APPLYING RESERVING AND DISCLOSURE RULES TO LITIGATION

• Jurisdiction: United States

Strategic Risk Management for Natural Resources Companies
(May 2008)
CHAPTER 6C
APPLYING RESERVING AND DISCLOSURE RULES TO LITIGATION
Carla Herron
Group Counsel - Litigation
The Shell Group
Denver, Colorado

Internal Controls

SOX 404 requires internal control reporting in a company's annual reports. The internal control report must describe management's responsibility for establishing and maintaining an adequate internal control structure and procedures for financial reporting, and must contain an assessment of the effectiveness of such control structure and procedures. The company's external auditors must attest to and report on the assessment.

[Page 6C-2]

Typical CEO certification:

• Designed disclosure controls and procedures...to ensure that material information relating to the company, including its consolidated subsidiaries, is made known to us by others within those entities...,

• Designed internal control over financial reporting,..., to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

• Evaluated the effectiveness of the company's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures...; and

• Disclosed any change in the company's internal control over financial reporting...that has materially affected, or is reasonably likely to materially affect, the company's internal control over financial reporting.

[Page 6C-3]

• I have disclosed,...

--All significant deficiencies and material weaknesses in the design or operation of internal control...; and

--Any fraud, whether or not material, that involves management or other employees who have a significant role in the company's internal control over financial reporting.

What does this practically mean? Must demonstrate existence of and compliance with company's internal control framework to ensure that matters requiring reserves or disclosure are properly identified, evaluated, and reported.

[Page 6C-4]

• Internal controls relating to litigation disclosure and reserving must be tailored to each unique company.

• They must satisfy the legal department, corporate finance, corporate compliance, the audit committee of the board of directors, and the external auditors.

• Must be good enough to enable the CEO and CFO to make the...