THE WALL STREET JOURNAL: Shell's Auditor Had Outside Support: ““KPMG and PricewaterhouseCoopers affiliates have been named in investor lawsuits alleging negligence and professional malpractice, among other charges.”: “In a sign the shake-up isn't likely to put the reserves issue fully behind the company, Shell also said last week that it may have to remove another big chunk of reserves from its books. That triggered Standard & Poor's to say Friday that it again was reviewing Shell's long-term double-A-plus credit rating.” (ShellNews.net)
Faith in Watchdog Raises
Questions of How Problems
Over Reserves Were Missed
By CHIP CUMMINS
Staff Reporter of THE WALL STREET JOURNAL
November 1, 2004; Page A6
LONDON -- One of Royal Dutch/Shell Group's outside auditors provided detailed assurances to the company in late 2002 that Shell's own reserves auditor was competent and independent, raising questions about whether external auditors missed big problems in the way Shell estimated its reserves.
Shell disclosed earlier this year that it had greatly overstated its oil and natural-gas reserves -- the estimate of energy an oil company has in the ground and a top investor parameter. The disclosure sent shares of Shell's two parent companies plunging and set off industrywide scrutiny over the way reserves are accounted for. The problems continue to plague Shell, which said last week that it may have to further reduce its reserves tally.
An internal Shell investigation and probes by U.S. and British regulators partly blamed Anton Barendregt, Shell's top internal reserves auditor. Investigators characterized Mr. Barendregt, referring to him by title but not by name, as poorly trained and not independent enough from Shell to give objective opinions.
But in a letter dated Dec. 13, 2002, a partner at KPMG International's Dutch affiliate wrote to Shell's controller, assuring him that Mr. Barendregt's qualifications were "excellent." Affiliates of KPMG and PricewaterhouseCoopers International Ltd. serve as Shell's external auditors. The letter, solicited by Shell, appears to be part of its annual review of reserves.
The role of Shell's outside auditors in the reserves scandal hasn't been explored in published portions of Shell's internal investigation and in regulatory findings. But the KPMG and PricewaterhouseCoopers affiliates have been named in investor lawsuits alleging negligence and professional malpractice, among other charges.
External auditors aren't required to sign off on an oil company's estimate of reserves, which makes up part of the "supplementary information" to financial statements in annual Securities and Exchange Commission filings. But U.S. accounting guidelines require auditors to check that internal processes for making those estimates are sound.
The KPMG letter, a copy of which was reviewed by The Wall Street Journal, also said that because Mr. Barendregt already was semi-retired from Shell and expected to retire permanently the following year, he could be considered a "financially independent" expert. "We have regularly assessed his position and experienced him as objective and critical," the letter stated.
That characterization contrasts sharply with subsequent findings by Shell internal investigators and the SEC. Mr. Barendregt had "received scant, if any, additional training on such critical matters as how he should conduct his work and the rules and standards on which his opinions should be based," the SEC said last August in its settlement order with Shell. "Critically, the Group Reserves Auditor also failed to act independently...facilitating the booking of questionable reserves," the order said.
A spokesman for KPMG declined to comment on the 2002 letter or on the firm's work for Shell, except to say it stood by the quality of its auditing. PricewaterhouseCoopers previously declined to comment on the investor lawsuits. Mr. Barendregt declined to comment on the letter.
The KPMG letter hasn't been made public, but a September legal filing by Sir Philip Watts, Shell's former chairman, refers to the document. Sir Philip was ousted from Shell after a probe led by Shell's audit committee laid much of the blame for the reserves scandal on him and a top deputy. He has said he acted appropriately and relied on assurances by internal and outside auditors that Shell's reserves were sound.
Last week Shell unveiled plans for a sweeping corporate remake, including the merger of its two parent companies -- Royal Dutch Petroleum Co., of The Hague, and Shell Transport & Trading Co., of London. The move was triggered by criticism that the company's nearly century-old dual structure contributed to the accounting scandal.
In a sign the shake-up isn't likely to put the reserves issue fully behind the company, Shell also said last week that it may have to remove another big chunk of reserves from its books. That triggered Standard & Poor's to say Friday that it again was reviewing Shell's long-term double-A-plus credit rating.
Write to Chip Cummins at chip.cummins@wsj.com