With accounting practices under intense scrutiny, accrual of field tickets and reconciliation with invoices can be made more accurate, timely and transparent using information technology.

Managing payables and accrued liabilities in the oil patch has always been problematic. Verbal commitments for goods and services in remote locations have been the norm for the past 70 years. Purchasing and accounting have had little or no visibility into those commitments until the supplier invoice arrived. Adding to the confusion, field tickets are lost or delayed, and invoices often don't match field tickets. Oil patch accounting organizations have had to develop methods of dealing with these realities at the expense of traditional accounting controls. There simply have not been viable alternatives that enable companies to be responsive to customers and the demands of the oilfield environment, yet provide good internal controls.

With the increasing scrutiny on corporate accounting practices and the SEC order requiring officers' certification of both their financial statements and the process in place for ensuring accounting accuracy, the failure to address these critical internal control weaknesses may fuel the indictments of the future. The technology supporting the business processes and controls has not been economically capable of meeting the needs of this environment - until now.

In the traditional order sequence, the purchase order is created and sent to the supplier, the supplier delivers, the purchaser receives, and the supplier invoices. The material is standard, the quantity is known and the delivery is to the same location every time - a relatively nice, clean and predictable process.

In the oil patch, there are fewer orders, the orders are created by a phone call or other verbal commitment, the delivery is to a highly mobile and often remote location, and the exact quantities often are not known until the delivery takes place. The formal receipt is on location (paper based) and is not recorded against a purchase order.

The problem with this process is that the accounting and procurement functions of the organization often have no visibility into purchases until the invoice shows up. Sometimes, the field ticket has been delayed or lost. In this case, the invoice receipt kicks off the search for the corresponding documents. Accounts payable departments and rig supervisors are sucked into a quagmire attempting to find documents and reconstruct events of several weeks or months ago. Even if the field ticket has been received, the invoice sequence, quantities or description differences create the same kind of resource drain. The net result is that the company wastes resources, liabilities are misstated due to the lack of visibility, and suppliers are not paid in a timely manner.

A related problem is that budgets are developed without considering these invisible liabilities. The result is the operations manager absorbs these expenses as the invoices come floating in, in effect reducing the available budget.

Figure 1 shows how field tickets are currently handled. In steps 1 through 5, the order is placed by phone to the supplier, the supplier enters the order into their sales order system and the supplier delivers the goods and/or services to the rig location along with a field ticket. If the order is for services, the services are provided at the drilling rig location. Next, the supplier prepares an invoice and forwards it on to the buyer's accounting department. The field supervisor at the rig then sends the field ticket to their accounting department. Once the buyer's accounting department receives the field ticket, they attempt to match it with the invoice.

This illustrates the lack of a formalized purchase order, the lag time that exists between the receipt of the field ticket at the rig and the accounting department, and the delay in matching the field ticket and the invoice. This process creates the need for additional, unwarranted communication between purchasing and accounts payable and frustration from the supplier, who is not paid on time.

So how can a purchase order be created in this environment that would match the supplier's delivery? What if the order data could be captured and shared from the point that it first becomes digitized? The key question then becomes "When is the data for the purchase digitized, and how can it be leveraged?" In most cases, this is the point at which the supplier takes the order. A simple example might be ordering a pizza. We do not enter an order when we pick up the phone and place the order, but you can be sure the pizza place does. Likewise, when the tool pusher orders pipe or cement, he doesn't enter an order, but the supplier certainly will. Whenever an order is placed, suppliers will enter it in some kind of digital format, be it an ERP system or a spreadsheet. If this digital order information could be shared or transmitted to the customer and received by the customer's purchasing system as a purchase order, then the order information would be captured in both the customer's and the supplier's systems. Technically, the supplier's sales order is converted into a customer's purchase order. All the information required is present.

Now let's complicate the arrangement slightly. In the case where the supplier is uncertain what ultimately will be delivered, as in the case of a cement job, the supplier could delay the sharing of the order information until the service or the product is delivered. This would greatly simplify invoice processing because the invoice would match the order information, which would have been captured in the customer's purchasing system. The delivery of the goods or services essentially would create the purchase order. The customer's accounts payable department could then see the actual order information and more accurately determine how much to accrue.

What about the approval process? How do we know that the goods and services were actually delivered? In order to complete the picture, the field receiver must be able to positively acknowledge the receipt of the goods and services. This acknowledgment also serves as the approval for payment even before the invoice arrives. Now that we have visibility into the process and how the order information is shared, the invoice should be accurate and match the field ticket. The processing becomes much more efficient.
The architecture for this solution is relatively straightforward. There are two components required: the Internet; and a connectivity provider, which provides a messaging architecture, back office integration connectivity and business rule support.

Novoforum provides a hosted messaging service hub that electronically connects the back office of the supplier to the back office of the customer. Figure 2 shows the process for this approach. In steps 1 through 8, the order is placed by phone to the supplier, the supplier enters the order into the sales order system, which then sends the sales order to the NovoChain hub, where it is translated into a purchase order for approval. The purchase order is then held in NovoChain until the receiver on the rig approves it for payment. Once approved for payment, the purchase order is sent to the customer's back office. The field receiver then logs on to a secure Web page to approve the purchase order. The purchase order is translated into a format that the customer's back office can read and process. Once the approved purchase order is entered into the customer's back office, it can be matched with the invoice for payment.
There are also several possible variations that would accommodate a wide variety of business processes and rules. NovoChain enables a customer to extend the functionality of its back office while maintaining its data integrity. It also allows the customer to leverage the services of its suppliers by capturing the data the suppliers have already digitized.

For example, some companies may have different systems for managing the field purchasing process and accounts payable. Without NovoChain, interface applications would have to be constructed to allow accounts payable to be notified of the purchase order. With NovoChain, the two systems can send transactions from the field simultaneously without the need for interfaces.

The difficulties of managing the nuances of the oil field will never be easy, but with some intelligent application of technology, the risks that are typically accepted as inevitable no longer have to be. Given the current economic and regulatory climate and intense scrutiny of accounting practices, the need to demonstrate more effective controls and more accurate accruals now has a viable solution through better utilization of information technology.

Comments