With the clamour arising from the regulators as they forge new rules and laws for his protection, the prudent investor might be lulled into thinking his investments in the resource industry are fully protected from corporate sins.
Even those living south of us, who were formerly such outspoken critics of Canadian stock markets, have been noticeably quiet lately. Could it possibly be that their own house is not quite so orderly as they would have us believe?
In any event, having perfect money management and corporate governance do not guarantee a well-run company when it is involved with natural resources. Now that we have a system of “qualified persons,” or QPs, we are led to believe that the opportunities for malfeasance in the technical field are closed. I do not believe this to be so.
For one thing, the QP offering services as consultant or contracting geologist who refuses to “sign off” on his client’s procedures may well find the relationship terminated and experience difficulties in being paid. Contemplation of this outcome could influence his judgment. This situation is made worse in cases where the QP is an employee who is responsible for the estimation of reserves.
For instance, the sort of trouble that can arise turned up recently in the affairs of the venerable Royal Dutch/Shell company where, as a result of his fine performance over many years in adding to reserves while head of exploration and production, Sir Philip Watts was promoted to CEO, only to have it revealed by an underling that reserves had been overstated for years.
Here is an example, in spades, of the sort of trouble any Canadian mining company can fall into when reporting reserves. It is not logical in my view to insist on all manner of audit procedures with which to burden the directors and accountants while the underlying asset of the company, the ore reserve, can be managed by a single employee with essentially no independent oversight.
In effect, the regulators are telling companies that “even though your corporate treasurer is a chartered accountant, and thus a qualified person in his own field, he needs to have his activities checked routinely by independent auditors, while your mine geologist/engineer, who is also qualified in his own field, needs no such oversight in the way he handles the company’s main asset.”
As a de-tribalized Brit of many years standing, I remain conscious of the deficiencies of the rules under which British mining companies operate (compared with those in North America), but I am amazed at the magnitude of this particular scandal at Shell.
In reporting the situation at Shell, The Economist (Apri1 24, 2004) commented: “Oddly, auditors do not routinely scrutinise reserve figures.” Given that a company can only be a resource company when it has reserves, the omission appears odd to me, too.