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Question:

Discuss about the Accounting Theory for BP Oil Spill.

 

Answer:

Introduction

The BP oil spill resulted in the spillage of approximately 4.9 million crude oil barrels into the Gulf of Mexico that created massive havoc amongst various industries including tourism, fishing pricing of real estates, etc. This is the reason why the spill is also popularly called as the Deepwater Horizon. Besides, many other industries were also heavily affected by the spill and as a result had to be temporarily discontinued so that further losses could be avoided. Moreover, due to the spill, the prices of oil significantly declined from $86.19 on 3 May 2010 to $68.03 on 21 May 2010. Considering all these disastrous influences, BP undertook the responsibility of restoring the entire Gulf area including its environment (DeVilliers & VanStaden, 2011).

In relation to the restoration process, the company expended billions of resources for the cleaning process, compensation measures, research aspects, etc. Besides, based on the Sustainability Review 2010, the company had also kept aside $37.2 billion in order to provide for appropriate compensation measures for the affected. 

 

Legitimacy Theory

This theory is based on a generalized assumption or perception that the affairs of an organization are proper, desirable, or adequate within few socially established system of beliefs, values, norms, and definitions. Companies rely on the fact of such social value and the societal assumption associated with their organizational performance. Further, a disparity is of primary concern to the organization and a threat to its legitimacy. Besides, it facilitates in contravening the contract (Booz & Hamilton, 2010). Thus, a legitimate threat is a key concern as it jeopardizes the company’s survival because stakeholders can terminate at any point the interconnections with the company, thereby limiting its supply of resources. Nevertheless, this a major problem that can also result in enhanced statutory government restrictions and several reporting activities, minimal employment level, deterioration in customer demand of the company’s goods and services, and disinvestment on the part of lenders from the company (Juhasz, 2011). Thus, companies are bound to conduct its activities in a proper manner so that the stakeholders’ concerns and views are taken into account, thereby resulting in the procurement of organizational objectives.

In relation to BP, the oil spill played a key role in establishing a legitimacy crisis, thereby influencing the company’s legitimacy as a whole. Thus, oil companies must implement an effective disclosure trend in their reporting activities so that the public responses are effectively addressed (Cherry & Sneirson, 2010). However, there was no track record of the company implementing such disclosure patterns in its reports. This proves the fact that the company had scorned the legitimacy theory as it failed to implement precautionary steps before the tragedy.

 

Stakeholder Theory

This theory generally implies that the goal of an organization is to establish a value for its stakeholders. It is involved in seeking the stakeholders of the company and the processes by which they coordinate or interact to affect the organization. Moreover, as a matter of fact, companies operate with the prior assistance of social contracts that plays a role in designing the eligibility of stakeholders towards several duties and rights. Further, the companies that can create an effective interconnection with the stakeholders can surpass others.

The BP oil spill resulted in disrupting the entire area of the Gulf of Mexico that includes industries associated with fishing, tourism, etc. All these issues posted a loss of more than $40 billion to the affected industries. BP does not grant direct power to the inhabitants of the region, but in the end, this creates an indirect control. Based on this theory, it is relevant for the company to smoothen its bonds with its primary stakeholders in order to sustain the social legitimacy (Dittrick, 2010). Further, BP must also restore the affected regions in order to develop its relationship with the Gulf communities. Besides, the negative response from the US public also resulted in the creation of a trust by the federal government of US that amounted to $20 billion for BP. This highlights the fact that indirect community poses a great strength and hence, BP is clearly bound to conduct its restoration process.

Public Interest Theory

This theory is primarily concerned with companies and the part they play in order to safeguard the effectiveness of the entire economy. Furthermore, agencies are duty bound to implement strict actions in the event of contingencies. Moreover, this generally depends on the role of the politicians. Besides, in the current situation, it has become nearly impossible for the trustees to maintain a record of accomplishment of the products and services that have deteriorated from the ecosystem.

 In relation to the BP oil spill, it can be stated that there was nil applicability of such public interest theory, as the company never offered any prior attention towards the effectiveness of the entire economy (Jacobson, 2013). Besides, this can be proved by its annual reports wherein no initiatives implemented for the effectiveness of the economy were mentioned.

 

Relationship of Theories with Accounting Record

Based on the legitimacy theory, companies that are observed as legitimate in nature must operate according to the rules and regulations. Besides, it must be noted that in order to maintain legitimacy, an effective disclosure pattern must be implemented because it is associated with social contract theory that necessitates companies to align the societies’ expectations about the company’s activities. Since BP failed to implement an effective pattern of the disclosure; it resulted in a break of people’s trust from the company (Dittrick, 2010). Therefore, it is the sole responsibility of the company to keep its stakeholders informed in an effective way so that they can entrust full confidence and trust upon the company.

Based on the stakeholder theory, it must be noted that BP must focus on maintaining an effective relationship with its stakeholders because, after the tragedy, it had to encounter massive frustration from the common people. Thus, this makes it clear that the company is directly liable for the tragedy, but implementing a proper restoration process to mitigate the harmful effects of the spill was an effective step (Upton, 2011).

Based on the public interest theory, it can be observed that the market is very delicate in nature and if allowed to function on its own, can result in unexpected results. This is the reason why the agencies failed to operate effectively, as sufficient resources were missing. In addition, the enforcement resources were also insufficient in nature that resulted in a major disaster, thereby ultimately leading to disintegration (Hooks & Staden, 2013).

Regulators’ Role

The role played by regulators is also relevant as it assists in framing a smooth balance, thereby resulting in the company’s smooth performance. Further, the prevalence of such regulators also assists in facilitating compliance with every rules and regulation by companies. This is because they ensure that all public advantages are accrued, thereby resulting in an enhanced goodwill for the company. In relation to BP, resources were not prevalent that could have benefitted the public (Mason, 2010). Besides, agencies failed to provide due focus on deepwater and drilling areas. In addition, the enforcement resources were insufficient as well that resulted in a major downfall and a tragic accident as a whole. Further, the disintegration of OCSLA can also be attributed to the fact that the provisions were inappropriate in nature and the review approach was absent as well. 

 

Conclusion

Due to the oil spill, the market capitalization of British Petroleum was strongly affected. In addition, the oil spill negatively affected the financial position of the company as it had to expend approximately twenty percent of its assets for the restoration process that includes compensation, lawsuits, and the cleaning-up processes as well. Due to the major impact of the spill, the stock prices of the company was also badly influenced and it reported the lowest as on 25 June 2015 when its prices reported an amount of $27.02. Hence, it can be concluded from the discussion that the financial activities of the company were strong but the tragedy played a key role in degrading its prices of stocks. Besides, after taking into account the operations of the company, it can be easily concluded that BP can easily provide for the restoration process by operating effectively in the upcoming future, and frame an effective framework for corporate sustainability reporting activities. Nonetheless, the company must pay attention to the governance issues and CSR issues that can allow it to compensate for its losses. 

 

References 

Booz, A & Hamilton, H 2010, The Offshore Oil and Gas Industry Market Response - Part One, Department of Energy, National Energy Technology Laboratory.

Cherry, M.A & Sneirson, J.F 2010, ‘Beyond Profit: Rethinking Corporate Social Responsibility and Green washing after the BP Oil Disaster’, Tulane Law Review, vol. 85, no.4, pp. 983-1038.

Dittrick, P 2010, ‘Investors ask firms to outline deepwater risks, spill-response plans’, Oil and Gas Journal, vol. 108, no. 30, p. 26.

DeVilliers, C & VanStaden, CJ 2011, ‘Where firms choose to disclose voluntary environmental information’, Journal of Accounting and Public Policy, vol. 30, no. 6, pp. 504-525.

Hooks, J & Staden, Van CJ 2011, ‘Evaluating environmental disclosures: the relationship between quality and extent measures’, British Accounting Review, vol. 43, no. 3, pp. 200-213.

Juhasz, A 2011, Black tide: the devastating impact of the Gulf oil spill, John Wiley and Sons, New Jersey

Jefferson, J., Bowling, N 2011, The Economic and Biological Impacts of The BP Oil Spill, NDS 372.01 Environmental Studies Capstone Seminar.

Jacobson, M 2013, By the Numbers: The Oil Spill and BP's Legal Troubles, PBS News Hour, viewed 16 May 2017, https://www.pbs.org/newshour/rundown/2013/07/gulf-oil-spill-by-the-numbers.html.

Mason, J.R 2010, The Economic Cost of a Moratorium on Offshore Oil and Gas Exploration to the Gulf Region, Working Paper :Louisiana State University.

Upton, H.F 2011, The Deepwater Horizon Oil Spill and the Gulf of Mexico Fishing Industry,

A look at Europe’s Financial Crisis, viewed 16 May 2017, https://hosted.ap.org/specials/interactives/_business/greece_imf/content.swf.

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