The Wall Street Journal: SEC May Require Auditors To Sign Off on Oil, Gas Reserves: “SEC's re-evaluation of its rules comes on the heels of the Shell accounting scandal”

Associated Press

July 20, 2004 8:15 p.m.

Posted 21 July 04

HOUSTON -- The Securities and Exchange Commission may require independent auditors to review the reserves of energy companies in light of recent oil reserves downgrades at Royal Dutch/Shell Group and other companies, SEC staff said in a memorandum provided to Congress.

The SEC, citing new requirements for companies to review their financial controls, said it will also consult with the Public Company Accounting Oversight Board on whether new regulations are necessary. There is no current requirement for outside auditors to certify oil and gas reserves, a key benchmark for valuing oil companies.

"In view of the recent revisions of many companies in this industry, the internal controls over preparation of reserve estimates may have been inadequate," according to the June 24 memo, signed by Allan Beller, director of the SEC Division of Corporation Finance, and SEC Chief Accountant Donald Nicolaisen. The SEC will review the matter with the accounting board "and evaluate, with them, whether auditors should be required to perform additional work."

Congress set up the accounting board in 2002 following a number of financial scandals.

The SEC's re-evaluation of its rules comes on the heels of the Shell accounting scandal and reserves downgrades by a number of smaller companies. The SEC memo, addressed to agency Chairman William Donaldson, is the agency's formal response to a lengthy inquiry from Rep. John Dingell (D., Mich.), the ranking member on the House Energy and Commerce Committee.

Saying he is "underwhelmed, if not outright troubled" by the federal response to a series of large oil and gas reserves downgrades, the Democratic congressman called on regulators to impose new rules immediately.

"The time is past for lengthy study," Mr. Dingell said in a July 20 letter to the heads of the SEC, the Financial Accounting Standards Board and the Federal Energy Regulatory Commission. "I urge you to undertake a standard-setting project in consultation with the appropriate accounting and energy regulators with all deliberate speed."

In the SEC memo, the commission's most extensive written commentary since the Shell problems surfaced, the commission declined comment on Shell and other pending cases.

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