In a move not entirely unexpected, but certainly beneath the dignity of one of the world’s most sophisticated companies, BP is crying foul, claiming to have been duped into last year’s oil spill settlement agreement.
In a recent court filing, the oil giant admits to not understanding even the most elementary of accounting principles, the proper application of which would cost BP billions more than it anticipated.
The accounting rules at issue, which are being painstakingly, consistently and fairly applied by court-appointed Claims Administrator Patrick Juneau, are the same rules used by almost all businesses, large and small, throughout the developed world.
By BP’s argument, it seems as if the company advocates the use of some as-of-yet undiscovered new math, devoid of all reason and common sense. Indeed, if BP wished for such novel concepts to be applied in the calculation of settlement claims, the company was within its rights to negotiate for them before the parties arrived at a settlement. They did not. Now, nearly a year later, BP is asking the court for a “do-over.”
At the heart of the dispute is BP’s desire to force claimants to engage in something it calls “revenue smoothing,” a kind of creative accounting that is anything but objective.
As any small business owner knows, revenues are not consistent. Sales are better in some months than others. Frequently, a longtime customer who operates on credit may fall behind on payments, only to catch up a few months later. BP, the fourth-largest company in the world, has made it known that it does not understand this Business 101 concept.
Let’s say you own a construction company and you win a $200,000 contract to build a new home. The client pays you a $100,000 deposit, with the remaining $100,000 balance due upon completion.
Looking at your financials, you will see a spike in revenue in January (initial deposit) and again in the month when the home is completed. Such a cash-flow pattern — called “cash accounting” — is the reality of almost every business, save for the very largest.
BP now says it would like claimants to use much more sophisticated “accrual accounting.” Under accrual accounting principles, revenues are “smoothed out” over the course of several months, even years. Accrual accounting is perfectly legitimate. It is simply more complex than cash accounting.
During the months of talks that the parties engaged in prior to the settlement, BP did not ask for one form of accounting to be required in lieu of another. Although they were well within their rights to negotiate a requirement that accrual accounting be used to calculate claim values, they did not. BP’s $1,000-per-hour Manhattan lawyers never brought up the point. BP’s financial experts, with MBAs, and actuarial scientists, with Ph.D.s, never broached the subject.
Out of those negotiations came a 1,200-page, detailed settlement document that dots every ‘i’ and crosses every ‘t.’
Until recently, BP stood firmly behind the rules laid out in those 1,200 pages. In fact, at the court hearing to finally approve the agreement back in November, BP’s lead counsel, Rick Godfrey, had this to say:
“(A)fter nine months and one day of robust and sometimes heated negotiations where we met 145 times face-to-face, BP believes that this settlement is unlike any other in the history of the United States, and we believe it to be good for our system of justice. BP has no intention of having justice delayed for those with legitimate claims.”
The difference today is that BP wishes to be the sole arbiter of exactly what is “legitimate.”
Why is BP now so adamant that accrual accounting and “revenue smoothing” be required of claimants? Because they screwed up their calculations. There are more legitimate claims being filed and paid by the neutral, court-appointed claims administrator than BP’s statisticians had anticipated. By asking for a mulligan to renegotiate the settlement to require accrual accounting, they would eliminate 75 percent of all Main Street small-business claimants, who simply do not engage in such Wall Street “creative accounting.”
With this filing, BP is attempting to invalidate the entire agreement and abolish the claims program, as the practical effect of the application of accrual accounting standards and “smoothing” concepts at this late hour would make claims administration unworkable.
Although we expect the judge to issue a strong rebuke to BP’s attempt, BP’s actions will significantly delay payment of legitimate claims. And payment delayed is payment denied.
Shame on BP.