Introduction
The Deepwater Horizon oil spill is regarded as one of the biggest marine hazards in the history of the US. The incident occurred on April 20, 2010. It followed an explosion in a drilling platform of an oil rig referred to as the Deep Water Horizon (Grant 2014). The rig was located approximately 40 miles from the coast of Louisiana in the Gulf of Mexico (Grant 2014). It had been leased to BP by TransOcean, who were the owners and operators.
According to Houdet and Germaneau (2011), 4.2million barrels of oil spilled from the Macondo well, which was being drilled. It caused major damages to the ecosystem and to the communities living in the area. The spill impacted directly and indirectly on the least 20 kinds of ecosystem services around and within the Gulf of Mexico (Casselman & Gold 2010). Such services touched on climate regulation, recreational facilities, as well as cultural and aesthetic values. Others entailed hurricane protection on the coastal wetlands. It was difficult to quantify the extent of damage on maritime and land flora and fauna.
In this paper, the author provides a critique of BP’s reporting system in relation to the spill. The shortcomings of the reports provided by the company will be analysed in the context of the provisions of General Purpose Financial Reporting (GPFR). The author will focus on the duration prior to and after the disaster.
BP’s Conformance to GPFR Standards and Shortcomings in Relation to Deepwater Horizon Disaster
The oil spill highlighted the failures of environmental laws and the agencies charged with the responsibility of supervising deepwater drilling (Grant 2014). In addition, corporate governance, corporate social responsibility (CSR), and doctrines of corporate law failed to prevent the disaster (Houdet & Germaneau 2011). A number of questions regarding the management of corporations, together with how they portray themselves to the public, were raised.
BP Ltd. is one of the leading companies in the global gas industry. The company deals with the exploration, production, refinery, distribution, and marketing of oil products (Houdet & Germaneau 2011). It is regarded highly by many people in the society.
According to Chazan and Daker (2010), the Deepwater Horizon disaster exposed a destructive corporate culture in BP. The company consistently neglected the safety of the workers and disregarded environmental regulations. The organisation maintained a poor safety record, which was made evident from previous accidents that could have been avoided. Most of the failures resulted from poor planning and incompetent maintenance of equipment. Some of these factors were blamed for the Deepwater disaster (Chazan & Daker 2010).
Houdet and Germaneau (2011) argue that prior to and even after the disaster, BP engaged in aggressive advertisement campaigns, projecting itself as an environmentally friendly organisation. The company promoted itself as better than its competitors, especially in relation to environmentalism. According to Grant (2014), the profits of the firm soared. In addition, it was ranked among the leading organisations in relation to CSR and employees’ welfare.
Alexander and Britton (2004) postulate that general purpose financial reports (GPFRs) provide information regarding the fiscal position of a company. The information touches on the economic resources of the entity and projected future performance. In addition, the reports highlight transactional effects and other claims that impact on the economic resources of the reporting entity. According Alexander, Britton, and Jorissen (2007), GPFRs are supposed to disclose information regarding the performance assessment of the entity. In addition, the reports should indicate the financial position of the firm with regards to finance, investment, and compliance with laid down procedures (Alfredson et al. 2007; Gleason, Jenkins & Johnson 2008).
Walker (2003) argues that the conceptual framework of GPFR is based on four criteria. The points taken into consideration include clarity of expression and consistency of assumptions touching on commercial practices. The behaviour of the external users of the accounting information is also factored in. Another criterion includes internal consistency and comprehensiveness of the financial reporting practice (Beatty & Weber 2006; Cho & Patten 2007).
Prior to and after the Deepwater disaster, BP focused more on the external users of its financial reports at the expense of compliance. According to Chazan and Daker (2010), in the mid 2000s, BP experienced two disasters within a period of twelve months. One of the catastrophes was in Texas City refinery. It occurred in March 2005. The other took place in Alaska’s Prudhoe Bay. It was reported in March 2006 (Chazan & Daker 2010). Key findings from the disasters indicated that BP had disregarded maintenance and safety measures in the plants to reduce operational costs (Houdet & Germaneau 2011).
In response to these disasters, BP provided reports on the need for resources to cover for plant systems and equipments. For instance, the company reported that it had set aside $7 billion to be used within the next four years to upgrade the safety of US refineries, including the Alaskan pipeline (Chazan & Daker 2010). It also reported about $300 million for renewal of safety management processes during refining (Houdet & Germaneau 2011). According to Houdet and Germaneau (2011), some of these changes were company-wide. However, many were specific either to Texas City or a few refineries.
According to Alexander and Archer (2000), one of the key objectives of a profit making organisation involves increasing shareholder’s value. According to the stakeholders’ theory, it is important to strike a balance between costs, revenues, and risks (Cherry & Judd 2011; Dhaliwal et al. 2011; Krishnan & Lee 2009). However, this was not the case at BP. It was reported that the company focused more on areas that generated profit for the shareholders at the expense of the other elements of the stakeholder’s model. In spite of acting in a socially irresponsible manner, the company portrayed itself as a responsible entity centred on CSR.
According to Casselman and Gold (2010), OSHA issued many violation alerts to BP between 2007 and 2010. It is noted that 97% of wilful safety violations handed to refineries went to BP. As such, it is clear that in spite of all the disclosures in GPFRs, BP scored low in compliance. Even after the Deepwater Horizon disaster, the company had difficulties disclosing actual damages and costs resulting from the occurrence.
The financial records of BP for the last quarter of 2010 reflected pre-tax charges of US$40.9 billion in relation to the Deepwater disaster (Chazan & Daker 2010). The charges included US$17.7 billion in relation to costs incurred in 2010. However, the financial statements failed to indicate the amount related to penalties and fines. It only reflected those charges resulting from liabilities associated with the Clean Water Act (Houdet & Germaneau 2011). The company was dishonest in the disclosures. It only sought to protect its corporate image in the eyes of the shareholders.
Conclusion
The behaviour of BP during the Deepwater Horizon disaster indicates irresponsible corporate governance. The governance framework failed in the performance and conformance dimensions. The organisation depicted an increased appetite for risk given that the disaster arose from negligence and greed to attain organisational objectives. Various measures need to be put in place to promote ethical and responsible decision-making in the company. Efforts should be made to enhance integrity and conformance in BP’s financial reporting.
References
Alexander, D & Archer, S 2000, ‘On the myth of “Anglo-Saxon” financial accounting’, International Journal of Accounting, vol. 35 no. 4, pp. 539-557.
Alexander, D & Britton, A 2004, Financial reporting, 7th edn, Thomson Publishing, London.
Alexander, D, Britton, A & Jorissen, A 2007, International financial reporting and analysis, 3rd edn, Thomson Publishing, London.
Alfredson, K, Leo, K, Picker, R, Pacter, P, Radford, J & Wise, V 2007, Applying international financial reporting standards, John Wiley & Sons Australia Limited, Milton.
Beatty, A & Weber, J 2006, ‘Accounting discretion in fair value estimates: an examination of SFAS goodwill impairments’, Journal of Accounting Research, vol. 44 no. 2, pp. 257-288.
Casselman, B & Gold, R 2010, BP decisions set stage for disaster, Web.
Chazan, G & Daker, S 2010, As missteps mount, so does the backlash, Web.
Cherry, A & Judd, S 2011, ‘Beyond profit: rethinking corporate social responsibility and greenwashing after the BP oil disaster’, Tulane Law Review, vol. 85 no. 4, p. 983.
Cho, C & Patten, D 2007, ‘The role of environmental disclosures as tools of legitimacy: a research note’, Accounting, Organisations, and Society, vol. 32 no. 639-647.
Dhaliwal, D, Li, O, Tsang, A & Yang, Y 2011, ‘Voluntary nonfinancial disclosure and the cost of equity capital: the initiation of corporate social responsibility reporting’, The Accounting Review, vol. 86 no. 1, pp. 59-100.
Gleason, C, Jenkins, N & Johnson, W 2008, ‘The contagion effects of accounting restatements’, The Accounting Review, vol. 83 no. 1, pp. 83-110.
Grant, W 2014, ‘Deepwater Horizon and the law of the sea: was the cure worse than the disease?’, Boston College Environmental Affairs Law Review, vol. 41 no. 1, pp. 63-131.
Houdet, J & Germaneau, A 2011, The financial impacts of BP’s response to the Deepwater Horizon oil spill: comparing damage valuation approaches & highlighting the need for more reliable environmental accounting and reporting, Web.
Krishnan, J & Lee, J 2009, ‘Audit committee financial expertise, litigation risk, and corporate governance’, Auditing: A Journal of Practice and Theory, vol. 28, no. 1, pp. 241-261.
Walker, R 2003, ‘Objectives of financial reporting’, Abacus, vol. 39 no. 3, pp. 340-355.