campbell 1988; Spear and Lee 1999; Berry 2007; and

Crain, Hennes, and Ghosh 2014) has also examined revision patterns for evidence of

conservatism or bias in reserve quantity estimates (with mixed results).

If the market assesses a valuation premium on proved reserves quantities that were

audited by an outside engineering firm (but prepared internally), it may be that these proved

reserves quantities are more reliable than those prepared by an outside engineering firm in the

first place. Using reserve revisions from 1985 to 1994, Spear and Lee (1999) find univariate

evidence that the absolute values of reserve revisions are larger for firms using an external

reservoir engineer rather than an internal reservoir engineer. That would suggest that inside

preparation is more accurate than outside preparation, but it is not completely clear whether the

study distinguished between using the external engineer in the preparation or the assurance

capacity or simply compared internal engineers versus external engineers in any role.

To continue exploring this issue, we examine both the signed and absolute magnitude of

revisions to proved reserves for our sample firms split by OUT_AUD (and alternatively by

OUT_AUD_TIER_1). We measure revisions as a percentage of beginning proved reserves,

winsorized at +/– 100%. We calculate signed percentage revisions to proved reserves

(REV_PR_%) to explore for signs of differential bias or conservatism in the reserve estimates

depending on use of an outside reserve audit. Simple means tests are provided in Table 7. We

24

fail to find evidence of any differences in the signed revisions for firms with and without outside

reserve audits (or with or without top tier reserve audits).

To investigate the overall accuracy of the reserve estimate irrespective of directional bias,

we also examine the absolute value of the revisions (ABS_REV_PR_%) as a percentage of

beginning proved reserves. The univariate evidence in Table 7 provides some evidence that

revisions were significantly smaller for firms with an external reserve audit than for firms

without (one-tailed p-value = 0.0594). Consistent with the valuation results, the difference is

more pronounced when partitioning on the use of a top tier engineering firm for the reserve audit

or not (one-tailed p-value = 0.0345). Although this simple means test is not conclusive on its

own, it does offer some preliminary evidence that the valuation premium may be related to the

reduced variance (i.e., smaller subsequent revisions) of reserve amounts for the firms that elect a

two-step process with internal estimation and external assurance.

7. Conclusion

Oil and gas reserves are the primary asset of exploration and production firms. The

reserve quantity estimates are a key disclosure for investors, but the estimation process is

complex and imprecise by nature. In this study, we examine the extent to which oil and gas firms

voluntarily elect to engage a third-party specialist to estimate or audit these proved reserve

disclosures. We find that nearly all sample firms use an outside engineering firm in some

capacity, so the bulk of a firm’s proved reserves estimates are either prepared externally or are

prepared internally but then audited by an outside engineering firm. Firms with technically

challenging offshore operations are more likely to engage a third-party engineering firm in an

original estimation role, but larger firms (in both assets and geography) and firms with Big N

25

financial auditors are more likely to engage an engineering specialist in an assurance role. We

provide evidence that the market places a valuation premium on proved reserves that have

received an outside audit, suggesting that the two-step approach (internal estimate, and then

external verification) offers more credibility than one (independent or not) original estimation.

This result holds after controlling for the firm’s voluntary preparation/audit choice. The

valuation premium for third-party assurance of internally generated estimates appears to be

driven by audits from top tier engineering firms, and we find preliminary evidence that the

estimates from this subsample may be more reliable (with smaller periodic revisions).

In addition to contributing to our understanding of the valuation of oil and gas firms (an

important industry to the US economy), this study provides initial information on possible costs

and benefits of mandating reserve audits. We also add to the literature on the assurance of

nonfinancial disclosures and on perceived benefits of independence in the preparation and

assessment of complex estimates. Christensen, Glover, and Wood (2012) have noted that the

increasing use of complex fair value measurements with nontrivial estimation uncertainties

create increasing challenges for auditors. It is unclear how the audit profession will evolve in

regards to providing assurance for these fair value estimates, but it is informative to understand

the costs and benefits of existing assurance decisions made in industries like oil and gas where

material accounts are difficult to assess and generally outside the expertise of conventional

financial auditors.

26

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Appendix: Variable Definitions

Variable Name Definition ABS_REV_PR_% Absolute magnitude of revisions to proved reserves during the year / beginning proved

reserves ASSETS Total assets END_PR_BOE Ending balance of proved reserves in thousands of barrels of oil equivalents END_PR_GAS Ending balance of proved reserves of gas (in millions of cubic feet) END_PR_OIL Ending balance of proved reserves of oil (in thousands of barrels) FC_METHOD One if the firm uses full cost accounting for oil and gas properties, and zero otherwise FIN_BIG_N One if the firm has a Big N financial auditor, and zero otherwise FOREIGN_RESERVES One if the firm has proved reserves located outside of North America, and zero otherwise IMR Inverse Mills ratio from estimating Equation 1 LEV_FC Leverage ratio if the firm uses the full cost method, and zero otherwise LEV_SE Leverage ratio if the firm uses the successful efforts method, and zero otherwise LEVERAGE Total liabilities / total stockholders' equity LIAB_PS Total liabilities / common shares outstanding LIABILITIES Total liabilities LN_AT_FC Natural log of total assets if the firm uses the full cost method, and zero otherwise LN_AT_SE Natural log of total assets if the firm uses the successful efforts method, and zero

otherwise MVE Market value of equity NON_OG_ASSETS_PS (Total assets - net book value of oil and gas assets) / common shares outstanding OFFSHORE_OPS One if the firm has proved reserves located offshore, and zero otherwise OUT_ALL_% Percentage of reserve quantity estimates prepared or audited by outside engineering firm OUT_AUD One if the more than 50% of the firm's reserves estimates are audited externally, and zero

otherwise OUT_AUD_% Percentage of reserve quantity estimates audited by outside engineering firm OUT_AUD_OTHER One if the more than 50% of the firm's reserves estimates are audited externally by a non-

Tier 1 engineering firm, and zero otherwise OUT_AUD_TIER_1 One if the more than 50% of the firm's reserves estimates are audited externally by a Tier

1 engineering firm, and zero otherwise OUT_PREP One if the more than 50% of the firm's reserves estimates are prepared externally, and zero

otherwise OUT_PREP_% Percentage of reserve quantity estimates prepared by outside engineering firm PR_PS Ending proved reserves (in boe) / common shares outstanding PRICE Closing stock price PRICE_GAS Market price of natural gas (measured as the Henry Hub spot price) PRICE_OIL Market price of oil (measured as the Cushing spot price for West Texas Intermediate) REV_PR_% Signed revisions to proved reserves during the year / beginning proved reserves ROA Net income / total assets ROA_FC ROA if the firm uses the full cost method, and zero otherwise ROA_SE ROA if the firm uses the successful efforts method, and zero otherwise SE_METHOD One if the firm uses successful efforts accounting for oil and gas properties, and zero

otherwise Notes: Variables are measured at the balance sheet date for each year included in the sample. All dollar amounts (except prices) are reported in millions of dollars.

31

Table 1  Descriptive Statistics    Panel A: Continuous Variables   Mean 25% Median 75%

 ASSETS 4602.82 158.81 750.29 2939.21 LIABILITIES 2409.91 57.29 386.50 1904.00 MVE 4033.16 98.82 604.79 2622.90 ROA -0.13 -0.09 0.01 0.05 LEVERAGE 0.49 0.46 1.03 1.77

OUT_PREP_% 0.73 0.00 1.00 1.00 OUT_AUD_% 0.22 0.00 0.00 0.00 OUT_ALL_% 0.95 1.00 1.00 1.00

END_PR_OIL 124581.96 2213.00 15461.00 75129.00 END_PR_GAS 1041634.04 3458.71 96145.00 632178.00 END_PR_BOE 298187.63 7270.16 40210.00 209824.00 PR_PS 1.91 0.14 0.89 3.08 NON_OG_ASSETS_PS 7.26 1.00 3.06 7.90 LIAB_PS 15.57 1.40 6.95 26.02 PRICE 23.85 3.00 12.20 33.60

REV_PR_% -0.02 -0.09 -0.01 0.01 ABS_REV_PR_% 0.13 0.00 0.01 0.16

Panel B: Categorical Variables Percentage

        FC_METHOD 50.31%     SE_METHOD 49.69%     FIN_BIG_N 55.65%     FOREIGN_RESERVES 24.23%     OFFSHORE_OPS 30.39%     OUT_PREP 74.13%     OUT_AUD 23.41%      OUT_AUD_TIER_1 15.20%      OUT_AUD_OTHER 8.21%          

Notes: Table 1 provides descriptive statistics for the sample of 487 firm-year observations. Variable definitions are provided in the Appendix. Panel A includes continuous variables, and Panel B includes dichotomous variables.

32

Table 2

Frequency Table

OUT_AUD

OUT_PREP 0 1 Total

0 14 112 126

1 359 2 361

Total 373 114 487

Notes: Table 2 provides the cross-tabulation of firms with primarily outside preparation of reserves (OUT_PREP = 1) and firms with primarily outside audit of reserve information (OUT_AUD = 1).

33

Table 3

Determinants Model

INTERCEPT -2.5962 ***

( 0.533)

LN_AT_SE 0.1870 **

( 0.081)

LN_AT_FC 0.2107 ***

( 0.081)

FOREIGN_RESERVES 0.8029 **

( 0.326)

LEV_SE -0.0221

( 0.041)

LEV_FC 0.0016

( 0.002)

FIN_BIG_N 0.7842 **

( 0.310)

OFFSHORE_OPS -0.7949 ***

( 0.302)

ROA_SE 0.9360

( 0.436)

ROA_FC 0.0852

( 0.372)

N 487

Likelihood Ratio 118.5322 ***

Adjusted R-Square 0.3257

Percent Concordant 81.6

Notes: Table 3 presents regression results for Equation 1 for the full sample with standard errors clustered by firm. The dependent variable is OUT_AUD, and all variable definitions are provided in the Appendix. Coefficient estimates are provided with standard errors in parentheses. ***,**,* indicate two-tailed p-values than 1%, 5%, or 10%, respectively. The reported R-Square measure is the Nagelkerke (1991) adjusted pseudo-R-square.

34

Table 4

Valuation Model

(1) (2) (3)

INTERCEPT 16.3561

-14.8543

-11.2803

( 13.536)

( 13.100)

( 13.196)

PR_PS 8.2177 *** 6.4524 *** 6.5437 ***

( 1.299)

( 0.989)

( 0.944)

PR_PS*OUT_AUD

2.9333 ** 2.6625 **

( 1.286)

( 1.297)

NON_OG_ASSETS_PS 0.5058 *** 0.4445 *** 0.4328 ***

( 0.104)

( 0.097)

( 0.093)

LIAB_PS 0.0836

0.1418

0.1244

( 0.165)

( 0.121)

( 0.117)

PRICE_OIL 0.1235

0.1156

0.1096

( 0.104)

( 0.101)

( 0.101)

PRICE_GAS 2.1806 * 2.1167 * 2.1002 *

( 1.149)

( 1.144)

( 1.137)

IMR

-1.4984 *

( 0.885)

R-square 0.6607 0.6819 0.6848

Model F-Test 34.57 *** 40.15 *** 36.01 ***

Notes: Table 4 presents regression results for variants of Equation 4. The dependent variable in all columns is PRICE. Coefficient estimates are provided with standard errors in parentheses. The tabulated results include the full sample (487 firm-years) with standard errors clustered by firm. Variable definitions are provided in the Appendix. ***,**,* indicate two-tailed p-values than 1%, 5%, or 10%, respectively.

35

Table 5 Outside Audit Firms

Outside Prep Outside Audit Outside Any

Frequency % Frequency % Frequency %

Netherland Sewell 91 25.2% 43 37.7% 134 37.1% Ryder Scott 56 15.5% 15 13.2% 71 19.7% DeGolyer and MacNaughton 37 10.2% 16 14.0% 53 14.7%

Cawley Gillespie 38 10.5% 1 0.9% 39 10.8% Wright 10 2.8% 5 4.4% 15 4.2% Miller and Lents 4 1.1% 10 8.8% 14 3.9% GLJ 3 0.8% 5 4.4% 8 2.2% Collarini 8 2.2% 0 0.0% 8 2.2% Gaffney Cline 1 0.3% 2 1.8% 3 0.8%

All Others 113 31.3% 17 14.9% 130 36.0%

Total 361 100.0% 114 100.0% 361 100.0%

 Notes: Table 5 provides the frequency data on the identity of the specific engineering consulting firm that provides the majority of the work for any firm that outsources the majority of the preparation (OUT_PREP = 1) or audit (OUT_AUD = 1) of reserves quantities.

36

Table 6

Tier 1 Outside Auditor

INTERCEPT -12.1126

( 13.298)

PR_PS 6.5665 ***

( 0.981)

PR_PS*OUT_AUD_TIER_1 3.4818 ***

( 1.268)

PR_PS*OUT_AUD_OTHER 0.6345

( 1.613)

NON_OG_ASSETS_PS 0.4575 ***

( 0.088)

LIAB_PS 0.1142

( 0.122)

PRICE_OIL 0.1156

( 0.102)

PRICE_GAS 2.1579 *

( 1.149)

IMR -1.4680 *

( 0.878)

R-square 0.6931

Model F-Test 48.69 ***

Notes: Table 6 presents regression results for another variant of Equation 4. The dependent variable is PRICE. Coefficient estimates are provided with standard errors in parentheses. The tabulated results include the full sample (487 firm-years) with standard errors clustered by firm. Variable definitions are provided in the Appendix. ***,**,* indicate two-tailed p-values than 1%, 5%, or 10%, respectively.

37

Table 7 Revisions Analyses

REV_PR_% ABS_REV_PR_% OUT_AUD = 0 -0.021

0.141

OUT_AUD = 1 -0.010 0.114 Difference -0.011

0.027 *

OUT_AUD_TIER_1 = 0 -0.015

0.140

OUT_AUD_TIER_1 = 1 -0.041 0.106 Difference 0.027

0.034 **

                   

         Notes: Table 7 provides univariate analyses of reserve revisions by groups. Variable definitions are provided in the Appendix. ***,**,* indicate one-tailed p-values than 1%, 5%, or 10%, respectively for tests of means (unequal variance) across the groups.