Accounting theories are very important tools in making decisions that involves the accounts and a lot of finances, these theories also help in providing guidelines for accounting decisions. BP group operation in the Mexican gulf can to a stop when its oil field prospect exploded and caused oil spillage in the Mexican gulf. The Transocean Company was in charge of the operations, although it was only BP that took responsibility for paying the damages of this accident. It is noted that, BP adhered to the Legitimization theory which requires a company to adhere to the norms and value of the society in which it operates
There is always a reason behind every action that a man or a company takes; these actions are always supported by sound reasons. Companies are always extra cautious especially when taking a financial or accounting process and therefore the there are theories that man has come up with to help and provide guidelines towards decision making process (Most, 1977). It should be noted that for accounting decisions, accounting theories are very important in guiding or explaining these decisions. This paper will therefore focus on the accounting theories and how the BP group applied the theory during the deepwater horizon oil spill.
Brief overview of BP’s oil spillage
Bp oil spill, also known as Gulf of Mexico Spill or the Deepwater Horizon oil spill is the largest marine oil spill in US history. This catastrophe is a resultant of an explosion on the deep sea horizon along the offshore of the oil platform which a way off 50 miles south East of the River Mississippi Delta. Although the BP Corporation tried to stop the leak it did not succeed but its success in stopping the leak is when it opted to cap the well unfortunately the damage was beyond measure and oil had spill into the Mexican gulf for eighty six days. Although the oil spill had been stopped the impact of its damages were devastating and therefore it arose intense debate and the many interested parties deliberated on the issue. It is speculated that the oil released to the Gulf of Mexico from the PB’s Macon do well was roughly over five million barrels of oil in which the gulf of Mexico directly receiving 4.2 million barrels. The damage estimated was huge and the from the satellite pictures it’s estimated that the total coverage of the oil spill was 68,000 square miles (Houdet & Germaneau, 2011).
Although the Transocean Ltd owned Deepwater Horizon was contracted by PB tasked with the duty of drilling an exploratory well but it is the PB who were the principle owners and developers of the Macon do oil well prospect where the catastrophic accident occurred. Both BP and Deepwater aware at a process of shutting down the well so that they can prepare for future mining while another contracted company, the Halliburton had completed the task of cementing the casings of the well. The US government intervened and in its verdict, BP was to take sole responsibility of the b damage and tasked with the duty of cleaning up the oil spill from the ocean. Although the BP Company did not decline the responsibility but it later felt that both the Halliburton and Transocean should be responsible too since they are partly to blame (Houdet & Germaneau, 2011).
BP’s response this accident had some serious financial implication because it had to release a large group income. It is this company released a pre-taxed amount of US$ 40.9 billion to cater for the damages the occurred due to the Deepwater horizon oil spill, and in from this amount a total of US$17.7 billion was spend in the year 2010 alone. The BP Company had to spend. The Bp as part of generating this amount the BP group had to 0-raise US$20 billion from the sale of its asserts in the US over a period of 3.5 years, these funds will satisfy all the legitimate claims that will be demanded by the independent Gulf Coast Claims Facility, litigations settlements, natural resource damage costs and local and state response costs. The group will fund a ten year research program at a cost of US$500 million that will study the impact of oils spills into Mexican gulf and the effect on the marine and shoreline ecosystem (Houdet & Germaneau, 2011).
Theory is a structure that plays the role of uniting the underlying logicor system of reasoning, therefore Accounting theory is logical reasoning in the form of a set of broad principles that give a provision of general frame of reference by which accenting practices can be evaluated and guide the evaluation of new procedures and practices. The accounting theory incorporates fundamental assumptions, debfinations, principles and concepts and the methods used to arrive at their definitions. The process of solving an accounting issue requires a person to have an absolute expertise and well acquaintance in theoretical knowledge and a backup of sufficient practical experience. Like any other theory accounting theory is based on sound reasoning and incorporates a logical and confirmed hypothesis that happens to be accepted by all. There exist a close interaction between accounting theory and the practice of account in a way that separation of the two improves to be a difficulty. The process of developing the theories of accounting involves observation, analysis, explanations, scrutiny and scanning of the daily practice of accounting.
To best suit the explanation of the BP’s case of oil spillage, Legitimacy theory of accounting can suit this scenario. This theory can be vaguely suit a description that businesses are liable to social contracts in which the farms agree to perform a variety of socially desired actions in return for the approval of its goals and other gains, and by this its existence is guaranteed (Ventureline, 2016). Legitimacy theory is one of the corporate strategy theories that is most cited and closely related to public relations theories. To understand this theory it important to expound on the term legitimacy, which refers to a generalized perception that, actions of an organization are justified within a given social system? In organizational context, legitimacy exist when organizational objectives, outputs and operational methods are in compliance with the value and norms of the larger societal system of which the organization is part of it (Wilson,2002). The basic argument of the legitimacy theory is an organization pursue legitimized activities due to the influence the external aspects on the administration. An organization that applies this theory ensures that its actions are based on the norms, culture and being legitimate with the society and therefore, ensuring its actions are legitimate and acceptable by the society. The organization will disclose its environmental information as motivated but this theory; it will also bus PR as a tool to legitimize its activities. This theory describes how an organization with all its mechanisms, operations and structures has gained acceptance in the society (Glautier, & Underdown, 1976). Legitimization has several basic strategies which includes;
BP group is a multinational company and for it in handling the deepwater Horizon oil spill accident, it took all the responsibility for the damages that resulted from the oil spill, this company incurred the losses at the expense of selling it US asserts to cater for the damages and the litigation claims and even to sponsor the research on the ecosystem and lastly it also invested majorly on the cleanup process to get rid of the oil spill from the Mexican gulf. It is noted that, this farm applied the legitimacy theory of social and environmental accounting (Houdet & Germaneau, 2011).
The BP group had to take the responsibility for the oil spill to legitimize its activities with the people of the alongside the cost of Louisiana and the Mexican bay. To foster its image and its principles of operation, the company had to take a sole responsibility for the oil spill even though two other companies were involved in the accident. BP also made sure the public is educated on the damages its actions had caused by setting up funds to cater for a ten year research into the damages its operations had caused. BP sought the societal approval in line with the legitimacy theory by setting aside funds that will compensate for the damages caused by the oil spills. It can be concluded that the BP Company honored the requirements of the Legitimacy theory by seeking approval of the society and taking responsibility for its actions (Houdet & Germaneau, 2011)
The BP group agreed with the legitimacy theory, by adjusting the expectations of its performances to suit the interest of the public which it had caused damages. This company’s operations in the United States incurred serious damages and losses but because of its legitimization, it had to sacrifice its US asserts to cater for the damages it had caused to the society an nd environment. Although the company’s operation is to make profit, but its societal norms and values binds the company to fulfill the demands of the society (Houdet & Germaneau, 2011).
BP adhered to the legitimacy theory by changing the relevant public perception without adjusting its practice behavior. This company continued in its operations of oil exploration in other areas while in the Mexican gulf it had to fulfill the demands of the relevant public. The government found BP solely responsible, but because this group is bounded by the regulations in the legitimacy theory, the company had to comply with the demands even though there were two other companies that could take responsibility (Houdet & Germaneau, 2011)
The legitimacy theory bounds a company to the norms and values of the people around its area of operations. The organization will formulate its goals and targets in a way that will ensure a good relationship is fostered with the public are located. Implementation of this policy requires that the company to consider the interest of relevant people, among whom it has to educate about their activities and procedures.
The BP group can be commended as perfect example of a legitimized company, its operations and actions is justified by how it responded on the deepwater spillage, it made all the efforts to rectify its damages and compensate the society around its operations. BP Company can be commended on the efforts it made to legitimize its actions even though it this actions cost it billions of asserts but it complied with consequences to clear its name and maintain a good perception with the relevant public
Glautier, M. W. E., & Underdown, B. (1976). Accounting theory and practice. London: Pitman.
Houdet, J & Germaneau.(2011). The financial impacts of BP’s Response to the deep water horizon oil spill. Comparing damage valuation approache & highlighting the need for more reliable environmental accounting and reporting. Case study 2011, Synargiz. –A@L Interrated sustainability services,P5
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Riahi-Belkaoui, A. (1981). Accounting theory. New York: Harcourt Brace Jovanovich.
Wilson, H. T. (2002). Capitalism after postmodernism: Neo-conservatism, legitimacy and the theory of public capital. Leiden: Brill