Shell

It was probably inevitable. The fall-out from the Shell corporate scandal of overstated mineral reserves is beginning to affect the group's two auditors, PricewaterhouseCoopers (PwC) and KPMG.

Shell's announcement that in future the company's auditors of reserves will now report to group internal audit, outside the business line of command, has led to suggestions from some commentators that PwC and KPMG were not sufficiently vigorous in their evaluation of the previous internal audit and reporting structures.

Shell has now announced additional strengthening of its internal reserves assessment procedures, with a significant increase in staff dedicated to reserves management. This will include both dedicated reserves auditors and the systematic use of external experts in the reviewing of reserves levels and processes. External experts will also be called in as part of the external audit function in future, with the largest supply regions audited on an annual basis.

But it has emerged that Shell's internal auditors were not the compliant and silent people that might have been assumed from the initial media coverage of the company's rows over its reserves statements. Back in 2002 Anton Barendregt, a senior reserves auditor at Shell, told an industry conference that reserves levels should not be used as a performance measure in determining bonuses.

Meanwhile, the corporate shock-waves from the scandal are still being felt. As expected, financial director Judith Boynton has become the third senior Shell executive forced out by the crisis, following the departures of chairman Sir Philip Watts and head of exploration and production Walter van de Vijver. An investigation carried out by Wall Street law firm Davis Polk & Wardwell concluded that Watts and van de Vijver were first aware of the reserves overstatement three years ago. Their report reproduced memos from van de Vijver to Watts pleading for them to go public on the reserves shortfall. The investigation also criticised Boynton for taking 'virtually no action' to assess whether reserves had been correctly booked.

The inquiry drew a picture of a climate of fear in the company which prevented a proper challenge to the level of reserves that were declared. Shell accepted that the investigation showed that it 'took a more aggressive tack than its peers to demonstrate reserve growth and the potential for rising production in the face of large embedded production declines'.

Shell will now have to restate its earnings for 2000 to 2003 and respond to continuing investigations conducted by the US Securities and Exchange Commission (SEC), the US Justice Department and the UK's Financial Services Authority. Credit rating agency Moody's has reacted to the company's problems by downgrading Shell's long-term debt ratings from AAA to AA1, with the debts of some subsidiary companies downgraded as low as A1. The ratings are subject to ongoing review, which may lead to further downgrades. The company conceded that its lowered credit ratings 'reflect the diminished prospects and positioning' of the group's oil and gas operations compared with those of its rivals.

However, the Royal Dutch/Shell group was able to report higher than expected current year first quarter profits, at $4.25bn (£2.4bn). It has increased investment to generate faster returns on short-term projects, while stabilising the position on long-term developments in Nigeria and Russia, where costs have gone over budget. The company attempted to improve investor relations by initiating a $2bn (£1.13bn) share buy-back programme. Analysts responded to the results by warning that Shell had fallen significantly behind its competitors.

Ironically, an external audit of oil reserves of Russia's largest oil producer, Yukos, conducted to satisfy stricter controls introduced by the SEC in the wake of the Shell revelations, showed that Yukos had understated proven reserves by 14%. Brunswick UBS suggested that across all exploring companies, Russia's proven oil reserves could increase three-fold as more external assessments are undertaken. If this is confirmed it would raise Russia to second place in oil reserve rankings ahead of Iraq, but still behind Saudi Arabia.