WASHINGTON - The government relies largely on an "honor system" for oil and gas companies to pay billions of dollars for drilling on federal lands each year and doesn't adequately check whether royalty payments are accurate or even filed, federal officials said Tuesday.

The Interior Department "lacks adequate assurance that it is receiving full compensation for oil and gas produced from federal lands and waters," officials of the Government Accountability Office testified.

"Ultimately the system used by Interior to ensure taxpayers receive appropriate value for oil and gas produced from federal lands and waters is more of an honor system than we are comfortable with," their statement said. "Despite the heavy scrutiny that Interior has faced in its oversight of royalty management, we and others continue to identify persistent weaknesses in royalty collections."

Interior officials testifying at the oversight hearing by the House Natural Resources Committee said they already are putting in place a series of reforms.

The Minerals Management Service collected more than $11.4 billion in revenues from federal production in fiscal year 2007, according to the Interior Department.

"MMS's systems and processes for collecting and verifying royalty data are inadequate and lack key internal controls," the GAO officials said.

Companies are required to self-report monthly production volumes to the MMS. The companies compensate the government for producing federal oil and gas resources either with cash or "in kind," with oil or gas. Cash payors must submit monthly royalty reports to MMS specifying how much they owe, and then pay the Treasury Department.

But the MMS does not consistently examine data from third parties to verify whether the self-reported industry data are complete or accurate, GAO officials said.

The MMS financial management system "continues to lack the ability to automatically detect missing royalty reports." That means MMS may not be able to identify instances in which it is owed royalties simply not being paid.

"Cases in which a company stops filing royalty reports and stops paying royalties would not be detected unless the payor or lease was selected for an audit or compliance review," the GAO officials said.

Companies may legally make changes to both royalty and production data in MMS'a financial management system for up to six years after the reporting month. Although those changes may necessitate adjustments in the royalty payment, they do not require prior approval by - or even notification of - MMS.

The Bureau of Land Management is charged with inspecting about 20,000 producing onshore leases annually to ensure that oil and gas volumes are accurately measured.

But BLM inspectors from Montana, Wyoming, Colorado, New Mexico and Utah told the GAO investigators that only eight of the 23 field offices in those states completed their required annual inspections of wells and leases that are high-producing and those with a history of violations, and inspections every third year on all remaining leases.

The Interior inspector general, who has harshly criticized MMS in the past, testified that in the long term, his office will develop the capacity to oversee all minerals-related Interior activity, including royalty payments. It is already in the process of opening a Denver-based royalty oversight office.

Responding to the earlier criticism, department officials asked its Subcommittee on Royalty Management to examine the program. The subcommittee came out with a 160-page report in December with 110 recommendations.

David Deal, who served as vice chair of the subcommittee, said the royalty program is "not broken, but does need a major tune-up." He testified that the department has already begun to make the recommended changes.

Interior Assistant Secretary C. Stephen Allred said they found no significant problems that threatened the viability of the program, but that there were "lots of opportunities for improvement."

MMS Director Randall Luthi of Wyoming also said the agency stands ready to put the recommendations in place. He noted that the GAO officials testified while their investigation is still in progress and said MMS will provide more data for the final GAO report.

Luthi also said the MMS financial management system has not been perfect and they have had to make changes to it. But he said it is working now and effective for the most part.