Discrepancy Remedy – Adjustment or Reconciliation?
June 22, 2016
When posed with the question, “What is Loss Control?”, one typically conjures visuals of various forms of metrology, including meters, gauges, instruments, intricate lab procedures, and complicated correction and compensation factors. Is this not correct – to consider all of the mechanical and molecular intricacies as the components of a loss control function? A journey down the path of Loss Control will certainly take you to all of these, and more – fascinating behaviors of machines and hydrocarbons as well as methods to increase accuracy and reduce variability. But at some point of this journey, one realizes that there is no loss until there is an identified discrepancy. Sometimes the discrepancy is obvious, such as a questionable entrepreneur driving away with a stolen barrel of your gasoline, or the visual of a physical spill of product on the ground. Both of these are usually immediate and quantifiable. But sometimes, the discrepancy is small, and only noticeable over a long period of time, or one may not even have the luxury of a discrepancy, as in receiving product into a dynamic system unable to verify the input.
How do we find discrepancies? Generally, this happens when we have an expected result and see something different. This scenario is when Loss Control can enter the picture as a key function in many discreet and non-discreet process industries. The verification of performance, quarterly reporting, commercial obligations, along with hundreds of internal metrics is how a company measures performance and results, so deviations would logically warrant further inquiry. Fortunately, even without loss control functions, companies rely on accounting principles to identify and remedy such discrepancies.
However, by the time accounting is dealing with the discrepancy (even if it is significant enough to be on their radar), the accounting remedy is far removed from the operational event that actually occurred. Not only is this separation seen as time, but is also seen as a divide between two functions that rarely have the insight as to each other’s detailed activities and responsibilities. There are many reasons for this. For example, the actual accounting entry may be a culmination of many smaller events, or even a post-period adjustment that will impact the company’s P&L weeks or even months after the physical event itself. In most cases, no investigation or telephone queries occur, so the event passes unnoticed and unable to play a role in changing or correcting processes or behaviors.
In the instances where accounting does recognize that the discrepancy has exceeded some threshold, and initiates some level of questioning, then begins the process of adding visibility and transparency to the loss event. In the accounting world, this step is sometimes called “reconciliation.” The connection between hydrocarbon loss control and accounting is this step of reconciliation. True reconciliation back to the front line, or point of measurement, is how companies recover financial loss. The alternative to a full reconciliation that will explain the discrepancy is simply quantifying the discrepancy and entering an adjustment.
This accounting event acknowledges the loss, and boldly off sets the discrepancy with the adjusting entry – now all the books are in balance. With no malice or misguided direction, this practice is the norm, and is seen in every company.
So when dealing with an identified discrepancy, one usually must either acknowledge it with an adjustment and the loss “goes away”, or continue the reconciliation process to identify the operational cause and determine if the correct course is financial recovery of the loss through investigation and escalation.
This blog was written by Gil Moore, Associate Principal at Trindent Consulting. He has over 25 years experience in the oil and gas industry and has extensive knowledge in Hydrocarbon Loss Control, business auditing, problem identification, and solution development.