The value of an oil and gas company is tied to two fundamental facts. The first is the amount of oil and gas the company is presently producing. This amount, along with unit prices, determines the revenue and cash inflow that the company generates. The second circumstance is the level of oil and gas reserves controlled by the company. Over the long run, the reserve level is a constraint on the amount and cost of current oil and gas production. Accordingly, the capital markets evaluate the performance of oil and gas companies as much on management of reserves as on management of current production. Because investors use information about reserves to value oil and gas companies, the SEC has developed rules for classifying and reporting reserves.
In a series of several announcements in early 2004, Shell Oil (Royal Dutch/Shell Group of Cos.) downgraded its proven oil and gas reserves by more than 20 percent, or about 4.5 billion barrels. Most of the misstatements of reserves, which were revealed to the public in 2004, had been booked in the years 1997-2000. Following the 2004 disclosures, regulatory bodies, including the SEC and the U.S. Justice Department, opened inquiries into the misreporting of reserves to determine if there had been violations of reporting rules or other laws.
a. Assume that the misreporting of reserves by Shell resulted from the MIS’s generation of unintentional but inaccurate information. From a cost management perspective, how might the CMS, built on inaccurate data, have caused managers to take actions that were not in the company’s best long-run interests? What actions could managers have taken to ensure the reliability of the data?
b. Assume that Shell intentionally misreported reserves. Discuss how the CMS, if not properly designed, could have contributed to the misreporting.
c. Discuss the ethics of manipulating financial and fundamental data for the purpose of managing (misleading) perceptions of investors and other interested users of company information.

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