Accounting Regulation of Deepwater Horizon Oil Spill - Case Study Example

Executive summary This report uses the interest theory to discuss the role of regulators (politicians) and their motivation as regulators. The report starts by introducing the need for regulation in accounting before looking at regulation as a political process. The report then looks at the role of regulators (politicians) as well as their motivation as regulators. This is done using the BP oil spill as a case study. The report then gives an overview of the BP oil spill stating why regulation is necessary in the industry. The report does agree on the recommendations of the case study on the need for increased regulation so as to ensure more environmental responsibility by corporates. In conclusion, the report puts more emphasis on the need for accounting regulation and the need for increased regulation in the industry especially as concerns the environment. Table of Contents Introduction 3 Regulation as a political process 4 The interest theory 4 The role of regulators (politicians) 5 The motivation of politicians as regulators 5 Overview of the Deep Horizon oil spill 6 Conclusion 8 References: 9 Interest theory and what the role of regulators (politicians) is. The motivations of politicians as regulators Introduction For many years, there have been arguments and debates concerning the necessity for accounting regulation with those against it advocating for regulation to be left to market forces to optimize allocation of resources. On the other hand, proponents of regulation argue that markets do not always operate at the best interest of the society and hence the need for intervention through regulation. Thus, regulation is seen as important as it guides how financial reporting will be carried out bearing in mind the interests of various stakeholders including the public which may not necessarily be directly involved in business. A good example of why regulation may be necessary is when actions by firms lead to the detriment of the society or the environment as was the result of the Deepwater horizon oil spill. In this case, BP’s actions had led to environmental consequences that had detrimental effect to the environment and hence the public. But devoid of regulation, who was to be held responsible for the spill? How were the costs to be accounted for? This case does show that regulation is necessary in a bid to safeguard various interests including that of the public. The case also does show that the process of regulation is a political one where the various parties involved are consulted on the best way forward. Organizations will obviously lobby the regulators/politicians to ensure their interests are well taken care of. On the other hand, the regulators/politicians will seek to safeguard public interests though at times private and self-interests do feature. This report seeks to establish the role of regulators/politicians and their motivation as regulators. In so doing, the Deepwater horizon oil spill is used as a case study. Regulation as a political process Regulation is a political process as it follows due process as an important ingredient in the regulatory process (Sebastian, 2012). The due process involves seeking to involve all affected parties in the deliberations and this is seen as important in maintaining the legitimacy of the regulatory process through involving all the affected parties. The development of accounting policies and regulation is thus political owing to its negotiated nature. Regulators (politicians) are thus involved in the due process in a bid to ensure that the interests of the public are well catered for during the development of accounting policies. The interest theory Devoid of regulation, firms would seek to maximize profits without regard of the effect of their actions to the public or the environment. Thus, regulation is in the interest of the public as it is put in place to benefit the society as a whole as opposed to private interests. For instance, regulation would ensure that financial accounting bears in mind the interests of the public such as the need to protect the environment. Thus, regulation in this case is supposed to be a balancing act between the perceived social benefits and perceived social costs. In this case, the regulator (politician) acts as the neutral arbiter. However, firms also have their private interests to take care of including how to ensure maximum profits (Johansen, 2016). As such, the interests of the public and those of the firm at times conflict and this is where the regulator (politicians) come in in a bid to ensure the balance as stated above. For instance, though BP sole intent was to make profits, the oil spill led to a lot of environmental damage with the public being affected in various ways including loss of ecosystem and fishing grounds. The regulator who in this case was the US government had to step in to ensure the public interest are well taken care of given the fact that there was no one best way to measure the financial impact of the spill and hence the valuation process had to be a political one so as to come up with the best valuation of the financial effect of the spill. The role of regulators (politicians) The case of the Deepwater horizon oil spill highlights an area where regulators (politicians) could play a role. The oil spill was blamed on BP which accepted responsibility as well as the ensuing cleanup costs and went ahead to provide $40 billion towards meeting the costs. Despite this, these amounts failed to reflect any fines and penalties that could be imposed on the company for the ecosystems affected. This is partly owing to challenges associated with assessing ecological and social economic damages. This implies that the scale of penalties is more likely to be resolved through political bargaining as opposed to technical calculation (Gipper etal, 2013,). Regulators in accounting play a great role in ensuring that public interests are well taken care of in such situations and during reporting. This includes ensuring that the environment is protected from degradation while financial reporting is not misleading to the public. This is because the public may not be involved in the day to day management of the company yet they are affected by its practices as seen by the destruction of the ecosystem during the oil spill. Regulators (politicians) also act to mediate between public and private interest given that private firms always lobby for their interests to the detriment of public interest. In this case, the regulators (politicians) would play a great role in determining the amount of penalties to be imposed on BP to cater for the ecosystems damage resulting from the oil spill. The motivation of politicians as regulators The Deepwater Horizon Oil Spill took 86 days to stop the flow of oil into the Gulf of Mexico with about 4.2 million barrels pouring into the waters of the Gulf of Mexico. The total oil-slick footprint at 68,000 square miles with massive damage to the ecosystem. This obviously affected the environment and sea life and hence affected the lives of those who depended on it. It is worth noting that the public had nothing to do with the spill. Yet the spill affected them. As such, the regulators were mainly motivated by the need to restore the environment to its original state after stopping the spill which is a major public interest. It is thus worth arguing that the main motivation of politicians as regulators is to ensure that the interest of the public is well taken care of. The motivation is as a result of the demand by the public for corrections to acts that result in loss to the public thus balancing between social benefits and social losses that result from the acts of the firm. The regulators are also motivated by the need to correct the inefficient and inequitable markets (Gaffikin, 2005). It is also worth noting that private interests also motivate the regulators/politicians owing to the lobbying by private companies so as to ensure that any regulations put in place are good for business whether or not they are in the interests of the public. This is why the regulators should be the neutral arbitors. To some extent, personal interests of the regulators/politicians also motivate them as the lobbying process at times result in personal gains for the arbitors. Thus, it can be concluded that the regulators are motivated by both public and private interests. Overview of the Deep Horizon oil spill Also known as the BP Oil Spill, it is the largest marine oil spill in US history that took 86 days to stop the oil flow into the Gulf of Mexico with about 5 million barrels having been released by the Macondo well and 4.2 million barrels being released into the waters of Gulf of Mexico. This obviously had a lot of negative effect on the environment with at least 20 categories of valuable ecosystems in and around the Gulf of Mexico being affected. For instance, the fish industry was greatly affected. Although BP accepted responsibility and set aside $40 billion as costs to go towards rehabilitation of the environment, it is argued that this amount is hardly enough for this exercise meaning that the environment may not after all be restored to the original form. There are challenges noted with valuing the resultant damage owing to the nature of explosion. However, it should be noted that though the public did not participate in the oil exploration, they well greatly affected by the effect of the spill. With challenges of estimating the amount of penalties to be levied on the party responsible, this case is a good example of why the regulators (politicians) get involved in regulation. In this case, the regulators have to come in to ensure that the interests of the public are well catered for even as BP seeks to incur costs into restoring the environment. The regulators have to ensure that the public is well compensated from the effects of the spill. With the challenges of determining penalties resulting from environmental damage when cases like the BP oil spill occur, the case roots for increased regulation for oil and gas activities globally. This will result in a more reliable environmental accounting and reporting. This will act as a guide whenever such incidence occurs. The case also roots for integrating biodiversity and ecosystem services metrics into the environmental risk management procedures which would eventually lead to improved environmental performance by corporates (ifac.org, 2011). The case study suggests that accounting disclosures on environment should include various information including the up to date status and trends of ecosystems within which the reporting entity operates, the social and ecological externalities of the reporting entity with respect to its dependencies and impacts on all ecosystem services and through both quantitative non-monetary metrics, summarized tables of all environmental revenues, charges and liabilities, calculation methods at the basis of all material environmental transactions and explanations for the potential gaps between the latter estimated externalities and as regards to environmental impact assessments, the methods used to design biodiversity and ecosystem services offset measures and systematic ex-post measurements of the ecological efficacy of all mitigation measures undertaken. To a great extent, we do agree with the suggestions of the article. There is need for environmental regulation for firms and hence the need to change how accounting reports on environmental matters. The provision by BP to cater for the environmental degradation resulting from the oil spill is not adequate given the impact. However, due to lack of sound environmental regulation and reporting framework, it is not clear how the resultant penalties could be measured and hence this is left to politics (Jared, 2007). However, establishing a framework as suggested in the article will ensure public interest on environmental matters is well catered for and in case of such a disaster, organizations will utilize a reliable measurement framework and hence ensure that any provisions for losses and penalties will be adequate to bring the environment to the original form while adequately compensating those affected. Thus, the suggestion for a more accurate way of reporting on environment is welcome and necessary to ensure more preparedness in future. Conclusion This essay has looked at the role of regulators (politicians) and their motivation as regulators. In so doing, the BP oil spill has been used as a case study. The role of regulators has been seen as that of mediating between public and private interests. In the case of the oil spill, regulation has been seen as important to ensure that the environment is brought back to its original state while compensating all the affected by the loss. We do agree with the suggestions of the case study for increased regulation in the sector so as to ensure a more accurate and reliable measurement system in future. Furthermore, better reporting will make corporates more environmentally responsible. References: Sebastian, B2012, The politics of accounting regulation, London, Rutledge. Gipper, B, Lombardi, B&, Skinner, D2013, The politics of accounting standard setting: A review of empirical research, Retrieved on 21st January 2016, from; https://www.business.unsw.edu.au/researchsite/publicationssite/australianjournalofmanag ement-site/2013-australian-journal-of-management-symposium-site/Documents/Skinner- ajms-20130612.pdf Gaffikin, M2005, Regulation as accounting theory, Retrieved on 21st January 2017, from; http://ro.uow.edu.au/cgi/viewcontent.cgi?article=1049&context=accfinwp ifac.org, 2011, Regulation of the accountancy profession, Retrieved on 21st January 2017, from; https://www.ifac.org/system/files/publications/files/PPP1-Regulation-of-the- Accountancy-Profession.pdf Johansen, B2016, The politics of regulation of financial statements, New York, Taylor & Francis. Jared, K2007, Accounting standards, London, Rutledge. Read More