Auditing a state-run escrow fund holding more than $24 million in natural gas royalties could cost $27,000. Or it could cost $1.25 million.

The auditor’s fee hinges on a question that members of the Virginia Gas and Oil Board have debated for a year: how thoroughly to probe gas corporations’ compliance with making legally required payments into escrow. And though the board voted Tuesday to authorize an audit – the first in a decade – the level of scrutiny remains an open question, according to the firm that will conduct the audit and state documents obtained by the Bristol Herald Courier.

State law requires gas corporations operating in Virginia to pay royalties into escrow whenever they produce gas belonging to people they cannot find or whose mineral ownership is in dispute. Thousands of people have a claim to these royalties, but they receive no accounting of what they have in escrow and face costly legal obstacles in collecting their money.

For almost 20 years, the state has essentially trusted gas corporations to make the required payments into escrow – which some don’t always do, a Herald Courier investigation found. In response to the newspaper’s analysis, the Virginia Department of Mines, Minerals and Energy acknowledged that discrepancies between gas production reported by companies and their corresponding escrow payments were a problem, and the agency pledged that it had begun taking steps to improve oversight of the process.

One of those steps has been to contract an independent auditor to gauge gas corporations’ compliance with escrow requirements. In September, the Gas and Oil Board published a request for bids to perform a detailed audit of 35 individual accounts in escrow, selected randomly, from 2000-2008.

On Tuesday, the board awarded the contract to the Central Virginia accounting firm of Robinson, Farmer, Cox Associates, a large operation which primarily performs audits for municipalities. The firm was the last one to audit the escrow fund in 1999 – a $4,000 affair that stated no opinion about compliance.

The firm’s current bid contains few specifics about how its accountants would perform the detailed audit, which is expressly not covered in the $27,000 fee quote. That fee is for verifying that the receipts from escrow payments match the gas companies’ deposits.

Auditing the 35 individual accounts over the eight-year period would entail between 8,000 and 12,500 hours of work, Robinson, Farmer, Cox estimated. That would translate to a fee of between $800,000 and $1.25 million, based on the lowest hourly rate charged by an accountant performing the audit.

Given the high anticipated costs, the firm recommended that the board create its own internal process to perform the detailed audit, and it volunteered to assist in developing one.

That doesn’t mean the firm isn’t going to conduct a detailed audit, Corbin Stone, managing director, said in a telephone interview Friday.

“We do plan to do a detailed audit,” Stone said. “The scope of that can change with what we find. If you don’t find noncompliance, you reduce the scope. You just don’t know. Ultimately, [board members] can decide to expand the scope or reduce the scope.”

Stone also expressed a desire to recover any royalties gas corporations have failed to deposit into escrow.

“We want to make sure that the people that own the mineral rights to these properties are being remunerated for them,” he said.

In fact, people with royalties in escrow cannot access them without suing to prove ownership, or splitting them with someone else who claims them. But they are the ones who will foot the cost of the audit.

From last to first

A year ago, the Gas and Oil Board received three bids to perform the audit. A panel of state officials evaluating the proposals ranked Robinson, Farmer, Cox last.

The highest ranking went to a Colorado-based accountant named Mary Ellen Denomy, who holds an apparently unique combination of certifications as a petroleum accountant, mineral manager, fraud deterrent analyst and forensic financial analyst. Denomy estimated her maximum fee at $106,000, and in March, board members voted 4-3 to hire her to audit the escrow fund.

But at its April meeting, board members dropped the bids and voted to craft a new request for the audit. Board members sparred over how thorough of an audit to authorize, and expressed concern about the wide range in cost – from Denomy’s six figures, to another firm’s $5,000 quote. Robinson, Farmer, Cox had estimated a $13,500 fee.

“This discrepancy between lower proposals and higher proposals was so great,” Sharon Pigeon, the board’s attorney, said Tuesday in reminding members why they had decided to readvertise the contract. “We felt like someone didn’t have the right information.”

The board published its revised request in September, adding a requirement for a detailed audit of the 35 accounts, and received five bids. Two of the bidders – Denomy and a Winchester, Va.-based firm – were eliminated for failing to meet a requirement 26 pages into the board’s request. No one appears to have noticed during the first round that Denomy and the other firm, Accounting Associates, had not registered with Virginia’s electronic procurement service.

On Nov. 3, Steve Cooney, a DMME official, e-mailed David Asbury, the director of the state Division of Gas and Oil, that the two bidders had not registered on the online service and would be disqualified.

“Let’s double check this again please,” Asbury replied.

“We’ve double and triple checked it,” Cooney wrote the next day.

That day, Cooney, Asbury and two other state officials scored the three remaining bids.

In its bid, Robinson, Farmer, Cox offered few specifics about how it would perform the detailed audit beyond reviewing “official minutes of the Board and administrative policies,” and using “analytical review procedures” to determine the reasonableness of escrow payments. Stone would not go into detail about his methodology when asked Friday by a reporter.

The state officials scoring the bids gave Robinson, Farmer, Cox the highest rating for “thoroughness and responsiveness,” and a perfect score across the board for “cost/pricing,” even though the firm’s price quote did not include the cost of the detailed audit.

The difference in cost between the high and low bidders, it turned out, was almost as large as it was in the previous round that had concerned Pigeon, the board’s attorney: A Chesapeake, Va., firm represented the high end at almost $120,000, and Robinson, Farmer, Cox quoted the least expensive fee at $27,000.

Stone’s firm is now charging twice what it estimated in January to perform same type of audit. The difference, Stone explained, is that the addition of a detailed audit is likely to add to the difficulty of the simple verification audit.

“It complicates it on a pretty grand scale – or it has the potential to,” he said.

The vote

Discussion of an audit has sparked sometimes heated debate among board members, with some calling for a forensic audit and others arguing to exclude gas corporations’ financial records from the analysis. Only four of the seven members were present for Tuesday’s vote.

In an unusual step, board Chairman Butch Lambert moved the vote on awarding the contract for the audit from the last to the first item of business – ahead of the public comment period.

That decision dismayed at least one person who had signed up to speak – a Gate City, Va., accountant named Charles Bridwell, who read about the pending audit in the Herald Courier on Dec. 12, and hoped to make a last-minute pitch to board members for his services.

The two board members representing the coal and gas industries, Donnie Ratliff and Bruce Prather, made the motion to award the contract to Robinson, Farmer, Cox, with Lambert also voting in favor.

Katie Dye, a public member, was the only one to object; she still believed Denomy was the most qualified to perform the audit, and was unsettled by Stone’s firm’s cost estimates. The other three public members missed the vote.

A week earlier, public member Mary Quillen had written to Asbury seeking additional information about each of the three bids.

“I think all of the proposals sufficiently address the main issue and that is the audit of the escrow account,” Quillen, who earlier opposed auditing financial records of gas corporations, e-mailed Dec. 8.

Quillen was a no-show for the vote Dec. 15, but appeared minutes after it was taken.

Asked Friday by phone why she missed the vote, Quillen said, “Excuse me? Well, you know, that’s my personal business.”

When pressed, Quillen said, “Yes there was a particular reason for not being there.” She would not elaborate.

“I have a full-time job with many responsibilities that I do not believe is in any way related to anything to do with whatever it is you’re doing. Thank you so much,” she said, hanging up.

The other two public members, Bill Harris and Peggy Barber, did not return phone messages Friday seeking comment.

The audit is slated to begin in January, and the results should be in by March.

Stone said his approach would be to identify whether gas corporations have not paid money into escrow that they should have, and then evaluate the likelihood of retrieving that money.

Noting that companies might not want to comply, Stone said, “You would want to collect all of it, but are you going to wind up in litigation with these companies? What are the chances we’re going to collect this money?”

Robinson, Farmer, Cox accountants will update the board about what it can recover against what the firm charges in hourly fees.

“When it’s no longer beneficial, then the audit stops – at the board’s discretion,” Stone said.

The contract, he added, “will be written in such a way that they have the ability to stop the audit.”