Accounting Theory:British Petroleum Oil Split in Mexican Gulf 2010 - Essay Example

?Accounting Theory: British Petroleum Oil Split in Mexican Gulf Table of Contents Table of Contents 2 Introduction 3 2. The Case 3 2 Case Study 3 2.2. Data 4 2.3. Methodology 5 3. Findings 5 4. Conclusion 7 References 9 1. Introduction With the intention to decode the operations of businesses and their consequences, various accounting theories have been brought into use (Elsbach, 2000). For instance, the positive accounting theory, also known as agency theory, emphasises the Ex Ente (before the event) agreement between the two parties, i.e. an agency and the agent. Notably, this particular theory accounts for the costs to be incurred by the agency, as a consequence to the failure of the agent to perform the delegated authority efficiently (Watts & Zimmerman, 1990). Correspondingly, the behavioural accounting theory argues that key decision makers of an organisation can add value to the company. Delivering the key decision makers of the company with such significance, the assumptions taken in the behavioural accounting theory intends to make the behavioural effects of the decision makers within an organisation, substantially transparent to the company stakeholders (Gillenkirch & Arnold, n.d.). Again, the Critical Accounting Theory (CAT) is concerned with the social customs and practices, which tend to ignite a change within conceptual, institutional and practical dimensions of accounting theories. Thus, arguing on the basis of the change drivers, the theory aims to justify the strategies needed to be taken by a business so as to avoid strategic failure (Tilling & Tilt, 2002). Emphasising these theories of accounting, the study aims at evaluating the incident of BP oil spill in the Mexican Gulf in the year 2010. 2. The Case 2.1. Case Study As reported in the company annual report, BP had to suffer a considerable loss and inhibited market reputation owing to the oil spill that occurred in the Gulf of Mexico, in 2010. The spill was caused due to explosion and the subsequent fire in the semi-submersible rig of its Deepwater Horizon plant. In the massacre, a total of 17 people on the vessel were injured apart from which, 11 people had died as the consequence of the blast. Following the explosion and the sinking of the vessel, the oil kept spilling in the gulf for around 87 days, causing severe negative impacts to the marine life and the entire biological cycle within and surrounding the horizon (BP Annual Report and Form 20-F, 2010). This indicates towards a poor agency relationship of the company with its stakeholders as per the positive accounting theory (Watts & Zimmerman, 1990). As per the report, Transocean Holdings LLC and BP plc were accountable for the oil spill in the Deepwater Horizon rig, as the former was the architecture of the well and the latter operated as the agency responsible to keep continuous check and control on the leak risks to the well, which implies to the assumptions of the critical accounting theory of effective decision making in response to the identified issue, confirming change in its organisational policy behaviour and structural orientation (BP Annual Report and Form 20-F, 2010; Tilling & Tilt, 2002). 2.2. Data As mentioned in its annual report, in July 2010, BP settled various agreements to sell the upstream assets in the US, Canada along with Egypt to Apache Corporations. This divestment was required for BP, as it was capable to increase the target for divestment to US$ 10 billion, which further assisted the company to suffice the GCCF claims at a greater ease. Similarly, in October 2010, BP again formed an agreement with its partner Hess Corporation for the sale of 20% interest that BP used to hold in Tubular Bells followed by the selling of its interest in Pan American Energy to Bridas Corporations and in a number of operational matured oil and gas fields in the UK to obtain liquid assets, which were further used by the company to suffice the claims made in lieu of the oil spill in the Gulf of Mexico (BP Annual Report and Form 20-F, 2010). A clear indication of the losses incurred and the corresponding responsive measures taken by the company to deal with the situation can also be related with the behavioural accounting theories emphasised on maintaining transparency in its accounting disclosures (Gillenkirch & Arnold, n.d.). 2.3. Methodology In this paper, the company annual report has been considered as the corporate text, which will be analysed with reference to the assumptions discussed as per the positive accounting theory, behavioural accounting theory and critical accounting theory. With regards to the incident to be assessed in this report, i.e. the oil spill in the Gulf of Mexico, holding BP plc as accountable for the damages caused, it becomes observable that the incident and the corresponding measures taken directly imply to the organisational responsible attitude deciphered in response to the massacre. The event apparently indicates towards the ethical legitimacy of the organisation, wherein the implication of these accounting theories shall be beneficial in gaining an in-depth understanding to the overall organisational efficiency. Notably, with the application of the positive accounting theory, the agency relationship of BP plc (as the agent) and the stakeholders (as the agency), depicting the accountability of the organisation in dealing with the issue. Correspondingly, the behavioural and the critical accounting theories will support the assessment of the decision making attributes as managed within BP in response to the oil spill. 3. Findings As argued by Heflin & Wallace (2012), the immediate responses taken by BP to account for the damages caused by the oil spill and suffice the compensation claims by selling its held interests can also be assessed as a replication of the strong bonding between the agency and the agent. However, a contrary view to the issue reveals that the company had not been efficient enough to take precautionary measures in order to prevent any similar occurrence (Windsor & McNicholas, 2012). The affirmation that the company was aware of similar risks in the Deepwater Horizon well, in its annual report, also denotes the inefficiency of the organisation in performing as per the positive accounting theory (Summerhays & Villiers, 2012). The company can be identified to have reported its strategic initiatives with clarity in its annual report, addressing the losses incurred and the requisite measures taken by the company to increase its reserves and suffice the capital needs required to settle the claims. Considerable transparency can be observed in keeping its stakeholders duly informed regarding its responsive measures to the oil spill (Botes & Samkin, 2011). Accordingly, a significance amount of transparency can be observed when assessing the company report, reflecting on the responsibility of the company considering the massacre. Apparently, these findings suggest that the company has been effective in applying the behavioural accounting theory with efficiency in its response to the oil spill in 2010 (Villines, 2011). Accordingly, following the accident, the company had to incur a cost of $3,023 million [refer to Figure 1]. The company also aimed at establishing a Gulf Coast Restoration Organization (GCRO) to take due measures in cleaning up the spilled oil in the Gulf of Mexico and support the advancement of life in the region towards normalcy at the earliest (BP Annual Report and Form 20-F, 2010). Figure 1: Key Statistics of Damages caused by Gulf of Mexico Oil Spill Source: (BP Annual Report and Form 20-F, 2010) A broader perspective to the issue indicates the significance of the positive accounting theory in the responsive process taken by the company, as its adopted measures directly emphasises the need for strengthening its agency relationship by augmenting stakeholders’ confidence. To be noted, the measures taken by the company to sell out its interests in various oil and gas plants further implies to a certain extent of change in its financial structuring. Thus, satisfying the assumptions of the critical accounting theory, the measures taken by BP in response to the 2010 oil spill indicate a change in the organisational practices. 4. Conclusion While the conventional philosophy in this regard argued the implication of accounting theories to be limited in the field of financial management, the unconventional paradigm delivers significant emphasis in arguing that accounting theories can also prove effective when assessing the responsible strategic behaviour deciphered by an organisation (Milne, 2000). From the case analyses presented in this paper, it becomes apparent that BP has been taking measures to respond to the massacre of 2010 oil spill that took place in the Gulf of Mexico, which again relates to the assumptions of the positive, behavioural and critical accounting theories. References Botes, V. L. & Samkin, G., 2011. Restoring legitimacy in order to remain sustainable: The case of BP. University of Waikato, pp. 1-23. BP Annual Report and Form 20-F. 2010. Annual Report and Form 20-F. [Online] Available at: http://www.bp.com/liveassets/bp_internet/globalbp/STAGING/global_assets/downloads/I/BP_Annual_Report_and_Form_20F.pdf [Accessed December 14, 2013]. Elsbach, K. D., 2000. The Architecture of Legitimacy: Constructing Accounts of Organizational Controversies. The Psychology of Legitimacy, Chapter 16. Gillenkirch, R. M. & Arnold, M. C. No Date. State of the Art des Behavioural Accounting. pp. 1-13. Heflin, F. & Wallace, D., 2012. The BP Oil Spill: Shareholder Wealth Effects and Environmental Disclosures. Florida State University, pp. 1-56. Milne, M. J., 2000. Positive Accounting Theory, Political Costs and Social Disclosure Analyses: A Critical Look. Accountancy and Business Law, pp. 1-21. Summerhays, K. & Villiers, C. De., 2012. Oil Company Annual Report Disclosure Responses To The 2010 Gulf of Mexico Oil Spill. Journal of the Asia-Pacific Centre for Environmental Accountability, Vol. 18, No. 2, pp. 103-130. Tilling, M. & Tilt, C. 2002. Alas Poor Critical Accounting, We Knew Him, Karl. University of South Australia. [Online] Available at: http://www.flinders.edu.au/sabs/business-files/research/papers/2002/02-03.pdf [Accessed December 14, 2013]. Villines, A. N., 2011. Communicating During Crisis: A Case Study of the 2010 BP Gulf Oil Spill. Undergraduate Honors Thesis Collection, paper 90. Watts, R. L. & Zimmerman, J. L. 1990. Positive Accounting Theory: A Ten Year Perspective. The Accounting Review, Vol. 65, No. 1, pp. 131-156. Windsor, C. & McNicholas, P., 2012. The BP Gulf Oil Spill: Public and Corporate Governance Failures. University of Wollongong, pp. 1-49. Read More