|Case 1 – Accounting 352
How Would You Account For The EXXON Valdez?
James Jones (my friends call me JJ) recently started a three month internship with GlobalCPA, an international accounting firm. He has been asked to meet with his supervisor, Gerda Gravitz. Let’s listen in on their conversation
Gravitz: “JJ, you have done some very good work for us so far and I think you are ready for an interesting research assignment. As you know, we have many international clients and quite a few of them are active in extractive or other industries where environmental problems can occur. I am scheduled to meet with one of them in two weeks and I would like you to prepare a brief memo – no more than two pages long – on how to account for actual or potential environmental disasters.” One of the biggest such disasters was caused twenty years ago by EXXON Valdez. Please review the facts of the oil spill and its aftermath and use this case to illustrate appropriate accounting under US GAAP and, since we are an international firm, also under IFRS in (a) anticipation of such an event; (b) after the event; and (c) after any court rulings. For example, should EXXON have anticipated such a disaster, after all, isn’t it pretty common for oil spills to happen? So, isn’t this similar to an asset retirement obligation and clients like EXXON should make provision in case something like that should happen”?
JJ: “Gee, Ms Gravitz, I’ll be very happy to do this, but I don’t know much about the – what did you call it – EXXON Valdez. Do you have any suggestions where I should start to look for information?”
Gravitz: “I thought of the EXXON Valdez – that’s the name of a tanker, by the way, because I just found a brief summary of the accident and its legal aftermath. I’ll e-mail it to you. Remember, I need the information no later than September 8th and keep it concise!”
JJ: “Ok Ms Gravitz, I’ll get right on it.”
JJ is hoping that he will be offered a full time job at the end of his internship and is eager to prove himself to Ms Gravitz. After returning to his cubicle he immediately starts to read the file on the EXXON Valdez sent by Ms Gravitz. He is very happy to see that it includes a number of references – they could come in handy. He thinks it would be a good idea to get an idea whether EXXON provided appropriate disclosures about the event in accordance with GAAP and IFRS and so he decides to review EXXON’s financial statements for 1989 and some of the other years where there were developments in the case.
JJ isn’t too sure how Ms Gravitz wants the memo to look, but he figures he should be ok if he followed the rules he learned in his Accounting 351COM class on how to write and reference such a memo.
Assignment: Assume that you are JJ, prepare the memo for Ms Gravitz. Make sure to download and attach the critical thinking rubric to the front of your memo. Due: 9/8
EXXON Valdez: The Disaster
March 24, 1989 was a bad day for Alaska and for EXXON’s shareholders. On that day, the tanker EXXON Valdez hit a reef and dumped approximately 260,000 gallons of crude oil into the pristine waters of Alaska’s Prince William Sound.
According to the Wall Street Journal1 clean-up costs were estimated to exceed $1.25 billion; EXXON had insurance for less than one-third of that amount. The accident had a huge financial impact on the company. EXXON’s earnings per share dropped from 90 cents a share for the second quarter of the previous year to 13 cents a share for the second quarter 1989.
The Clean Up and the Long March through the Legal System
Clean-up operations began almost immediately after the accident and between 1989 and 1992 EXXON spent about $2.2 billion on the clean-up effort. Nevertheless, in 1989 a class action lawsuit was filed against EXXON in the District Court of Alaska on behalf of fishermen and other parties who claimed to have been damaged by the spill; the state of Alaska and the federal government also brought legal actions against EXXON. On September 24th1996, after seven years of legal wrangling and a lengthy trial, a jury awarded compensatory damages of $287 million (including accrued interest) and 5 billion in punitive damages to the plaintiffs. EXXON paid the compensatory damages to affected Alaskans and an additional $1 billion to the state of Alaska and the federal government that had been awarded in this and other lawsuits. However, although EXXON voluntarily paid to clean up the damage, it appealed the punitive damages to the Ninth Circuit Court in San Francisco.
On November 7th, 2001, The Ninth Circuit Court affirmed the compensatory damages, but remanded the case back to the District Court of Alaska to review the amount of the punitive damage award. Following the ruling by the Ninth Circuit, EXXON paid the compensatory damages. In 2002 the District Court of Alaska affirmed the judgment but reduced the punitive damages to $4 billion. Both parties appealed this verdict to the Ninth Circuit Court which once again remanded the case to the District Court of Alaska for review of the amount of the punitive damages in view of a recent Supreme Court decision. In 2004 the District Court again affirmed the verdict, but this time changed the punitive damage award to 4.5 billion. Once again, EXXON appealed to the Ninth Circuit Court. In 2006 a divided Court reduced the punitive damage award to $2.5 billion (The Whole Truth Campaign, 2009).
The Supreme Court
After additional hearings before the District Court of Alaska and the Ninth Circuit Court, the Ninth Circuit Court refused to rehear the case. This cleared the way for EXXON to file a petition for a Writ of Certiorari (for an appeal) with the United States Supreme Court in 2007. The petition was granted and the Supreme Court heard the case in 2008.
The Supreme Court reduced the final amount of punitive damages to about $500 million, arguing that punitive damages should not exceed actual damages (Gold and Bravin, 2009). While the verdict was cheered by EXXON, it caused great distress among the 32,000 fishermen, cannery workers and others in the Prince William Sound area who had suffered damages as a result of the disastrous oil spill from the EXXON Valdez in 1989. Average payouts per claimant were expected to be about $15,000. (Riccardi, 2008)
Author. “Statement by ExxonMobil Chairman and CEO, Rex W. Tillerson, Regarding the Valdez Supreme Court Ruling” Businesswire; June 25, 2008 accessed online 1/12/2009: http://www.businesswire.com/portal/site/exxonmobil/index.jsp?ndmViewId=news_view&ndmConfigId=1001106&newsId=20080625006111&newsLang=en
Author. “The Whole Truth Campaign” accessed online 1/19/2009: http://www.wholetruth.net/caseBriefs.htm
EXXONMobil. Links to SEC filings: http://ir.exxonmobil.com/phoenix.zhtml?c=115024&p=irol- sec&secCat01.1_rs=1031&secCat01.1_rc=10
“EXXONMobil Sets Valdez Record Straight”: October 6, 2004. Accessed online: http://www.exxonmobil.com/Corporate/about_issues_valdez_record.aspx
Gold, Russel and Jess Bravin. “EXXON Oil-Spill Damages Slashed by Supreme Court” The Wall Street Journal, June 26, 2008; p. A1
Riccardi, Nicholas, “Valdez ruling pains many in Cordova, Alaska” The Los Angeles Times, June 26, 2008; accessed online a 1/19/2009: http://www.latimes.com/news/nationworld/nation/la-na-exxonreact26-2008jun26,0,3633443.story
Rubenstein, David, “There’s no accounting for the EXXON Valdez” The CPA Journal, July 1990. Accessed online, January 9, 2006 at http://www.nyscpa.org/cpajournal/old/09657092.htm
Appendix A – Excerpt from EXXONMobil 1989 Annual Report
EXXON Accrual of “provision for EXXON Valdez: 1989 total expense shown on income statement 1989 for EXXON Valdez: 2. 545 billion (page 30) net of tax effect on net income: $1.68 billion, (page 6)
Source: EXXON 1989 annual report. Footnote 14, page 37