Royal Dutch Shell Suits – KPMG/PwC Joined at the Hip

I wrote earlier about the unusual situation of PwC and KPMG being joint auditors at Royal Dutch Shell. KPMG and PwC supposedly maintain an integrated audit team that reported to two co-heads of audit. A true joint audit arrangement is not that common for many reasons, not the least of which is the competitiveness of the audit firms whenever they’re not meeting to discuss their lobbying efforts for liability reform. It’s most common in France, where it is enshrined in law.

Now the two firms are also joined in litigation, similar to what happened with Deloitte and Grant Thornton, but not exactly the same. That arrangement was a dual audit, whereby one firm (GT in that case) working on parts of a group reports to another audit firm (Deloitte) that ultimately signs off on the group audit. In that case, the firms could not have been farther apart, blaming each other and making their own deals with the client and the courts.

At the bottom of the following disclosure, it states that Royal Dutch Shell has set aside US$500 million in reserves for this litigation. Unfortunately, we don’t know how much PwC or KPMG has set aside. As private partnerships, they do not have to disclose that.

I believe the regulators should be reviewing audit firm litigation reserves, the methodology the firms are using to determine these reserves and the means they are using to fund these reserves. Do the funding mechanisms meet independence requirements? There are only so many banks, private equity firms, hedge funds and other sources of big money and the Big 4 audit almost all of them.

Are the firms really too poor to afford the settlements or are these claims just an unchallenged public relations tactic? The PCAOB should be disclosing this information. However it is currently included in their Part 2 report on each firm, which is now private. This voluntary disclosure by the firms, enabled by the PCAOB, would be a welcome bit of transparency. The regulators should strongly encourage this transparency, rather than agreeing under the cloak of secrecy to shield them from or cap exposure to legitimate litigation.

What do you call an entity that can shield itself from risk and shifts the burden of uneven, unpredictable or poor quality and lack of customer satisfaction to the taxpayer?

A Government Agency!

Recategorisation of hydrocarbon reserves
(From Royal Dutch Shell’s Website)

A consolidated shareholder class action pending in the US District Court for New Jersey alleges losses related to the 2004 recategorisations of certain hydrocarbon reserves. Lead plaintiffs are the Pennsylvania State Employees’ Retirement System and the Pennsylvania Public School Employees’ Retirement System. Following dismissal of a number of original defendants, the remaining defendants are: Royal Dutch Petroleum Company (now merged into Shell Petroleum N.V.), The “Shell” Transport and Trading Company, plc (the companies are referred to collectively as Shell), Sir Philip Watts, Judith Boynton, PricewaterhouseCoopers LLP, KPMG Accountants N.V., and KPMG International. On January 6, 2006, certain Dutch pension funds, and German and Luxembourg institutional shareholders filed two related actions that have been consolidated with the existing class action for pre-trial purposes.

The preliminary motion phase of the litigation has been completed, an amended complaint has been filed and answered by the defendants, and discovery has commenced. The District Court will hold hearings in June 2007 on plaintiffs’ motion for class certification, on whether the federal securities laws apply to the claims of non-US putative class members who purchased Shell’s securities on foreign markets, and on various summary judgement motions to be filed by Shell.

The class actions and individual cases are at an early stage and subject to substantial uncertainties concerning the outcome of material factual and legal issues relating to the litigation. In addition, potential damages, if any, in a fully litigated securities class action would depend on the losses caused by the alleged wrongful conduct that would be demonstrated by individual class members in their purchases and sales of Shell shares during the relevant class period. During 2006, management of the Shell Group have established a $500 million provision in respect of this litigation. The provision is included in the Corporate segment.

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