Samarco Dam Disaster in 2015 - Case Study Example

Name: Tutor: Subject: Date: INTRODUCTION AND OUTLINE OF THE CASE Summary of the Key Facts The Samarco dam disaster in 2015 claimed several people who got buried under an avalanche of red mud. Since then, the major culprit, BHP Billiton became adversely affected experiencing significant losses (The Conversation, 2015). The Conversation (2015) continued to observe that this is not the first time the company has to defend itself against safety issues. According to the Guardian (2015), the Samarco incident was not an accident; it was a case of negligence. The disaster represents one of the biggest environmental disasters in Brazil. Around 62 cubic meters of water combined with sediments from BHP Samarco’s iron ore extraction site buried over a dozen people after the Fundao tailings dam failed at the Samarco’s site. Although, the cause of the incident is not yet known, it is clear that the incident was avoidable with prosecutors alleging negligence. According to the investigating team/environmental prosecutors there was no due care in the monitoring and operations at the dam. Also, according to an earlier environmental report, Instituto Pristino had raised safety concerns after Samarco was allowed to increase the height of the dam (The Guardian, 2015). Instituto Pristino recommended monitoring of the dam and other contingency plans. Samarco indicated that it had acquired appropriate licenses for the three dams, including the one that burst. The effects of this dam burst were immense for the residents of the surrounding village. First, twelve people were left dead while 11 others were still missing; fish and aquatic life was also affected; and the water became undrinkable. In addition, the incident left over 500 people without homes with most of them being housed by relatives or in hotels. Samarco mine was a joint venture between the Brazilian resources giant, Vale and BHP. The BHP Samarco case also raised an ethical question as to whether one or all decision makers lived in the villages that were affected by the incident; they would have changed their decision-making process. Key Stakeholders Samarco BHP incident was more than an accident. As a result, the chain of culpability may have extended to the BHP’s senior management team in Australia, including its CEO, Andrew Mackenzie. Mackenzie is much accountable and responsible because, to an extent, the incident was largely as a result of lack of accountability. The CEO of any organization should be held accountable for everything that goes on in the organization and the organization’s projects except in the case of events classed “superior force” (The Conversation, 2016). The corporate culture of an organization is the one that translates into responsibility, and this culture starts at the top management. There are even worst cases in which the top managements have become rubber stamps that cover for organizations’ profits at any price culture. Most organizations have a corporate culture that have a hard driven profit aspect. There are times when such a corporate culture steps the line and becomes unethical such as the case of BHP Samarco. In consideration of this, the management of BHP and the company itself were some of the main stakeholders with the company experiencing losses. The profitability of the company was adversely affected when the company has publicly traded bonds lost almost 50 percent of their value. Second, the others most affected stakeholders were the company’s creditors who lost significant portions of their capital to the extent that they received and accepted a rate of return that was non-commensurate with the risks involved (The Conversation, 2015). One of the major stakeholders that felt the greatest effect of the incident were BHP Biliton which a partner in the merger with BHP. The two companies merged 15 years ago and BHP Biliton had never experienced a loss prior to the Samarco incident (ABC News, 2016). The analyst projected the BHP Biliton to post a loss of $5.9 billion. Since the incident, the company’s commodity prices have continued to drop (31 percent drop). This drop in commodity prices has cut into its profits. In addition to cutting the company’s US shale oil and gas asset, the Samarco iron ore disaster is considered to have adversely affected the company’s profits (accounted for $2.2 billion) (ABC News, 2016). The state of Minas Gerais suspended Samarco from operating in the area whereas over £5.2 million of company’s funds were blocked by a judge to cater for the damages caused by the dam burst. Nature of Stakeholders’ interests Stakeholders’ interests have been adversely affected by this incident. First, it is important to observe that Samarco is one of the most important businesses for BHP because it accounts for 5 percent of valuation and around 3 percent of annual earnings (Wall Street Journal, 2015). According to one Australian bank, this is a very meaningful unit for such a huge company as BHP. To demonstrate this, in the first half of the 2015 financial year the Samarco venture contributed to BHP a total of $695 million in earnings and $1.41 billion in revenue (Wall Street Journal, 2015). The failure of this venture will be a major concern for stakeholders because it will cause them huge losses. The failure will have a significant material impact in both the short-run and the long-run. Since the incident, the prices for its commodities have slumped. Such losses for the company will translate into losses for every stakeholder, including its creditors, the management, and the employees of the company among others. The fault in construction may have originated from the little amount of construction costs that may have been allocated to the reinforcement of the wall after the company realized that the wall was weak. Many mining and construction companies have been cutting the costs allocated to some projects to the extent that they endanger the lives of its employees and the community. It is clear that there was a breach in accounting standards at Samarco. Accountants have a role to act as gatekeepers (Songini, 2014). Clearly, BHP’s accountants must have realized that there was a breach in good practice. HOW ACCOUNTING DEVELOPED To overcome some design changes, the management involved itself in a series of engineering compromises and thus accounting misdeeds for years prior to the incident. This led to construction defects such that the dam was badly damaged. The resulting new plan increased the risk of the dam experiencing sand liquefaction (Financial Review, 2016). The management involved itself in years of financial and non-financial compromises. First, engineering requirements were not adhered to. Any change that was to be made on the dam was followed by an adjustment – in terms of design and accounting. Both the engineering and accounting standards got ignored by the company for a period of two years (Financial Review, 2016). As a result, slimes slowly settled into areas it was not intended to settle. In 2012, the company identified some problems in a large concrete conduit on the left side of the dam. A certain part of the wall was found to have some deficiencies in structure thus being unable to support further loading. The company’s management decided to reinforce that particular part of the wall only. To allow the dam to continue functioning during this reinforcement the engineers moved the wall of the dam forward such that the new embankment was made to sit right on top of slimes. This caused increased pressure thus releasing a lot of water from the plasticine (Financial Review, 2016). Not only was failure due to the management’s fault alone, rather, the International Tailings Review Board also failed because they signed each and every adjustment done on the original plan. Therefore, this incident is largely attributed to the failure of accountability. Despite the earth tremors that are said to have caused the tremor, it is clear that the Fundao’s failure was already well advanced. According to Financial Times (2016), the dam was already at a very fragile state – a state that could not handle the pressure it was subjected to. Although there is no evidence that Samarco management was aware of this fragility. However, this was not the first time that Samarco management was experiencing static liquefaction which is also cited to be one of the causes of Fundao breach. The management of Samarco seems to have identified the gaps between best engineering and accounting practice and what transpired in Brazil because it moved with speed in the wake of the incident to assemble, draft, and embed a set of new global standards for constructions. Therefore, it is clear that there was interplay between financial and non-financial factors. First, the wall was just reinforced rather than being constructed anew to shelve the company’s revenues. Other Recent Cases There may be similarities between the BHP Samarco case and the BP Deepwater Horizon oil spill which had a culture of cost cutting and risk taking, and to some extent, with a bit of bad luck. The oil spill involved another company with owned and leased a contracted oil rig. Investigations conducted and released by the US Safety Board Managing Director, Daniel Horowitz indicated that process safety standards applied were lesser than expected and lesser than those BP applied in its own facilities (The Conversation, 2015). The conclusions to these investigations indicated that there was more focus on financial risks than there was on process safety risks. According to Brennan (2013), BP Company released around 4.9 million oil barrels into the Gulf of Mexico causing great economic and environmental damage. BP Company management failed to ensure that there was compliance with ethical standards. Such incidents, including the BHP Samarco’s case beg the question whether such companies are accountable enough. These companies continue causing economic and environmental damages while continuing to earn billions in revenues. Most of these companies write off such environmental harm as a cost of conducting their business (Brenna, 2013). Brennan’s (2013) study observes that the stock prices for BP decreased following the oil spills; however, within a few months the prices were back to normal. There are both local and international standards that prescribe the accounting treatment of costs and revenues associated with such construction contracts (MCA, 2015). Therefore, the major issue in accounting for construction works is the allocation of costs. This begs the question whether the BHP’s management had allocated enough costs for the construction of the wall of the dam. Analysis According to the Guardian (2015), the Samarco’s dam burst was a preventable tragedy because majority of modern mines employ safety techniques, including laser and radar monitoring which are meant to warn in case of any structural problem. However, the analysts observe that the Samarco’s dam that collapsed had used earthwork structures to hold a mix of extraction waste and water. In its defense, the company indicated that it used drones and piezometers to monitor the mines; surface marks, water level gauges, and conducted daily and bi-weekly checks (The Guardian, 2015). However, none of these safety measures can adequately indicate anomalies in the dam. Therefore, Samarco used controls that could ensure that it maximizes its revenues to the detriment of the surrounding community’s life and safety. The design of the dam was not adapted to variation to the contents it held, including proportions of slimes and sand and this was a case of negligence on the part of the company’s management. At the site, the company produced two types of tailings waste – the sandy waste and slimes (Financial Review, 2016). The first tailing waste – sandy waste – drains quickly settling into a resistant solid form. Slimes are the second type of waste resembles a reddish plasticine and remains as a moist clay material. The latter material acts more malleably under pressure compared to sand. To prevent the two from merging, the company raised the walls of the Fundao dam. However, this could not work well because it was not the original design of the dam. As a result, the management involved itself in a series of engineering compromises and thus accounting misdeeds. This led to construction defects such that the dam was badly damaged. The resulting new plan increased the risk of the dam experiencing sand liquefaction (Financial Review, 2016). All this probably happened due to breach in both accounting and non-accounting standards. The same case has been found to apply for BP during oil spill. References ABC News (2016). Samarco disaster: 10-month investigation reveals construction and design flaws. Retrieved from http://www.abc.net.au/news/2016-08-30/bhp-samarco-dam-disaster-investigation/7797048 ABC News (2016). BHP Billiton posts first full-year loss, totalling $8.3b, dividend slashed. Retrieved from http://www.abc.net.au/news/2016-08-16/bhp-billiton-posts-massive-full-year-loss/7748302 Brennan, K. (2013). A Stakeholder Analysis of the BP Oil Spill and the Compensation Mechanisms Used to Minimize Damage. Thesis. University of South Florida. Financial Review (2015). BHP Billiton's Samarco disaster the result of human error. Retrieved from http://www.afr.com/opinion/columnists/bhp-billitons-samarco-disaster-the-result-of-human-error-20160830-gr48kt MCA (2015). Construction Contracts. Retrieved from http://www.mca.gov.in/Ministry/notification/pdf/AS_7.pdf Songini, L. (2014). Accounting and Control for Sustainability. Emerald Group Publishing. The Conversation (2015). Ultimate responsibility for Samarco dam disaster will haunt BHP. Retrieved from http://theconversation.com/ultimate-responsibility-for-samarco-dam-disaster-will-haunt-bhp-50924 The Guardian (2015).Brazil's mining tragedy: was it a preventable disaster?. Retrieved from https://www.theguardian.com/sustainable-business/2015/nov/25/brazils-mining-tragedy-dam-preventable-disaster-samarco-vale-bhp-billiton Wall Street Journal (2015).Authorities Race to Rescue Victims of Burst BHP-Vale Dam in Brazil. Retrieved from http://www.wsj.com/articles/bhp-shares-sink-after-dam-bursts-at-brazil-mining-operation-1446788120 Read More