Wednesday, February 28, 2007

Auditing Timberland Silvicultural Activities

This is a sensitive subject but it needs surfacing. It applies to all organisations that are subject to financial audits. Many, perhaps most, financial audits of timberlands operations are pretty much worthless and provide a false sense of security. An effective audit of their revenue/expenditures for activities such as timber sales, site preparation, tree planting and road construction must have four components to have any level of credibility. They are:

1. the convention financial audit
2. a report of activities showing the pertinent information by an I.D. number (sale, stand, activity, etc).
3. a map with corresponding I.D. numbers
4. A field audit that verifies that what is on the ground is consistent with what has been reported. (i.e. stand 1521 is actually 156 acres of loblolly pine and is stocked reasonably close to the reported level).

So..., if you have an investment in timberland, did your forest managers audit meet these requirements for both revenue and expenditures. From my experience, there are three requirements necessary to make this happen.

First, the senior manager team must include foresters so there is a solid understanding of what is happening on the ground. You would think that this would be a given but it is not true in all TIMOs.
Second, a management information system capable of reporting those activities (the report) and capable of saying exactly where the activity took place (the map). This requirement is generally met in the form of a Geographic Information System.
The final requirement is a management team willing to make it happen. This type of an audit can expose weaknesses in even the best of organisations. Properly executed, these audits will not only assure investors but will also form the basis of improved operations.

When I was with the Forest Technology Group (responsibilities included both development and sales of webFRIS at various times) I had the opportunity to see the information systems of many forestry companies, TIMOs and state forestry organizations. In the process, I also noted a huge difference placed on the value of solid information by different organisations. The organisations with the best systems wanted even better systems. Some organisations had virtually nothing and little interest in obtaining the type of system required for adequate timberland management. If there were no foresters in key roles, there was little priority placed on good information systems or field audits. And I am convinced that those in charge did not recognize their vulnerability. The long term nature of forestry investments has the capability of masking poor management control. But sometimes, the chickens do come home to roost.

There is an alternative to a willing management team - an investor that requires it. As President Reagan put it - "Trust but verify".

2 comments:

  1. Brian,

    I couldn't agree more. Auditing of silvicultural results should be much more rigorous. In today's age of Sarbanes Oxley compliance requirements it should go beyond just auditing silvicultural results but should include audits of GIS acreage, standing merchantable inventory, and pre-merchantable stand characteristics. This is especially true for TIMO's and Timberland REIT's who's main asset is their land and trees.

    Bruce

    ReplyDelete
  2. Timber Investments have proven to be good for individual investors though...

    An article for your worries... Investing in Timber Stocks

    Enjoy…Cheers!

    ReplyDelete