unproved
property pool and (5) errors related to the evaluation of our asset retirement
obligation. These errors came to management's attention in connection with the
preparation of our consolidated financial statements for the year ended December
31, 2005. The controls in place related to items (3), (4) and (5) (“Other Controls”)
were not properly designed and/or operating to provide reasonable assurance that
amounts would be properly recorded in the Company’s consolidated financial statements.
The failure of the Other Controls constituted a third material weakness in our
internal controls as of December 31, 2005. Management has determined that the
restatement of our consolidated financial statements discussed in Note 3 to our
consolidated financial statements included in Item 8 of this report was an additional
effect of the year-end close process material weakness. All correcting adjustments
were recorded by the Company prior to the finalization of its 2005 financial statements.
The Company has implemented procedures to prevent these specific errors from occurring
in the future. However, the additional initiatives (outlined below) are needed
to remediate the material weaknesses in our internal controls, and thus lower
the risk level to remote of other potential material errors or omissions. As
a result of these three material weaknesses, our management has concluded that
our internal control over financial reporting was not effective as of December
31, 2005. We made a similar conclusion as of December 31, 2004. Remediation
Steps While there can be no assurance in this regard,
we expect that the following initiatives will eliminate the material weaknesses
relating to our year-end close process and Other Controls in 2006: (1) increasing
the level of our professional accounting staff, including the successful placement
of a new manager of financial reporting, new controller, new manager of accounting
and new director of financial planning and analysis (except for the last position,
the new professionals have either already started work or will begin in April
2006), and (2) completing our transition to a new fully-integrated accounting
software system (phase one was completed in the fourth quarter of 2005) to automate
processes and improve qualitative reviews. Until the these initiatives are fully
implemented, we will continue to rely on manual processes and require additional
commitment of resources to the closing process to produce our financial records
and reports. We have engaged a consultant to assist us in evaluating our risk
management program to provide guidance, and where needed, assistance so that we
may continue to account for our derivative activities as cash flow hedges in accordance
with the requirements of SFAS No. 133 on a prospective basis. As of the date of
this report, we have not yet completed the initiatives described above. While
we have hired three new accounting professionals, we have not yet hired a new
director of financial planning and analysis. Also, our project team has made significant
progress towards completing the transition to a new fully-integrated accounting
software system described in the second initiative. We have discussed these material
weaknesses and our remediation steps with our Audit Committee. PKF
has issued its own attestation report on management’s assessment of the effectiveness
of internal control over financial reporting as of December 31, 2005, which is
filed herewith. (c) Changes in Internal Control
Over Financial Reporting. Except as described above there have not been any
changes in the Company's internal control over financial reporting during the
fiscal quarter ended December 31, 2005 that have materially affected, or are reasonably
likely to materially affect, the Company’s internal control over financial reporting.
As described above in paragraph (b) of this Item 9A under Management’s Annual
Report on Internal Control over Financial Reporting, the Company identified material
weaknesses in the Company’s internal control over financial reporting and has
described a number of planned changes to its internal control over financial reporting
during 2006 designed to remediate these weaknesses. (d)
Report of Independent Registered Public Accounting Firm.
Board of Directors and Shareholders
Carrizo Oil & Gas, Inc.
Houston, Texas
We have audited management’s assessment, included in
the accompanying Management’s Annual Report on Internal Control Over Financial
Reporting appearing under Item 9A, that Carrizo Oil & Gas, Inc. did not maintain
effective internal control over financial reporting as of December 31, 2005, because
of the effect of the material weaknesses identified in management’s assessment,
based on criteria established in Internal Control—Integrated Framework issued
by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
The Company’s management is responsible for maintaining effective internal control
over financial reporting and for its assessment of the effectiveness of internal
control over financial reporting. Our responsibility is to express an opinion
on management’s assessment and an opinion on the effectiveness of the Company’s
internal control over financial reporting based on our audit. We
conducted our audit in accordance with the standards of the Public Company Accounting
Oversight Board (United States). Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether effective internal control
over financial reporting was maintained in all material respects. Our audit included
obtaining an understanding of internal control | 
