Audit Committee Report

Committee membership and attendance for 2022

Ann Godbehere

Chair

100% attendance

6 out of 6 possible meetings attended

Member since: May 23, 2018

Dick Boer

Committee member

100% attendance

6 out of 6 possible meetings attended

Member since: May 20, 2020

Martina Hund-Mejean

Committee member

100% attendance

6 out of 6 possible meetings attended

Member since: May 20, 2020

During 2022, the members and meeting attendance of the AC were as follows:

Committee member	Member since	Maximum possible meetings	Number of meetings attended	% of meetings attended
Ann Godbehere (Chair)	May 23, 2018	6	6	100%
Dick Boer	May 20, 2020	6	6	100%
Jane Holl Lute [B]	July 28, 2021	3	3	100%
Martina Hund-Mejean	May 20, 2020	6	6	100%
Gerrit Zalm [C]	March 8, 2017	3	3	100%
[A] In addition to the six meetings, as part of its activities, the AC conducted two deep-dive sessions, a site visit to the London trading floor and members of the AC also visited Shell Recharge Fulham Road. [B] Jane Holl Lute stepped down from the AC with effect from May 24, 2022. [C] Gerrit Zalm retired from the Board and the AC with effect from May 24, 2022.

Dear Shareholders,

I am pleased to present our Audit Committee Report for 2022.

I begin this report by thanking Gerrit Zalm and Jane Holl Lute for their contributions as members of the Audit Committee (AC) since March 2017 and July 2021, respectively. I am also delighted to welcome new Committee member, Cyrus Taraporevala, who joined the AC on March 2, 2023. I also welcome Sir Charles Roxburgh, who has been appointed as a Non-executive Director of Shell plc, effective March 13, 2023 and will become a member of the AC as of the same date.

The AC’s primary role is to assist the Board in fulfilling its oversight responsibilities in areas such as the integrity of financial reporting, the effectiveness of the risk management framework and system of internal controls as well as consideration of ethics and compliance matters. We are responsible for assessing the quality of the audit performed by, and the independence and objectivity of, the external auditor. The AC also makes a recommendation to the Board on the appointment or reappointment of the external auditor. In addition, we oversee the work and quality of the internal audit function.

Our work programme over the course of a year focuses on a variety of matters that involve a high degree of judgement and/or are significant to Shell’s consolidated financial statements. We review with management the sources of estimation uncertainty and other key assumptions in light of economic and market uncertainty, volatility, climate risk and the energy transition and evolving stakeholder expectations. In addition, we consider the robustness of the risk and internal control framework, results of internal control testing performed throughout the year and remediation activities.

Topics addressed in 2022 included the impact of Russia’s invasion of Ukraine and Shell’s announced withdrawal from Russian oil and gas activities; the potential impacts of climate change on Shell’s consolidated financial statements; deferred taxes and tax exposures; the impact on tax balances and disclosures as a result of new windfall and minimum taxes around the world; significant portfolio developments; litigation; impairment trigger assessments; charges and reversals; accounting for complex contracts; dividend distribution capacity; and mark-to-market derivatives accounting, including the impact of volatile gas and power markets.

We received briefings from the Chief Internal Auditor on the effectiveness of Shell’s risk management and internal control system and on the outcomes of significant audits and notable control matters.

The impacts of climate change and the energy transition continue to touch on many aspects of the AC’s work. The AC’s focus areas for 2022 included several discussions on the financial statement impacts of climate change and energy transition, and the increasing expectations around expanded climate-related information. In order to obtain feedback to continuously improve carbon-related disclosures, management engaged with Sarasin & Partners and Carbon Tracker during 2022. The quarterly reports reviewed by the AC from Ernst &Young LLP (EY), our external auditor, and the Chief Internal Auditor, also continued to include specific steps they have taken to incorporate climate change considerations into all facets of their work.

The AC commends Shell’s financial reporting team on feedback received from the Financial Reporting Council (FRC) which carried out a limited scope review [A] of TCFD disclosures and the disclosures of climate in Shell’s financial statements for the year ended December 31, 2021. The FRC confirmed that, based on their review, there were no questions or queries which they wished to raise at this stage. In its “CRR Thematic review of TCFD disclosures and climate in the financial statements” published in July 2022, the FRC referenced what they regarded as better practice disclosures with a number of examples from Shell’s 2021 Annual Report.

[A] The FRC noted that their review is based solely on the annual report and accounts and does not benefit from detailed knowledge of Shell’s business or an understanding of the underlying transactions entered into, but that it is, however, conducted by staff of the FRC who have an understanding of the relevant legal and accounting framework.

The AC, recognising the ever-evolving nature of climate change risks and responses, concluded that climate change has been appropriately considered by management in key judgements and estimates and agreed with the disclosure made by management.

The AC was briefed on Shell’s Carbon Management Framework and its Carbon Reporting Committee, including future priorities. The AC was also briefed in relation to the Shell Performance Framework which is scheduled to replace and enhance the current Shell Control Framework. Other focus topics for 2022 included non-operated ventures controls and governance.

As part of its oversight of compliance with applicable legal and regulatory requirements, including monitoring ethics and compliance risks, the AC discussed with the Chief Ethics and Compliance Officer activities undertaken in the ethics and compliance programme related to conduct risks stemming from Russia’s invasion of Ukraine, and steps taken to manage those risks.

During the year, AC members visited Shell Recharge Fulham Road, our first UK all-electric vehicle charging hub and the AC also conducted a site visit to Shell’s London trading floor. As part of Board Strategy Days, AC members also visited Singapore in June 2022 (see Board Strategy Days). During 2023, the AC plan to visit a number of operations in the USA, including Shell Polymers Monaca and Shell Convent. These site visits deepen the AC’s understanding of the risks and opportunities arising as well as its understanding of how the Company’s Powering Progress strategy is being implemented.

On a final note, the AC acknowledges the financial reporting team’s substantial work during 2022. The AC conveys its gratitude and appreciation for their strong commitment and dedication.

Ann Godbehere
Chair of the Audit Committee
March 8, 2023

“The primary role of the AC is to assist the Board in fulfilling its oversight responsibilities in areas such as the integrity of financial reporting, the effectiveness of the risk management framework and system of internal controls as well as consideration of ethics and compliance matters.”

All AC members are financially literate, independent Non-executive Directors. In respect of the year ended December 31, 2022, for the purposes of the UK Corporate Governance Code, Ann Godbehere and Martina Hund-Mejean both qualify as: a person with “recent and relevant financial experience” and competence in accounting, and, for the purposes of US securities laws, an “audit committee financial expert”.

The experience of the AC members outlined in the "Section 172(1) statement" demonstrates that the AC as a whole has competence relevant to the sector in which Shell operates, and the necessary commercial, regulatory, financial and audit expertise required to fulfil its responsibilities. The AC members have gained further knowledge and experience of the sector as a result of their Board membership and through various in-person and virtual site visits since their respective appointments.

The AC invites the Chief Financial Officer, the Legal Director, the Chief Internal Auditor, the Executive Vice President (EVP) Taxation and Controller (as of October 1, 2022, this role was divided into two roles: EVP Taxation and EVP Controller), the Vice President Group Reporting and the external auditor to attend each meeting. The Chief Executive Officer attends each meeting where the quarterly, half-year and year-end financial results are discussed. The Chair of the Board also regularly attends AC meetings. Other members of management attend when requested on specific topics or to provide input on more detailed technical matters that may arise. The AC regularly holds private sessions separately with the Chief Internal Auditor and the external auditor without members of management, except for the Legal Director, being present. Outside of the formal AC meetings the Chair of the AC meets regularly with each of the following: the Chief Financial Officer, EVP Taxation, EVP Controller, the Chief Internal Auditor, the external auditor, and the Chief Information Officer.

AC remit

The roles and responsibilities of the AC, as set out in its Terms of Reference, are reviewed annually taking into account relevant regulatory changes and recommended best practice. The key responsibilities of the AC include, but are not limited to:

Risk Management and Internal Control

• evaluating the effectiveness of the system of risk management and internal control;

Financial Reporting

• reviewing the integrity of the financial statements, including annual reports, half-year reports, and quarterly financial statements;
• reviewing the potential impacts on the consolidated financial statements of the implementation of the Company’s strategy, climate change and the energy transition;
• advising the Board whether, in the AC’s view, the Annual Report taken as a whole is fair, balanced and understandable and provides the information necessary for shareholders to assess the Company’s position and performance, business model and strategy;
• reviewing and discussing with management the appropriateness of judgements involving the application of accounting principles and disclosure rules;

Compliance and Governance

• reviewing the functioning of the Shell Global Helpline and reports arising from its operation;
• overseeing compliance with applicable legal and regulatory requirements, including monitoring ethics and compliance risks;

Internal Audit

• monitoring the qualifications, expertise, resources and independence of the internal audit function;
• approving the internal audit function’s remit and the annual internal audit plan to ensure alignment with the key risks of the business;
• reviewing the significant matters arising from internal audits with the Chief Internal Auditor and assessing management’s response to significant internal audit findings and notable control weaknesses. This includes discussing with management potential improvements and agreed actions;
• assessing internal audit’s performance and effectiveness each year;

External Audit

• reviewing and monitoring the qualifications, expertise, resources and independence and objectivity of the external auditor;
• considering the annual external audit plan and approving related remuneration, including fees for audit and non-audit services;
• assessing the performance and effectiveness of the external auditor and the audit process, including an assessment of the quality of the audit; and
• recommending to the Board for it to put to the Company’s shareholders for approval at the Annual General Meeting (AGM) to appoint, reappoint, or remove the external auditor.

These responsibilities form the basis of the AC’s annual work plan, which is adjusted as necessary throughout the year. In addition, the AC annually identifies certain business and function areas to focus on during that year. The focus areas generally encompass aspects of risk management and internal control, financial reporting and compliance. The AC is authorised to seek any information it requires from management and external parties and to investigate issues or concerns as it deems appropriate. The AC may also obtain independent professional advice at the Company’s expense. No such independent advice was requested in 2022.

The AC keeps the Board informed of its activities and recommendations, and the Chair of the AC provides an update to the Board after every AC meeting. The AC discusses with the Board if it is not satisfied with or believes that action or improvement is required concerning any aspect of financial reporting, risk management and internal control, compliance or audit-related activities.

A copy of the AC’s Terms of Reference can be found at www.shell.com.

AC topic coverage in 2022

The pie chart below shows the percentage of time the AC spent on various activities during 2022.

The AC met with senior leaders from various business and function areas to discuss the adequacy, design and operational effectiveness of risk management and controls related to the critical activities carried out by their respective business or function. The discussions included information on any enhancements to strengthen controls and how areas identified for improvement had been addressed; the monitoring of activities around key risks; and the steps being taken to identify new or emerging areas of risk.

In addition to the significant accounting and reporting considerations discussed in section “Significant accounting and reporting considerations” the business and function areas reviewed by the AC in 2022 included the following:

• Impact of Russia’s invasion of Ukraine and Shell’s announced withdrawal from Russian oil and gas activities – Management and the AC discussed the management of the crisis including the establishment of the Group Crisis Team which was set up to assess the situation, consider potential scenarios of how events could develop and co-ordinate Shell’s responses. The AC reviewed management’s approach to impairments of Russian assets; the potential total carrying value of all exposures to Russia (including Russian assets, obligations related to Russia (e.g. taxes and/or royalties due) and credit exposures related to the Group’s Russian activities); contracts; insurance implications; and sanctions. Throughout the year, the AC and management discussed the actions taken and their impacts. The AC also reviewed disclosures in relation to the situation, including the notes to the quarterly and year-end results announcements.
• Non-operated ventures (NOVs) controls and governance – Management provided the AC with an overview of the strategic decisions for when management decides to utilise a NOV structure; the population of NOVs by size; which NOVs had adopted Shell’s control framework or implemented scalable control frameworks and the associated risks for those NOVs that have yet to adopt or implement such controls; and a self-assessment tool used to assess risks and the compliance status of NOVs. Management and the AC also discussed the pace of NOVs in progressing the energy transition and their approach to risk management.
• Climate change and energy transition, including impacts on financial statements as well as relevant sustainability and non-financial reporting and other regulatory developments – the AC was regularly updated in relation to developments and their potential implications for Shell including in relation to sustainability-related financial reporting standards, the TCFD guidance, the UK government’s response to the Department for Business, Energy & Industrial Strategy (BEIS) “Restoring trust in audit and corporate governance” consultation and the FRC consultation on minimum standards for audit committees.
• Carbon management, including GHG reporting and assurance framework – the AC was provided with an update in relation to the Carbon Management Framework (CMF) and the Carbon Reporting Committee (CRC). The role of the CMF is to ensure that targets are achievable, have assurance and that performance can be measured. The purpose of the CRC is to ensure that GHG emissions targets, including both absolute emissions and carbon intensity and associated financial metrics, comply with legal and regulatory requirements and that data is timely, complete and accurate. The CRC focuses on methodology, standards, processes and assurance. Management provided the AC with an overview of processes, systems and assurances in relation to Scope 1, 2 and 3 emissions. The AC and Management also discussed potential future regulatory assurance requirements for the financial statements..
• Resegmentation – the AC reviewed the appropriateness of the financial disclosure improvements made during the first quarter of 2022 including disclosures of the Renewables and Energy Solutions business following resegmentation and further transparency through the split of downstream businesses into Marketing and Chemicals and Products.
• Trading and Supply – the AC was provided with a number of updates in relation to Trading and Supply activities, particularly in the light of market volatility. The AC also visited the trading floor in London during which the AC members received a number of briefings, including in relation to the trading platforms used by the Trading and Supply team and an overview of gas storage management during 2022.
• Introduction and implementation of windfall taxes such as the EU solidarity contribution and the Energy Profits Levy in the UK – the AC was provided with updates in relation to this topic and also reviewed the disclosures in the financial statements.

Site visits

During the year, AC members visited Shell Recharge Fulham Road, Shell’s first UK all-electric vehicle charging hub and the AC also conducted a site visit to the London trading floor. As part of Board Strategy Days, AC members also visited Singapore in June 2022 (see “Board Strategy Days”). During 2023, the AC plan to visit a number of operations in the USA.

Site visits are a welcome addition to the AC’s annual work plan, as they provide the opportunity for the AC to gain a deeper understanding of the various businesses and functions at each location, the local external environment within which those activities take place and how they contribute to Shell achieving its strategic ambitions. In addition to in-depth examinations of specific business areas, site visits enable the AC members to interact with a diverse group of staff and learn about their experiences, challenges they face and their opportunities for career development. The AC is also briefed on the impact of the energy transition at a local level, how risks associated with climate change are managed, and the results of the Shell People Survey.

The AC assists the Board in fulfilling its responsibilities in relation to risk management and internal control. In order to monitor the effectiveness of the procedures for internal control over financial reporting, compliance and operational matters, the AC reviews reports on risks, controls and assurance, including the annual assessment of the system of risk management and internal control. This annual assessment includes the AC’s review of outcomes from the Group Assurance Letter process. The Group Assurance Letter process involves each Executive Director conducting a structured internal assessment of compliance with legal and ethical requirements and the Shell Control Framework. The AC also reviews the Company’s evaluation of the internal control over financial reporting as required under Section 404 of the Sarbanes-Oxley Act (SO_X 404). The AC updated the Board on compliance with internal controls across the Shell Group and on any major matters for which action or improvement was recommended.

Throughout the year, the AC and management discuss Shell’s overall approach to risk management and internal control, including compliance, tax, and information risk management matters and the adequacy of disclosure controls and procedures. The AC receives regular reports from the EVP Taxation and Controller (EVP Controller with effect from October 1, 2022) on the status of actions to address control weaknesses identified via business control incidents and the trends in other measures used to monitor the robustness of the risk management framework and internal control systems.

The AC is also briefed on litigation matters (see “Other regulatory and statutory” and Note 31 to the “Consolidated Financial Statements”.

The AC regularly reviews the status of management’s SO_X 404 testing of controls and remediation actions to address any identified weaknesses. For 2022, these reviews included consideration of how the volatile external environment, including the impacts of the Russian invasion of Ukraine, affected the controls and assurance landscape, including the financial reporting process. The AC and management discussed the steps taken to maintain an effective control environment, to demonstrate “management in control” during the year and to address any new or emerging risks due to hybrid working. The AC was also briefed on how management was monitoring and addressing any continuing impacts on the control environment from the organisational restructuring from Reshape.

It is important that the AC monitor and learn about evolving external developments in a timely fashion. Accordingly, the AC is regularly briefed on developments in the legal, regulatory and financial reporting landscape that could affect the Company.

In 2022, the AC dedicated time to the following topics:

• Tax risks – In addition to the regular review of Shell’s tax provisions, the AC and management discussed the tax implications stemming from the Simplification that took place in early 2022. Management also briefed the AC regarding developments in the external tax landscape, including the new windfall and minimum taxes and different types of taxes when entering new markets and businesses. Management outlined for the AC the steps being taken to manage tax risks and exposures arising from differing viewpoints on complex tax laws. The AC and management discussed proposed changes to Shell’s “approach to tax” which were being made to align with Shell’s Powering Progress strategy and Simplification.
• Information risk management –The Chief Information Officer briefed the AC on the various actions under way to strengthen Shell’s IT systems and cyber security framework in response to the changing risk landscape and diverse forms of external threats observed. The AC and management discussed the use of dashboards in monitoring assets and compliance and enabling the deployment of actions when required. The AC and management discussed tracking of projects, including the utilisation of clear milestones and value assessments as projects develop. The AC and management also considered the impact of Russia’s invasion of Ukraine and Shell’s announced withdrawal from Russian oil and gas activities from an information risk management perspective, including the separation of information systems from Russia and monitoring of cyber-security risk.
• Oil and gas reserves control framework – The AC annually reviews the framework that supports Shell’s internal reporting and external disclosures of oil and gas reserves. The AC also reviews the processes and controls that prevent and/or mitigate the risks of non-compliance with regulatory reporting requirements. This annual review of Shell’s oil and gas reserves control framework supports the AC’s review of Shell’s reported proved oil and gas reserves discussed later in this report.

In addition to the above, the AC also had quarterly discussions with the Chief Internal Auditor regarding the Company’s risk management and internal control system, significant matters arising from the internal audit assurance programme and management’s response to significant audit findings and notable control weaknesses, including planned improvements and agreed actions.

The AC similarly holds discussions with EY on a quarterly basis regarding how risks to audit quality are addressed, key accounting and audit judgements, results from audit procedures and management’s response to any significant audit findings and any material communications between EY and management.

The AC receives comprehensive reports from management and the external auditor on quarterly financial reporting, accounting policies and significant judgements and reporting matters.

The AC reviewed the Company’s 2022 quarterly unaudited interim financial statements, half-year report, Annual Report and Form 20-F with management and the external auditor.

Shell uses alternative performance measures (APMs) to provide greater insights into its financial and operating results. The AC regularly considers the APMs used in Shell’s reporting, the reconciliations to IFRS financial statements and explanations for changes from the previous quarter and year. The AC reviews the overall presentation of APMs with management to ensure they are not given undue prominence. The AC discusses adjusting items with management including any changes to methodology.

The APMs disclosed by Shell are subject to the same internal control process as applied for other financial reporting.

Fair, balanced and understandable assessment

The AC advised the Board that in its view the 2022 Annual Report including the financial statements for the year ended December 31, 2022, taken as a whole, is fair, balanced and understandable and provides the information necessary for shareholders to assess Shell’s position and performance, business model and strategy (see “Governance” section). To arrive at this conclusion, the AC critically assessed drafts of the 2022 Annual Report including the financial statements and discussed with management the process undertaken to ensure that the relevant requirements were met. This process included: verifying that the contents of the 2022 Annual Report are consistent with the information shared with the Board during the year to support their assessment of Shell’s position and performance; ensuring that consistent materiality thresholds are applied for favourable and unfavourable items; considering observations from the external auditor; and receiving assurance from the Executive Committee (EC).

Going concern and viability statement

The AC reviewed and considered the Directors’ half-year and full-year statements with respect to the going concern basis of accounting. As noted in the viability statement, the Board also reviews the strategic plan which takes account of longer-term forecasts and a wide range of outlooks. Key assumptions included: the impact of commodity prices; exchange rates; future carbon costs; agreements such as liquid natural gas contract renewals; production levels, product demand and schedules of growth programmes; the financial framework; Shell’s business portfolio developments including consideration of the impacts of various possible energy pathways and scenarios for changes in societal expectations in relation to climate change and Shell’s commitment to the Paris Agreement goals; the project funnel to support future growth; and using severe but possible scenarios to run models of the financial impact if certain of Shell’s principal risks materialised. The AC considered the mitigating measures and sensitivities that management had applied to the modelling of scenarios when evaluating the viability statement and noted that assumptions do go well beyond the three-year period and do take into account climate change and energy transition. The AC also considered the merits of extending the viability statement beyond a period of three years and concluded that the three-year period selected by the Board for the review of Shell’s prospects, in line with the operating plan, remained appropriate. The AC supported the going concern basis of accounting and the inclusion of Shell’s viability statement in “Other regulatory and statutory information” and considered such statement to be in line with best practice guidance issued by the Financial Reporting Council (FRC).

Significant accounting and reporting considerations

The AC assessed the following significant accounting and reporting areas, including those related to Shell’s 2022 Consolidated Financial Statements. The AC was satisfied with how each of the areas below was addressed. As part of this assessment, the AC received reports, requested and received clarifications from management, and sought assurance and received input from the internal and external auditors.

Other matters

The AC reviewed: the year-end reported proved oil and gas reserves, including management judgements and adjustments made to reflect changes in geological, technical, contractual and economic information (including yearly average price assumptions) and the effectiveness of financial controls.

Ethics and compliance

In 2022, the AC received an update from the Chief Ethics and Compliance Officer on how a range of macro factors and external trends and developments, including Russia’s invasion of Ukraine, were affecting conduct risk at Shell. The Chief Ethics and Compliance Officer summarised the specific emerging ethics and compliance risks, with a particular focus on trade compliance and data privacy, and management’s actions to manage and mitigate them. The Chief Ethics and Compliance Officer briefed the AC on communications to staff from both senior leaders and mid-level management reinforcing the importance of adherence to and affirming Shell’s commitment to the Ethics and Compliance framework and Code of Conduct throughout the year.

As part of the annual assessment of the system of risk management and internal control, the AC discussed with the Chief Ethics and Compliance Officer his annual report on compliance matters. The report included an overview of the effectiveness of the Shell ethics and compliance programme in managing ethics and compliance risk in Shell’s business activities, regulatory developments and compliance activities. The AC also reviewed investigations of cases involving ethics and compliance concerns. The AC discussed management’s findings in such cases to satisfy itself that a rigorous process had been followed, with appropriate disciplinary action being taken where necessary, and that management had embedded learnings into Shell’s systems and controls.

Whistleblowing investigations

The AC is responsible for establishing and monitoring the implementation of procedures for the receipt, retention, investigation and follow-up actions of complaints received, including those from the Shell Global Helpline. The AC reviewed whistleblowing reports and internal audit reports and considered management’s responses to the findings in these reports. In 2022, 1,790 allegations and inquiries were received through the Shell Global Helpline (2021: 1,479), of which approximately 41% were submitted anonymously (2021: 42%). In 2022, a total of 412 investigations were closed (2021: 369), of which 44% were found to have some level of substantiation (2021: 49%) and were primarily in the areas involving harassment, conflicts of interest and protection of assets.

Regulatory developments

The AC was briefed on regulatory developments in areas including sustainability and climate-related disclosures (in particular management’s responses to proposals from the International Sustainability Standards Board and the US Securities Exchange Commission in this area and FRC/EU disclosure requirements); the UK government’s response to the consultation on strengthening the UK’s audit, corporate reporting and corporate governance systems, and potential implications for the Company, the Board and the AC; accounting and reporting; environmental liabilities; and treasury activities.

AC annual evaluation

The AC undertakes an annual evaluation of its performance and effectiveness. Consistent with the requirements of the UK Corporate Governance Code, the performance evaluation was externally facilitated in 2022, and an overview of the evaluation process and the feedback themes for the Committees can be found in the section “Board activities and evaluation”. It was concluded that the AC’s performance in 2022 had been effective and that the AC had fulfilled its role in accordance with its Terms of Reference.

In preparing its work plan for 2023, the AC has included the following focus areas in addition to the standing items: risk management, including cyber security; regulatory developments, mainly those in relation to climate change and energy transition; Trading and Supply; and the Shell Performance Framework. As noted earlier, the AC also plans to visit a number of operations in the USA in 2023.

Each quarter, the AC discusses with the Chief Internal Auditor the Company’s risk management and internal control system, any significant matters arising from the internal audit assurance programme and management’s response to significant audit findings and notable control weaknesses including planned improvements and agreed actions. The AC also regularly holds private sessions separately with the Chief Internal Auditor without members of management, except for the Legal Director, being present. The AC’s time for these activities is included in Risk Management and Internal Control described earlier in this report. Outside of the formal AC meetings, the Chair of the AC meets regularly with the Chief Internal Auditor.

Internal audit remit

The internal audit function is an independent assurance function which supports Shell’s continuous efforts to improve its overall control framework. The internal audit function contributes to the maintenance of a systematic and disciplined approach to evaluate and improve the design and effectiveness of Shell’s risk management, and control and governance processes. The primary role of the internal audit function’s assurance and investigation activities is to safeguard value by protecting Shell’s assets, reputation and sustainability in relation to the organisation’s defined goals and objectives.

The AC defines the responsibility and scope of the internal audit function and approves its annual plan. The Chief Internal Auditor reports functionally to the Chair of the AC and administratively to the Chief Financial Officer. The Chair of the AC approves, in consultation with the Chief Financial Officer, all decisions regarding the performance evaluation, appointment or removal of the Chief Internal Auditor.

Annual internal audit plan and assessment of internal audit’s effectiveness

The AC considered and approved the internal audit function’s annual audit plan, including focus areas for 2022 consisting of:

• talent and capability (professional audit development and technical capabilities);
• quality (developing first-line staff competence and clarity on self-verification and supervisory controls);
• alignment (improved integration of risk management and alignment of assurance processes across Shell); and
• engagement (mainly in the area of keeping staff and Shell stakeholders engaged and informed on effective risk management and internal control).

Beginning August 2021, audits of the Health, Safety, Security, Environment and Social Performance (HSSE & SP) Control Framework were added to internal audit’s remit, creating a unified internal audit function. The Chief Internal Auditor updated the AC quarterly on the approved 2022 internal audit plan and discussed whether the plan remained fit for purpose in addressing the most critical areas of risk in a year of transition. The AC assessed the performance of the internal audit function as effective. The AC also assessed the performance of the Chief Internal Auditor as effective.

The Chief Internal Auditor periodically assesses whether the purpose, authority and responsibilities of the internal audit function continue to enable it to accomplish its objectives. The results of this periodic assessment are communicated to the EC and AC. The Chief Internal Auditor also confirms to the AC the continued validity of the charter of the internal audit function or puts forward proposals for updates to it. The Chief Internal Auditor maintains an internal quality assurance and improvement programme, including an annual assessment of the effectiveness and efficiency of the internal audit function’s activities and evaluations of conformance with the standards of the Chartered Institute of Internal Auditors (CIIA). The Chief Internal Auditor discusses the results of this annual assessment with the EC and AC. At least every five years, the effectiveness and quality of the internal audit function are independently assessed externally, and the Chief Internal Auditor reviews the report with the EC and the AC. An independent assessment of the internal audit was conducted at the end of 2022, following up on the previous review in 2018. The assessment confirmed that the internal audit conforms with the CIIA standards and the 2020 Internal Audit code of practice. Strengths were highlighted with respect to the clarity on management ownership of the actions in response to the audit findings, and the integration of learning and improvement into the scope of effective risk management and internal control. Opportunities to further improve were identified with respect to efficient quality assurance and having clarity on the internal audit strategic roadmap, how it links to Powering Progress and the plan for technology, skills and staffing. The roadmap will be discussed with the EC and AC during 2023.

Annual external audit plan and assessment of external audit’s effectiveness

EY reviewed with the AC its audit strategy, scope and plan for the 2022 audit, highlighting any areas which would receive special consideration. In particular, the AC and EY discussed how the audit would take into consideration risks associated with:

• Trading and Supply deal complexity;
• Revenue recognition (unauthorised trading and risk of fraud or management override);
• Climate change considerations;
• Russia;
• Oil and gas reserves;
• Renewables and Energy Solutions;
• Exploration assets; and
• Compliance with laws and regulations.

EY defines significant audit risks as those areas where there is a higher likelihood of a material error and therefore require special audit attention. In EY’s view, the significant audit risks are Trading and Supply complexity and the risk of unauthorised trading or management override.

The AC considered the annual audit plan, which included assessing whether the planned materiality levels and proposed resources to execute the audit plan were consistent with the scope of the audit, particularly in light of the Russian invasion of Ukraine. During the year, EY provided regular updates to the AC on the envisaged separation of its businesses into two multidisciplinary organisations. EY provided assurances that it would be able to continue to perform a high-quality audit should the split of businesses proceed.

EY regularly updated the AC on the status of its procedures and preliminary findings, providing an opportunity for the AC to monitor the execution and results of the audit. The AC and EY discussed how risks to audit quality were addressed, key accounting and audit judgements, material communications between EY and management and any issues arising from them. At least quarterly, the AC met privately with EY representatives without management being present in order to encourage open and transparent feedback from both parties. In addition, the Chair of the AC meets separately with the external auditor on a regular basis.

As part of its oversight of the external auditor, the AC annually assesses the performance and effectiveness of the external auditor and the audit process. This includes assessing the quality of the audit, how the auditor handled key judgements, and the auditor’s response to the AC’s questions. The assessment also involves the AC evaluating the objectivity and independence of EY and the quality and effectiveness of the external audit process.

The AC’s evaluation of the performance and effectiveness of the external auditor and the audit process includes the following key criteria:

• professionalism, competence, integrity and objectivity during the audit,including handling of areas involving judgement and estimates;
• EY’s quality assurance procedures and internal quality control procedures;
• audit quality priorities and actions taken as part of maintaining a sustainable audit quality programme;
• constructive challenge of management and key judgements;
• efficiency, covering aspects such as service level and innovation in the audit process, use of data analytical and digital audit tools, and opportunities for improvement;
• quality of the audit team’s leadership;
• the most recent EY Transparency Report;
• thought leadership and actions, especially in the areas of climate change; and
• compliance with relevant legislative, regulatory and professional requirements.

In addition to reflecting on its own experiences, including interactions with the external auditor throughout the year, the AC considered and discussed the results of management’s internal survey relating to EY’s performance over the financial year 2022, which reflected a broadly comparable performance to 2021 and the views and recommendations from management and the Chief Internal Auditor.

Taking into account the above, the AC is satisfied that EY continued to provide a high-quality and effective audit in its seventh year as auditor and maintained its objectivity, integrity and impartiality. As required under UK and US auditing standards, the AC received a letter on independence related matters from EY. EY also informed the AC in writing of any significant relationships and matters that may reasonably be thought to affect its objectivity and independence. The AC and EY discussed such relationships and matters and determined that they did not impair EY’s objectivity, integrity and impartiality.

During 2022, there was no review of EY’s audits of Shell’s Consolidated Financial Statements by the Audit Quality Review (AQR) team of the FRC.

Reappointment

The AC is responsible for considering whether there should be a rotation of the independent registered public accounting firm in order to ensure continuing auditor quality and/or independence, including consideration of the advisability and potential impact of conducting a tender process for the appointment of a different independent public accounting firm. The AC is also responsible for recommending to the Board whether it should ask the Company’s shareholders to appoint, reappoint or remove the external auditor at the AGM.

At the AGM in May 2022, the shareholders approved a resolution to reappoint EY as external auditor until the conclusion of the next AGM. EY was first appointed at the AGM in May 2016 after a competitive tender process. This means that 2022 represents EY’s seventh year as the Company’s external auditor. Under UK legal requirements, the Company may retain EY as its external auditor for 20 years. For the 2022 financial year, the Company has complied with The Statutory Audit Services for Large Companies Market Investigation (Mandatory Use of Competitive Tender Processes and Audit Committee Responsibilities) Order 2014.

In its oversight of the external audit, the AC considered whether it would be appropriate to conduct an audit tender at this time. The AC took into account:

• its continued satisfaction with the quality and independence of EY’s audit;
• any new external auditor would need a transition period to develop sufficient understanding of the business given Shell’s size and complexity;
• frequent changes of external auditor would be inefficient and could lead to increased risk and the loss of cumulative knowledge;
• a change in auditor would be expected to have a significant impact on Shell, including on the Finance function; and
• any change in auditor should be scheduled to limit operational disruption.

The AC also considered EY’s leadership and activities in the area of climate change.

After due consideration the AC determined that it would not be appropriate to re-tender for the external audit at this time. The AC has recommended to the Board that at the 2023 AGM the Board should propose that EY be reappointed as the external auditor of the Company for the year ending December 31, 2023. The AC’s recommendation is free from third-party influence and there are no contractual obligations that restrict the AC’s ability to make such a recommendation.

The AC acknowledges the UK legal requirements relating to mandatory audit rotation (maximum 20-year engagement) and audit tendering under which the Company will be required to tender for the audit no later than the financial year 2026. The AC regularly reviews auditor performance and may decide to conduct the tender earlier than the financial year 2026 if it considers this to be in the interests of the Company’s shareholders.

Non-audit services

The AC maintains an auditor independence policy (AIP) in respect of the provision of services by the external auditor. Under the AIP, the AC will only approve services to be carried out by the external auditor or its affiliates where such services do not present a conflict of interest risk in fact or in appearance. The AC regularly reviews this policy for necessary changes in response to changes in related standards and regulatory requirements.

This policy is designed to safeguard auditor objectivity and independence. It addresses the provision of audit services, audit-related services and other non-audit services and stipulates which services require specific prior approval by the AC.

The policy also defines prohibited services in line with applicable rules and regulations. Our external auditors are not allowed to provide prohibited services due to independence concerns. For certain non-prohibited services, because of the knowledge and experience of the external auditor and/or for reasons of confidentiality, it may be more efficient or prudent for the external auditor to provide such services.

The AC reviews quarterly reports from management on the audit and non-audit services reported in accordance with the policy or for which specific prior approval from the AC is being sought. Under the AIP, no prior approval by the AC is required for any additional audit service contract not individually exceeding $500,000. All non-audit services where the fee for an individual contract exceeds $100,000, including audit-related services, require individual prior approval by the AC. For audit or non-audit service contracts that do not exceed the relevant threshold, the matter is approved by management by delegated authority from the AC and is subsequently presented for approval by the AC at the next quarterly AC meeting. The AC is mindful of the overall proportion of fees for audit and non-audit services in determining whether to approve such services.

The scope of the non-audit services contracted with the external auditor in 2022 consisted mainly of interim reviews and other audit-related assurance services. The associated compensation for these audit-related services and other non-audit services amounted to 5% and 5%, respectively, of the external auditor’s audit and audit-related remuneration.

Fees

After due consideration, the AC approved the auditor’s remuneration, satisfying itself that the level of fees payable in respect of the audit and non-audit services provided was appropriate and that an effective, high-quality audit could be conducted for such fees.

Note 34 to the “Consolidated Financial Statements” provides details of the auditor’s remuneration.