April 2004 - VOLUME 25 - NUMBER 4
N A M E S I N T H E N E W S
Accounting Shell Game
A senior executive at the Royal Dutch/Shell Group told a subordinate in an e-mail message in December that the employee's preliminary analysis of the company's oil and gas reserves problems was "dynamite" and "needs to be destroyed" because it was incomplete, the New York Times reported in April.
The senior executive, Walter van de Vijver, the head of Shell's exploration and production unit at the time, was dismissed on March 3, along with the company's chair, Sir Philip Watts.
Their dismissals came two months after the company stunned investors by lowering its estimates of proven reserves, a crucial financial indicator, by 20 percent, or 3.9 billion barrels.
The company is under investigation by regulators and prosecutors in Europe and the United States.
In London, the combined boards of Shell met to discuss whether to ask other executives at the company to step down, the Times reported.
Van de Vijver issued a statement indicating that he had promptly warned top executives early in his tenure, which began in mid-2001, about the need to re-evaluate "potentially noncompliant reserves." He also said he was asked to resign "without credible explanation."
The Times quoted an unnamed source saying that Van de Vijver's e-mail message figured in the company's internal inquiry.
His e-mail message came on the heels of draft audits by the company describing serious reserves problems in Nigeria and Oman.
Despite the suggestion in the December 2 e-mail message, the analysis, by Frank Coopman, the chief financial officer for the exploration and production unit, was not destroyed, the Times reported.
On December 8, Van de Vijver forwarded a 42-page report to top executives describing significant overstatement of the company's oil and gas reserves.
The December 8 report concluded that the company's filing with the Securities and Exchange Commission might have overstated proven reserves by 2.1 billion to 3.6 billion barrels of oil.
The higher adjustment is close to what Shell reported a month later, the Times reported.
IRS Soft on Business
Major IRS programs to enforce the tax laws against corporations are continuing to slump, according to a Transactional Records Access Clearinghouse (TRAC) report released in April.
According to the report, audits for business taxpayers are down from three audits per 1,000 tax returns five years ago to two audits per 1,000 returns in fiscal year 2003.
The decline in face-to-face-audits for all corporations was steeper -- 15 per 1,000 in fiscal year 1999 compared to 7 per 1,000 in fiscal year 2003.
For the largest corporations, those with $250 million or more in assets, 347 out of every 1,000 were audited in fiscal 1999. This compared with 290 out of 1,000 last year.
The audit rate for what are known as pass-through entities also has continued to decline, 4.5 per 1,000 in 1999, 3.2 per 1,000 in 2003.
In a recent year, the returns filed by pass-through entities such as partnerships and S corporations reported gross revenues of $6.7 trillion.
While long favored by lawyers and doctors, these entities increasingly are being used by thousands of firms to gain special tax advantages.
The number of civil penalties assessed each year against corporations for tax fraud and negligence has always been minuscule, but has declined still further in recent years.
From 1999 to 2003, the total number of civil negligence penalties aimed at corporations all over the United States dropped from 62 to 12.
In the same period, civil fraud penalties fell from 247 to 170.
"Reckless" Ernst & Young
Calling big four accounting firm Ernst & Young "reckless, highly unreasonable and negligent," an administrative law judge in April barred the company from taking on any auditing clients for the next six months.
Securities and Exchange Commission (SEC) administrative law judge Brenda Murray came down hard on the firm for participating in a lucrative consulting deal with PeopleSoft while it was auditing the company.
Ernst & Young initially called the SEC enforcement action "outrageous," but after the judge issued her order last week, the company said it would not challenge the ruling.
With few narrow exceptions, SEC rules prohibit auditing firms from conducting consulting business with firms that they audit.
Ernst & Young argued that it fell within one exception -- that it was just purchasing PeopleSoft products as any consumer might.
But Judge Murray rejected Ernst & Young's claim that it was just an ordinary consumer of PeopleSoft products. "This was not a situation of an isolated mistake or confusion over a complicated, technical issue," she wrote in a 69-page decision.
"These violations occurred over an extended period. They were committed by professionals throughout the firm who exhibited no caution or concern for the rules of auditor independence in connection with business relationships with an audit client."
-- Russell Mokhiber