Accounting Professors Back BP in Oil Spill Payouts Battle

A group of U.S. accountancy professors is backing BP’s fight to rein in compensation it has to pay for the 2010 Gulf of Mexico oil spill, which is threatening to add billions of dollars to its growing bill for the disaster.

The news comes after the payouts administrator, Patrick Juneau, predicted that over 200,000 claims may be made in total by businesses and individuals under a settlement BP agreed last year – a level that could result in a charge against the oil company’s profits as early as next year.

BP has said some of the claims Juneau, a Louisiana lawyer, is approving are “fictitious” and “absurd”.

The 12 academics are represented by Paul Clement, one of the best-known lawyers in the United States. Clement was solicitor general under President George W. Bush, and is seen as a potential candidate to fill a Supreme Court vacancy if a Republican becomes president in 2017.

The expert group includes Andrew Bailey, former deputy chief accountant at the U.S. Securities and Exchange Commission, the national financial markets regulator, now of the University of Illinois.

In a court document filed on May 10, ahead of BP’s one-day appeal hearing due on July 8, the professors said their motivation was to ensure that accounting terms and principles were “properly construed and applied” when relied upon in judicial decisions.

They filed the document as a “Brief of Amici Curiae” – which means “friends of the court”. Under U.S. law, these are filed by parties who have an interest in the outcome of a case, but have no declared connection to either side.

In April BP lost its battle to convince Carl Barbier, the judge presiding over a complex set of legal proceedings in a New Orleans federal court, that the terms of the compensation settlement it reached in April 2012 are being misinterpreted by Juneau.

The case will now be heard at the United States Court of Appeals for the Fifth Circuit.

Much of BP’s argument against the way Juneau is making the payouts hinge on an interpretation of accountancy terms that BP says is too loose.

One of the key eligibility triggers for a so-called business economic loss claim is the ability to show a lower revenue, higher expense, or both, during and/or after the oil spill, compared with other periods. Proof of a connection with the spill itself is not necessary in most cases.

A looser definition of revenue and expenses could be more volatile and less likely to match up large sums going in and out of the business. BP argues this approach is triggering eligibility even though, over time, there was no real impact on profit.

The accountancy professors backed that argument in their May 10 document, saying; “identifying revenues and expenses requires more than a mere consideration of cash receipts and disbursements. Any judicial decision to the contrary is in conflict with well-established accounting principles.”

BP said in its latest court filing: “The result is that thousands of claimants that suffered no losses are coming forward in ever-increasing numbers, seeking and obtaining outrageous windfalls and making a mockery of what was intended to be a fair and honest court-supervised settlement process.”

In an interview with Reuters last week, Juneau said he believed the filing was concerned with “general accounting,” and added “it’s not in the agreement that you follow general accounting principles”. BP declined to comment on the filing.

BP has a total provision of $42.2 billion in its accounts set aside for clean-up costs, fines and compensation for the oil spill in 2012, which killed 11 men and devastated the Gulf of Mexico coastline.

The extra compensation payouts BP is arguing about may end up as a relatively small part of the total final bill. Other developments – such as being found grossly negligent by Barbier instead of simply negligent as BP argues, could increase its liability by much more.

However, the nature of the payments – many, small and individual – mean that unlike other future costs, recovering them through further litigation would be next to impossible, BP has argued. That, along with the unpredictability of the final amount, could leave BP “irreparably harmed,” it has said.

CHARGE AGAINST EARNINGS NEXT YEAR?

In April, BP added $500 million to its best guess of compensation payouts under the settlement, based on what it knows so far, for a total $8.2 billion of business economic loss and other compensation claims. It has $1.7 billion left in the $20 billion pot it has set aside for paying these and other costs.

After that is gone, BP has said it will take future compensation money straight from its net profit – which could mean a charge as early as next year if payments continue at the same rate until then.

The deadline for claims is April 2014, and Juneau told Reuters last week that he expects total claims will top 200,000, and that the pace of filings from the five states covered by the settlement has picked up in recent months.

Of the 165,877 claims filed as of May 15, Juneau’s office has found 40,970 eligible for payment, with a total value exceeding $3.2 billion.

Some 16 percent have been rejected. At that rate, 200,000 claims with 32,000 rejected and 168,000 paid would cost BP a total of $13.1 billion – almost $5 billion more than it has budgeted for and about four months’ of earnings.

However, that sum takes no account of the fact that most claims made so far are of uncertain status, having yet to be either rejected or made eligible for payment. It also assumes a steady average payout rate of $78,106 per successful claim.

BP has said the total is impossible to estimate, and declined to comment on the calculations by Reuters. Juneau’s office did not return calls asking for comment on them.