Risk-Based Audit as a Strategic Tool for Improving Accountability in PSC System

Abstract

Cost recovery is an integral part of Indonesian Production Sharing Contract (PSC). The mechanism function as an incentive to attract investment in oil and gas exploration and production. The separation of function in PSC between the government and the contractor leads an information asymmetry over cost recovery. This issue makes the cost recovery calculation vulnerable to manipulation. In the context of the agency problem, the audit on cost recovery is deemed crucial as the government procedure to secure its share from inappropriate reimbursed cost. The paper presents the challenge of traditional cost recovery audit, and a proposal to implement a Risk-Based Audit (RBA) approach as a strategic monitoring tool over cost recovery. The RBA provides an efficient and effective audit practice to maintain audit quality. The paper also adds to the literature on the government practice in addressing agency problem in PSC's cost reimbursement system based on a case study in Indonesian PSC environment.