Financial Impacts of Bps Response to the Deepwater Horizon Oil Spill Essay Example

Financial Impacts of Bp’s Response to the Deepwater Horizon Oil Spill

Financial Impacts of Bp’s Response to the Deepwater Horizon Oil Spill

Introduction

The environmental accounting has received acceptance by the company and advocates of environmental conservation as a crucial component in ensuring that organisations make decisions that are environmental-friendly (Michael, n.d.). The ability to incorporate environmental accounting helps in ensuring that the firm reduces pollution to the environment and achieve organisational sustainability. Therefore, the firm becomes innovative in identification and implementation of financial and accounting policies that provide the actual value of its performance after factoring in environmental impact. The environmental accounting improves disclosure of company’s performance by reporting both financial (Profits and losses) and non-financial (environmental impact) performance of the company (Michael, n.d.). The environmental accounting is a component of the Generally Accepted Accounting Principles (GAAP), it entails the provision of additional and valuable information about a financial activity and the associated environmental risks (Michael, n.d.). The incorporation of environmental accounting was developed due to the aggressiveness of the firms for financial gains without considering the impact of their activities on the environment. The discussion provides analysis of Deepwater Horizon oil spill in the Gulf of Mexico.

Discussion of Deepwater Horizon Oil Spill

The spill occurred on 20th April 2010 and continued for 86 days until 15th July 2010 when BP managed to close the well. The spill occurred due to the explosion of an oil platform on the Deepwater Horizon offshore and considered the largest oil spill of approximately 5 million barrels of which 4.2 million barrels were poured into the water of the Gulf of Mexico (Goldenberg, 2013). The BP was held accountable for the spillage by the US government since they were the developer of the oil field and had contracted Deepwater to drill an exploratory well. Also, Halliburton Company was caught in the fiasco since it was responsible for cementing well casings.

The BP Fourth Quarter results for 2010 released on 1st February 2011 reflected $40.9 Billion US dollars allocated to the oil spill in Mexico Gulf. The company distributed the allocated $17.7 Billion to for the cost incurred during the oil spillage and were treated as non-operating costs. Also, $20 Billion of the allocated amount was meant for legitimate claims and litigation settlements of damages caused by the spillage to the natural resources and habitat (Goldenberg, 2013). The company dedicated $500 million for a research program that will last for 10years to investigate the impact of the oil spill in the Gulf of Mexico and BP’s response on the marine and its ecosystem (Boyd, n.d.).

The amount allocated in BP’s income statement related to the Deepwater Horizon was considered inadequate to compensate the damaged that it had caused to the ecosystem. Also, the amount was restricted to incidences that are strictly proven that damage occurred as a result of the oil spill and thus locking out compensation of those who suffered indirectly. The company argued that it was not possible to determine the exact amount of the damage and thus uncertain on the exact amount required (Orlitzky and Whelan, 2007). The parameters used in valuing the cost include date when oil flow was permanently halted, barrels of oil spilled, claims that resulted from the oil spillage and time required to clean up the site.

Joel and Charles (2011), holds the opinion that uncertainty on the amount charged for the oil spillage signifies a lack of sound environmental accounting framework that would sufficiently match the likely risk versus compensation for the project before exploration. The escrow fund of $20billion was paid after the US government pressured the company to gather for cleanup cost since the company had argued that it should share the cost with Deepwater and Halliburton Company. The reluctance to compensate the damage of oil spill by BP shows a lack of environmental consciousness in pursuit of economic performance. Therefore, BP accounting practice shows the disadvantage of using traditional accounting practices that emphasize on economic performance reporting but ignores the environmental aspects (Rikhardsson, 2005).

According to Uno and Bartelmus (2013), the environmental accounting principle are similar to financial accounting such that the definition of the scope of the action (entity principle), considering worst case scenario (conservatism) and matching of revenue to the associated expenses (matching principle). Therefore, failure BP Company to adequately allocate the amount to compensate damage caused by oil spillage shows fallout of company financial accounting system. The drop in the company’s shares value shows that users of financial information are becoming aware of the impact of environmental issues on the sustainability of the company performance. Therefore, environmental accounting is paramount to the investors and other users of the financial reports.

According to Joel and Charles (2011), the ambiguity surrounding scientific and economic knowledge, the penalty for the spillage elicits political bargain rather than a technical evaluation of the ultimate cost for the oil spillage. The political influence signifies complacency of regulatory authorities in formulating and implementing strong rationales in determining, measuring and accounting for the implication of company operational activities to the environment. Goldenberg (2013), points out that courts, plaintiffs and trustees lack framework and effective tools in evaluating environmental damage caused by corporate. The failure of BP to disclose rationale used in evaluating damage and compensation of the oil spillage is as a result of the weakness of regulatory bodies. There should be adequate information that is vital in guiding the parties in the assessment of amounts charged to account for any negative externalities that result from normal operation of the company (Orlitzky and Whelan, 2007).

Consequently, the guidelines should offer an understanding of restoration effort of a destroyed ecosystem and estimation method used to evaluate monetary value of the damage. The failure to account for the true picture of the social, environmental and financial implication of the Deepwater Horizon oil spill, might have caused the drop in share value due to drop in investors’ confidence in the competence of directors and management in mitigating contingencies (Joel and Charles, 2011).

The Deepwater Horizon oil spill aroused the need to formulate and implement the more stringent regulation in the exploration of gas and oil in the US and globally. The regulations aim at protecting the environment, health and safety promotions as well as control and oversight of oil drilling and transportation activities. Also, it ensures that the company operates within the stipulated limit and balance between economic purists and environmental consciousness. The environmental consciousness can be achieved through the integration of financial, environmental and social information in a momentous framework that would help stakeholders in the process of decision-making (Buccina, Chene and Gramlich, 2013).

The accounting regulators such as Australian Accounting Standard Board, International Financial Reporting and relevant government bodies should formulate and raise the minimum disclosure on environmental aspects of the firm. Also, the accountants should be trained on ways to estimate and predict unforeseen environmental implication of projects within the company. The BP Company would have created a sinking fund for the contingent given that it had accounted for the cost as stated by the environmental economies during evaluation of the project (Goldenberg, 2013).

CONCLUSION

The negligence of environmental accounting framework has a detrimental impact on financial performance of the company and environment. The pursuit of economic performance prevents the company to realise the damage it causes to the environment. Also, inadequate guidelines and ambiguity in the evaluation of environmental impact encourage political view in advocating which does not offer a fair deal to either plaintiff or complainant. The Deepwater Horizon oil spillage was a wake-up call for regulatory bodies to develop sound environmental policies on minimum disclosure, but there is a lot to be done in future to allow recognition, reliable measurement of damage and compensation for environmental damage caused in the course of economic activity (Goldenberg, 2013).

REFERENCE:

Boyd, J. (n.d.). Lost Ecosystem Goods and Services as a Measure of Marine Oil Pollution Damages. SSRN Electronic Journal.

Buccina, S., Chene, D. and Gramlich, J. (2013). Accounting for the environmental impacts of Texaco’s operations in Ecuador: Chevron’s contingent environmental liability disclosures. Accounting Forum, 37(2), pp.110-123.

Goldenberg, S. (2013). US government assessment of BP oil spill ‘will not account for damage’. [online] the Guardian. Available at: https://www.theguardian.com/environment/2013/jul/11/us-assessment-bp-oil-spill-damage [Accessed 23 May 2017].

Michael, V. (n.d.). Environmental — Economic Accounting in Australia. [online] ttps://unstats.un.org. Available at: https://unstats.un.org/unsd/envaccounting/seearev/meetingMay2011/bg12_MVardon.pdf [Accessed 23 May 2017].

Orlitzky, M. and Whelan, G. (2007). On The Effectiveness of Social and Environmental Accounting. Issues In Social And Environmental Accounting, 1(2), p.311.

Rikhardsson, P. (2005). Implementing environmental management accounting. 1st ed. Dordrecht: Springer.

Uno, K. and Bartelmus, P. (2011). Environmental accounting in theory and practice. 1st ed. Dordrecht: Springer.

Joël, H and Charles G. 2011.The Financial impacts of BP’s response to the Deepwater Horizon oil spill. Synergiz Case Study 2011-01. Available at: http://www.synergiz.fr/wp-content/uploads/2011/04/Case-study-BP-gulf-oil.pdf [Accessed 23 May 2017]