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The Independent: Watchdog shakes up oil audits in the wake of Shell scandal

The Independent: Watchdog shakes up oil audits in the wake of Shell scandal

By Tim Webb

02 May 2004

The global accounting watchdog has launched an overhaul of the accounting rules for the oil and gas industry in the wake of the Shell reserves scandal.

Auditors could be forced to sign off oil companies’ reserves under the new rules being proposed by the IASB.

It is also expected that companies will have to make far more disclosures to back up their reserves statements as a result of the changes.

Members of the watchdog decided to launch the review for extractive industries, including the mining sector, after meeting in London last week.

Warren McGregor, a member of the IASB, said that the watchdog has been spurred into action by Shell, which in January reclassified a fifth of its “proven” reserves as “probable”.

“We admit this is overdue,” he said. The IASB first recognised that accounting standards for the extractive industries needed overhauling in 2000 but then Enron and other corporate scandals took centre stage.

The independent body’s powers will increase next year when all companies with listings in the EU or Australia will have to comply with its standards.

Mr McGregor said the review will take two years, but an interim standard will be introduced at the end of this year.

The IASB will establish an advisory committee to examine the issue which will consult with regulators, including the Securities & Exchange Commission in the US, the accounting industry and listed companies.

The oil companies’ practice of amortising – or spreading over a number of years – the cost of exploring for oil before any proven reserves are booked will come under the microscope.

Accountancy firms which audit oil companies say they are planning to hire engineers who can verify companies’ reserves statements after the Shell scandal. “In the past, we have taken what directors say at face value,” one senior accountant said. “We can’t do this anymore.”

In the same way that auditors use actuaries to assess the value of pension funds and insurance policies, it is expected that auditing of oil companies will require more specialist expertise.

Lord Browne of Manningley, the chief executive of BP, attacked the SEC last week for its handling of the reserves issue. The US regulator has allowed unnamed companies – suspected to be mostly US companies – which have deepwater operations in the Gulf of Mexico, to book proven reserves there without drilling the required appraisal wells, it has emerged.

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