Initial RFS Audits, Updated Rules Require Comprehensive Evaluations

Tracking the Renewable Identification Numbers required by the renewable fuels standard is a daunting task. The first full year of the system provided experience that will pay off in the future.
By Wade Watson | February 04, 2009
When the U.S. EPA's Renewable Fuels Standard program went into effect on Sept. 1, 2007, it established a range of provisions applicable to regulated parties. Those provisions include annual attest engagements (audits) that must be performed by a certified internal auditor, an independent certified public accountant or a CPA firm.

The first reporting period covered by those requirements was Sept. 1 to Dec. 31, 2007, with attest engagement reports due by May 31, 2008. Auditors examined companies' annual compliance demonstration reports, quarterly renewable identification number (RIN) generation reports, quarterly RIN transaction reports, quarterly gallon-RIN activity reports, and the underlying documentation, including product transfer documents required for each change in renewable fuel ownership.

EPA provisions mandated detailed examinations and audit reports that went beyond identifying exceptions. While particular circumstances varied among obligated parties (a gasoline refiner or importer), exporters of renewable fuel and non-obligated parties (renewable fuel producers and importers, and any other party taking ownership of RINs), initial audits for the 2007 reporting period identified the following general concerns which must be addressed as companies face updated audit procedures.

Complete, Accurate RINs
The EPA established the RIN system to track renewable fuel batches from the producer through various downstream entities. Each RIN represents a batch of renewable fuel, and each batch of renewable fuel generated requires a RIN.

A RIN consists of a 38-digit code that includes the year the fuel was generated, the equivalence value for the specific type of renewable fuel, a company registration number and a facility registration number. Each RIN also includes an unassigned or assigned designation. Generally, an assigned RIN must accompany any renewable fuel batch transferred to a new owner.

Once the renewable fuel batch is purchased by an obligated party or blender of gasoline with renewable fuel, the RIN can either be retained by the purchaser or sold separately as an unassigned RIN. With that system, the EPA created a market where obligated parties could purchase RINs to meet annual renewable volume obligation requirements.

Quarterly RIN transaction reports contain the RIN traded as part of the transaction. Common difficulties uncovered during audit examinations included RINs that did not have all 38 digits or typographical errors related to entry of some of the characters in the RIN sequence. Companies need to ensure that RINs are correctly entered.

The Need for RFS Compliance-Specific Software
In addition to difficulties encountered in recording complete and accurate RINs, companies faced challenges in correctly documenting all of the activities associated with generating, buying, selling or retiring renewable fuel batches, and producing the necessary quarterly and annual reports for RFS program compliance.

Using a spreadsheet or another general business application for necessary documentation requires devising macros for cross checking, as well as conducting regular manual reviews. Without such controls, companies faced considerable risk for reporting errors.

To promote greater accuracy and efficiency, some larger companies have developed custom compliance-related applications. For smaller companies lacking such in-house information technology capabilities, a variety of applications specifically designed for RFS compliance purposes are on the market.

Balancing Reports, Accurate Reporting
When the EPA established the audit requirements for the RFS program, it defined methods for auditors to use in reconciling or verifying the accuracy of various reports. For example, the total buys, sells and retirements listed in the quarterly RIN transaction reports should correspond to the total buys, sells and retirements listed in the quarterly gallon-RIN activity report. Inventory analysis is used to verify gasoline production volumes reported in the annual compliance report. Renewable fuel production documentation is used to determine the accuracy of RIN generation reports.

Unfortunately, audit examinations revealed instances where various report totals that should have balanced did not balance. To promote greater efficiency and remain in compliance, companies need to deploy the EPA's prescribed methodology and regularly contemporaneously check whether report totals balance properly.

Renewable fuel producers and importers generate RINs. Uncertainty regarding the proper method to account for such generations in the gallon-RIN activity reports, however, prompted some companies to report those activities as purchases in transaction reports. The RINs generated must be manually added to the end-of-quarter RINs for balancing.

The EPA allows parties to use RINs generated in a previous year for current year compliance, up to a 20 percent threshold. A company cannot, however, use RINs generated in a future year. In other words, RINs generated in 2008 were not valid to meet 2007 compliance.

Planning for Future Audits
In February 2008, Congress approved increasing the annual renewable fuel amount that is required to be blended into gasoline for the 2008 compliance year to 9 billion gallons, or 7.76 percent of the nation's gasoline production. That standard is used to calculate the renewable volume obligation that obligated parties must meet every year. A company's renewable volume obligation for 2008 is determined by multiplying annual gasoline production volume by 7.76 percent.

The EPA also released technical amendments in October 2008. The amendments address various grammatical or typographical errors, or provide minor clarifications to assist regulated entities in complying with the existing RFS program requirements and include revisions to the audit procedures. Audit procedures for the 2008 compliance year address:

› Annual Compliance Demonstration Reports
The annual compliance demonstration report is used to verify that an obligated party has met its renewable volume obligation. For meeting that obligation, RINs are considered expired or invalid two years after they were generated.

Documentation for all renewable fuel used in gasoline at the refinery or import facility must be obtained and reviewed by the auditor, with the volume being reported as a finding.

This procedure is meant to address situations where renewable fuel is used in the production of gasoline and should be excluded from the volume of gasoline produced for purposes of calculating the company's renewable volume obligation. Inventory analysis is then used to verify the total gasoline production volume reported to EPA. Auditors are also responsible for recalculating the renewable volume obligation.

One of the updated rules directs auditors to calculate the total number of RINs used for compliance based on year of generation, rather than calculating and reporting on all RINs used for compliance. The auditor must compare that data with information reported to the EPA. For further examination, the auditor must select a representative sample of RINs used for compliance and review supporting product transfer documents and other documentation.

› RIN Generation Reports
The RIN generation report is unique to a renewable fuel producer or importer, and must be filed quarterly. Auditors cannot rely upon examining samples and need to review production data for each renewable fuel batch, and verify that the proper number of RINs were generated and assigned to fuel batches.

The auditor must determine whether actual volumes of denaturant and applicable values, the designated renewable fuel type and other listed details conform to information provided to the EPA. Related product transfer documents require scrutiny on a representative sample of renewable fuel batches produced or imported during the year, with auditors verifying the accuracy of the information contained in the product transfer document.

› RIN Transaction Reports
Each transaction in a listing of RIN transaction reports is essentially a report in itself, providing considerable documentation for that event. Under revised EPA rules, a sample is required for each type of transaction—purchases, sales and retirements—included in the listing of transaction reports. Retirements are of particular concern to obligated parties, since they retire RINs for use in meeting their annual renewable volume obligation. RINs listed as retired due to use need to include the unassigned RIN (k=2) designation.

The auditor must test each transaction sampling to verify its accuracy. That entails obtaining and reviewing contracts, invoices, product transfer documents or other relevant documentation. Findings must conform to what was reported to the EPA, and any exceptions must be reported.

› Gallon-RIN Activity Reports
Auditors must review documentation used to generate information for the quarterly gallon-RIN activity reports, and compare information contained in that report to the transaction samples examined as part of the transaction report audit procedures. Sampling information from the transaction report should correspond with activity report data. Quarterly beginning and ending totals and sums for RIN purchases, sales and retirements should also correspond to transaction report information. The auditor is required to report any discrepancies.

› Product Transfer Documents
Under RFS provisions, a product transfer document needs to accompany each change in renewable fuel ownership. Each product transfer document requires the RINs assigned to the volume transferred, as well as the name, address and EPA registration number for the transferor and transferee, volumes of renewable fuel being transferred and transfer date.

The auditor must verify that this information is included on all product transfer documents reviewed related to audit procedures performed, with exceptions being reported.

Summary
The initial work related to RFS filings and audits illustrated the importance of devising and sustaining processes for effectively capturing necessary information, and then regularly reviewing that data for accuracy. RFS compliance is an ongoing requirement, and addressing those provisions in the most efficient manner possible is a crucial concern for all affected parties.

Wade Watson is a certified public accountant, certified fraud examiner and an audit partner for Weaver and Tidwell LLP. Reach him at wlwatson@weaverandtidwell.com.