Write about Positive Accounting Theory (PAT) and you have to mentioned that you gonna support Current Accounting Standard so we don’t need new Accounting.
The paper examines the BP’s Deepwater Horizon oil spill to illustrate the need for the prior provision of detailed information as required by the public interest theory of accounting. From the BP’s Deepwater Horizon oil spill’s case, BP hoarded the critical ecosystem information to the public to avoid compensation for the damages. This practice went against the Interest Theory consequently delaying payment of damages caused by externality (Herz and Petrone 2004). The BP has underestimated the physical damages by taking the advantage of the challenge of demonstrating causally linked effects. The BP also took the advantage of the then methods of measuring ecosystem services which fell short of a more mature stage. However, the current accounting standards are effective in ensuring that the plaintiffs, government trustees as well as courts enjoy powerful tools for assessing marine liability damages.
The BP failed to disclose the critical accounting information to escape proper payment of damages since the cost are not the same as the benefits. This problem is complicated by the fact that a focus on the restoration cost as a measure of the damages has the possibility of leading to both over-deterrence and under-deterrence depending on the association of restoration cost to the true social cost of the physical damage. BP prevented the plaintiffs, trustees as well as courts from having powerful techniques for active assessment of marine liability damages. The paper stressed the significance of the Interest Theory and Positive Accounting Theory in ensuring that BP disclose the required information. The current accounting standards are efficient to tackle issues in accounting and hence it unnecessary to embrace new Accounting Standards.
The discussion of this paper anchors on the BP’s Deepwater Horizon oil spill to showcase the need for prior provision of detailed information as required by the public interest theory of accounting. The failure of BP to provide the required ecosystem information to the public tends to go against the Interest Theory and has derailed the process of settling the damages caused by BP through this externality. BP has failed to give detailed information on the external cost that resulted from the spillages. Accordingly, the BP has underestimated the physical damages taking the advantage of the challenge of demonstrating causally accompanying effects.
The BP has taken this advantage to escape proper payment of damages since the cost are not the same as the benefits. This problem is complicated by the fact that a focus on the restoration cost as a measure of the damages has the possibility of leading to both over-deterrence and under-deterrence depending on the association of restoration cost to the true social cost of the physical damage. The BP also took the advantage that the then methods of measuring ecosystem services fell short of a more mature stage, as it is presently, to bar the plaintiffs, trustees as well as courts from having powerful mechanisms for effective assessment of marine liability damages.
BP, therefore, benefitted since the then prevailing scientific and economic knowledge restricted technical calculation of damages thereby paving the way for political bargaining. BP optimized this deficiency by neither failing to fully disclose the details of the ecosystem as well as social damages, nor the fundamental computation methodologies of the firm’s pre-tax charge of US$40.9. Nevertheless, this paper stresses the importance of the Interest Theory and Positive Accounting Theory and how they could have ensured that BP discloses the required information. Accordingly, the paper takes a stance that supports the effectiveness of the current Accounting Standards by showcasing that it is needless to introduce new Accounting Standards.
The Interest Theory posit that regulation is supplied in reaction to the public demand for the correction of the inequitable or inefficient practices in the market. The Interest Theory assumes regulation to benefit the society as an entirety instead of given vested individual interest. The theory regards the regulatory body as the representative of the entire societal interest where it undertakes its operations rather than the individual regulators’ interests. The Interest Theory is based on certain assumption in its operation. One of these axioms is that markets are extraordinarily delicate and suitable to undertake their operations inequitably and inefficiently if the regulator does not intervene.
The theory views the government as an unbiased arbiter to facilitate market operations. The public interest perception hold that governments undertake regulatory activities on banks to enhance the efficient operations of financial institutions by bettering market failures to trigger gains of broader civil society. The theory is sensitive to market fragility and its likelihood of operating in favor of private concerns while neglecting the significance of the society as a whole. Accordingly, it recommends government market intervention to direct and monitor the economic markets.
The government intervention focuses on making banks serve the social interest in allocating resources efficiently. It provides that the corporate need to disclose adequate and updated information about their financial performance, and non-financial relevant information including environmental and social impacts (Chua and Taylor 2008). The Interest theory anchors on the rationale to introduce the legislation that mandates the corporate to disclose the impact of their operations on the environment and society. It also advocates for the disclosure of initiatives that corporate embrace to safeguard the society as well as environment from adversarial impacts of their operations.
Accounting regulation is a product of political processes. However, people raise questions on the perception that financial accounting should be neutral, objective as well as apolitical when practitioners agree that accounting standard-context process is a political process (Chapple and Koh 2007). Nevertheless, the bottom line is that financial accounting impacts the wealth distribution within the society and hence it is a political process. The free market perspective hold that accounting information need to be treated similarly to other goods where the supply and demand forces need to be permitted to operate to produce an optimal supply information regarding the firm. However, pro-regulation viewpoint holds that accounting information needs to be treated as a public good.
In this case, once the accounting information is available, the public can utilize it without paying as well pass it on to their colleagues (Whitley 1988). The regulators hold that few people have the incentive to pay for the services and goods in the same way producers will. Consequently, underproduction of information will occur (Kabir 2010). The regulators come in to help alleviate this underproduction phenomenon. Regulation is, therefore, critical to declining the impacts of market failure regarding the accounting information (McMahon, Davies and Bluhm 1994). The existence of a horde of accounting standards in the developed countries that cover a vast cross-section of issues have triggered regulation. Proponents of regulation oppose the free-market mechanism and advocate for regulation for universal methods to enhance comparability as well as safeguard misleading information. Therefore, the public interest theory of regulation help protects the public.
The inefficiency and inadequacy of the market motivate the regulators to intervene by being neutral arbiters of the ‘public interest’. Since the accounting information is a public good, the producer is unwilling to pay the additional cost of generating the required information leading to under-production of the information. However, since this information is critical to the public, the regulators come in as neutral arbiters to correct the inefficiency and inadequacy in the market (Herz and Petrone 2004). The regulators will make legislations and standards that guide the financial reporting including the disclosure of pertinent information.
The availability of this information, for instance, the environmental and ecosystem impacts of a firm’s operation, allows the regulator to safeguard the interest of the public in case of externalities as witnessed in BP’s Deepwater Horizon oil spill. The regulators want to integrate biodiversity as well as ecosystem services metrics into the environmental risk management procedures alongside the information systems of the entire business operating perilous property. They are also inspired to establish more reliable environmental accounting as well as reporting practices to address the corporate environmental performance (Cheney 2001). The regulator also want to make entities adopt an integrated reporting for companies which integrates social, financial, and environmental (non-monetary and monetary) issues thereby generating honest disclosure of integrated performance of entities to the stakeholders.
I do not agree with the decisions taken by BP to compensate for damages caused by the Deepwater Horizon oil spill. BP violated the requirements and goodwill of the Interest Theory by hoarding essential ecosystem information. In this regard, BP did not give the exact demonstration of the social damages that its operation caused to the public making it hard to use technical calculations to arrive at better compensation. The government trustees, therefore, found it tough to vigorously measure the lost ecosystem services and goods (Christenson 1983). If BP could have embraced the Interest Theory provisions, it could have disclosed critical information helpful in assessing the suitability of the extensive amounts charged thereby determining whether there were negative externalities uncounted for by BP.
The information could have also help in understanding the amplitude of the efforts of restoration to be carried out about the ecosystem values as well as assets that have been lost or partially diminished. In this regard, the restricted disclosure by BP falls short of providing the stakeholders with the comprehensive picture of the financial environmental as well as the social implication of the Deepwater Horizon oil spill. As reflected in Positive Accounting Theory (PAT), the disclosure of accounting information is effective (Klersey, Stunda and Vinson 2005). PAT is helpful in the prediction of actions such as the choices of accounting policies by entities and how firms react to proposed new accounting standards. The PAT is also helpful in the reconciliation of efficient securities market theory with the economic consequences. As reflected in the BP’s Deepwater Horizon oil spill, PAT was helpful in the minimization of political heat. PAT hold that the severe the political cost a firm faces, the most probable that a manager is to embrace accounting procedures which defer reported earnings from current to the future.
BP made policy choices that helped it minimize the contracting cost as well as accounting policies. PAT aligns to the current effective accounting standards such as AAS 16 which details the reporting and disclosure requirements of the information (McMahon, Davies and Bluhm 1994). It advocates for the disclosure of up-to-date status as well as trends of the ecosystem within which BP undertakes its operation. This is essential in ensuring that stakeholders possess strong ecological reference points before the occurrence of any potential accident, like oil spillage. The current accounting standards are effective, and there is no need for new standards. The standards such as AAS 15 and AAS 16 have comprehensively detailed disclosure and reporting requirements. The standards provide for social and ecological externalities of the BP including the accidents on water consumption, climate regulation as well as biodiversity. In this case, the currently available accounting standards only need proper implementation based on goodwill rather than introducing new standards to solve the cases regarding externalities due to inadequate disclosure as reflected in BP”s Deepwater Horizon oil spill.
Conclusion
BP benefitted because the prevailing scientific and economic knowledge restricted technical calculation of damages thereby giving room for political bargaining. BP exploited this deficit by neither failing to disclose the details of the ecosystem as well as social damages, nor the underlying computation methodologies of the firm’s pre-tax charge of US$40.9. The paper has emphasized the position of the Interest Theory and Positive Accounting Theory in the facilitation of both disclosure and financial reporting. It demonstrated that BP did not disclose the required information (Nagy 2001). The paper supports the effectiveness of the current Accounting Standards and hence it is needless to introduce new Accounting Standards.
References
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