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The horror story that has emerged from Shell

The Times: An auditor of no account

“the horror story that has emerged from Shell”: “determination to present the City with inflated numbers…widespread”

by Patience Wheatcroft

Business Editor’s Commentary

August 25, 2004

IT cannot have been much fun being the Group Reserves Auditor (GRA) of Shell. With no staff and limited resources, the part-timer could only visit a fraction of the group’s operating units in any one year. And it seems that he might have just as well not have bothered anyhow.

Reading the Financial Services Authority’s report into why it felt Shell deserved a £17 million fine, it emerges that the GRA was given as much respect in the organisation as the tea lady might have had. He could voice concerns about the valuations the company chose to use and they would be totally ignored. He had no authority to enforce the official rules on how reserves should be valued or even hold the company to its own guidelines.

Had the views of this individual been listened to, the horror story that has emerged from Shell would have been avoided. However, what is clear from the FSA’s report is that the determination to present the City with inflated numbers was sufficiently widespread to ensure that one individual’s carping was not going to have any weight at all.

Had he been a braver individual, a GRA seeing his misgivings so repeatedly ignored might have decided to blow the whistle, either to the company’s auditors or to the wider world. The culture at Shell, however, was not one to encourage whistle-blowing. Given the personalities involved, it was perhaps brave of the GRA to have the temerity even to mention that there might be the slightest problem.

While the criticism of the now departed chairman, Sir Philip Watts, was well deserved, it now seems apparent that the problems on reserving valuations can be heaped on a number of shoulders, although the FSA carefully avoids mentioning any individuals. Eventually, when the US Securities and Exchange Commission finishes its investigations, it will be clearer who said what to whom and when.

But in the meantime what we learn from the FSA is that when the company, under the leadership of Sir Mark Moody-Stuart, established five Value Creation Teams, it was certainly looking for creativity. That a paper of May 1998 could have been entitled “Creating Value through Entrepreneurial Management of Hydrocarbon Resource Values” is an eloquent indication of what was to follow.

It was the precursor of the changes in valuation policy that eventually led to Shell having to admit that it had “lost” billions of barrels of oil. But the FSA also points out why the company, or some in it, were so keen to make the figures look good. It was not merely that the company had been looking a poor performer by comparison with some of its rivals. No, the motivation, as is so often the case, owed something to the fact that remuneration packages for some were directly linked to the reserves figures.

That might have been expected to have alerted the company’s own auditors, as well as the GRA, to look carefully in this quarter. However, although the FSA report does mention that the auditors had challenged some of the figures, nothing seems to have come from the challenge. Maybe they received answers that reassured them or maybe, like the GRA, they decided that Shell should be allowed to continue with its policies on reserving.

Either way, KPMG and PwC look likely to find themselves involved in the class actions that are an inevitable follow-on from this sorry situation. Shell, meanwhile, is continuing to work out how to restructure itself. Clearly, the need for a drastically different organisation is now greater than ever.

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