EXXON Valdez1 March 24, 1989 was a bad day for Alaska and for EXXON’s shareholders. That day, the EXXON Valdez hit a reef and dumped approximately 11 million gallons of crude oil into the pristine waters of Alaska’s Prince William Sound.
The Wall Street Journal estimated clean-up costs to exceed $1, 25 billion; EXXON had insurance for less than one-third of that amount. The financial impact was huge. 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.
Why did this have such a sudden, huge impact on EXXON’s financial statements? This was something that could have been predicted; it certainly wasn’t the first (nor was it the last) environmental disaster to result in significant economic costs. Shouldn’t financial statements provide information that predicts the impact of such events?
Reflecting on the disaster, EXXON’s accountants questioned their prior accounting. Had they failed to book an estimated liability for all the years oil had been shipped? They reasoned that it was probable that a major environmental accident would occur given the amount of oil EXXON was shipping through Prince William Sound. They also knew that EXXON would have to clean up such an accident. There was a clear social contract between EXXON and Alaska.
How does our profession prescribe the accounting for something like the EXXON Valdez oil spill? For proper matching should accountants have booked a recurring accrual when revenue from oil shipment was recorded? Such accruals are common in the mining industry when a company has a legal obligation to restore the land when a mine is shut down. Similar asset retirement obligations are recognized for example, for the eventual decommissioning of nuclear reactors.