Shell's auditors are braced for tough questions from regulators about their oversight of the Anglo-Dutch oil company's accounts in light of disclosures that internal controls were deficient.

KPMG and PwC, Shell's joint auditors, are both expecting in the coming weeks to be forced to justify their work to the Securities and Exchange Commission, the chief US financial regulator.

Neither firm would comment and the SEC does not discuss individual investigations. However, people familiar with the probes said Shell's revelations on internal controls this week created problems for the auditors.

Until now, these people said, the write-downs of reserves in January that precipitated the crisis at the company would not necessarily have led to difficulties for the firms. Reserves are not balance-sheet items, nor part of the independent annual audit.

But an internal report prepared for Shell by law firm Davis Polk & Wardwell added internal control problems to the company's list of issues. Independent auditors must verify that a company's internal controls are adequate and provide numbers that can be used in an outside audit.

Internal controls are broadly defined as processes designed to provide assurance on the reliability of financial reporting, the effectiveness and efficiency of operations, and compliance with laws and regulations.

The Davis Polk report says overbooking reserves was possible only "because of certain deficiencies in the company's controls".

It says the internal reserves audit function was "understaffed and undertrained".

It also says the finance department's controls were not working, saying there were problems with checking that disclosures to investors and regulators were correct. Ms Judy Boynton, chief financial officer, this week became the third high-ranking Shell executive to lose her job.

The US Sarbanes-Oxley Act of 2002 significantly adds to auditors' responsibility on internal controls and increases the chances that regulators will sanction them for oversight failures.

But even prior to the act - Shell's problems pre-date the new requirements - auditors had to try to issue a clean audit opinion and were required to flag problems in internal controls. Regulators will want to be satisfied that with two auditors doing the work, problems were not assumed to be the other side's responsibility.

The people close to the issue said that KPMG and PwC maintained an integrated audit team that reported to two co-heads of audit. - (Financial Times Service)