Issues Accounting Issues – Manipulation of Reserve Reporting Royal Dutch Shell was required to comply with Security Exchange

Commission (SEC) reporting standard including the disclosure of proved oil and gas reserve since its securities was traded on the New York Stock Exchange. According to SEC rules, a reserve must have ‘reasonable certainty’ of being technically and commercially produced to be considered ‘proved’. SEC claimed that Shell over-reported its proved reserved in 2002 by 4.47 billion barrels of oil equivalent or approximately 23% and further concluded that Shell also overstated the standardized measure of future cash flow in the report by approximately $6.6 billion.


1. The company should ensure that the Internal Audit department consists of sufficient and well trained staffs to carry out their duties effectively and efficiently. Internal Audit function can serve as check and balance mechanism and to provide reasonable assurance that it was estimating and reporting proved reserves accurately and in compliance with applicable requirements. 2. Shell should have clear guidelines on reporting the proved reserve whether for the purpose of internal decision making or for regulatory reporting and there should be no distinction between the end result between them.

Shell’s overstatement of proved reserves, resulted from: (i) Its desire to create and maintain the appearance of a strong Reserve Replacement Ratio (RRR), a key performance indicator in the oil and gas industry, (ii) The failure of its internal reserves estimation and reporting guidelines to conform to SEC s requirements, and (iii) The lack of effective internal controls over the reserves estimation and reporting processes. These failures led Shell to record and maintain proved reserves it knew (or was reckless in not knowing) did not satisfy SEC requirements, and to report for certain years a stronger RRR than it actually had achieved.

An independent “arbitrator” who could actually make decisions to resolve issues put forward by a complainant or a whistleblower in a way the arbitrator believes to be fair and proper. His main concern was to achieve more than 100 percent of reserve replacement. Thus. Provide discussion channel Shell’s largest competitor – Chevron . took no action on the matter even she was aware of the overstatement. 2. As a chairman. Indeed. ExxonMobil and BP were able to maintain reserve replacement ratios in excess of 100 percent but Shell reserve replacement ratio was declined to 74 percent. would need to agree that the arbitrator decision or action would be binding. the company’s’ chief financial officer Judy Boynton. The management could provide several formal channels such as internet discussion forum to ensure all issues highlighted are properly managed and discussed with top level management. his main focus was on reserves. Both parties involved – the complainant and Shell. in struggling to improve the reserve replacement ratio. He changed the working culture of the company. This facility consist not only representative from Shell management but also independent arbitrator from outside the company. he exercised autocratic leadership and was so directive towards other managers and officers. Aggressive Leadership During the leadership of Sir Philip Watts. Encourage Whistle Blowing In the Organization Shell should setup its Whistleblowing facility to facilitate and encourage any individu in the company to expose any misconduct or fraudulent act by the management. Walter van de Vijver concern regarding the possibility of overstatement of company’s reserves.Ethics – hiding fraudulent conduct 1. Shell could prepare a medium for its managers and employees to voice out their ideas .and to compete with its competitors . thought and complaints and dissatisfaction without being penalised. His .Chairman Sir Philips Watts undermined company’s exploration chief .

Besides that. . This cultural revolution ultimately led Shell into one of the worst crises in its history as the company turned to accounting maneuvers to hide its failures in finding energy. the company’s training approaches were concentrated on the creativity to find reserves.leadership was so aggressive and discouraged the freedom of speech especially in reserves issues .