The Oil Reserves of Royal Dutch Shell: How Royal Dutch Shell has accounted for their oil reserves as a practise of looking for grey areas in Financial Accounting.

Essay by kanpaiUniversity, Master'sA+, November 2006

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"Initially there is simply a business problem. Then people start messing with the numbers to cover it up." Christian Leuz, Wharton


I will look into how Royal Dutch Shell (hereafter only Shell) has accounted for their oil reserves as a practise of looking for grey areas in Financial Accounting.

I choose Shell because when the news broke out, the international financial press was quick to label it "Europe's Enron" and after reading about Parmalat and the US scandals it was interesting with a European one. As the media rage over corporate wrongdoing grows louder, it could be likely that Europe might see its own version of corporate governance reform, comparable to the legislations in the US?

Christian Leuz, a professor of accounting at Wharton, has done research which incorporates information from some 8,000 companies in 31 countries to support his contention that insiders use discretion in financial reporting to boost reported earnings and conceal losses, thus smoothing earnings.

Logically, he sees no reason why European countries would be any less likely to do so than American companies, the home of such scandals as Enron and Tyco, despite a common gut reaction that European companies are more conservative.

The Oil Industry

The Oil Industry and market is complex. It was defined by entrepeneurs in the beginning and then driven by an enormous demand. The first entrepeneur that managed to refine oil was Edwin L Drake in Pennsylvania 1859. And then the story was continued by John D Rockefeller. The first part of our century the industy was dominated by 7 large oil companies called 'the seven sisters'.

In our modern time competition has hardened, the sisters are now only five; BP, Chevron Texaco, Exxon Mobil, TotalFinaElf and Royal Dutch Shell. Many companies have been bought or turned into bancruptcy. During...