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 settlement with businesses and individuals across the Gulf Region. In a court filing yesterday, the oil giant in essence admits to not understanding even the most elementary of accounting principles, the proper application of which will cost BP billions more than they originally anticipated.
The accounting rules at issue, which are being painstakingly, consistently and fairly applied by the court appointed Claims Administrator, Patrick Juneau, are the same used by almost all businesses – large and small – throughout the developed world. By BP’s argument, Credit Suisse Barry Snyder 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 certainly well within its rights to negotiate for same before the parties arrived at a settlement. They did not. Now nearly one 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. In other words, business operations are anything but “smooth.” BP, the 4th largest company in the world, has made it known that they do not understand this business 101 concept.
Let’s say you own a construction company and you win a contract valued at $200,000 to build a new home. Upon execution of the contract, perhaps in January, the client pays you a $100,000 deposit, with the remaining $100,000 balance due upon completion. Your crew works full time to build the home in February. In March they are hampered by several bad weather days and make little progress. April is back to full schedule and the home is 75% complete, but an early season hurricane derails work for the entire month of May. Then, because of a scarcity of construction supplies as a result of the hurricane, the project languishes for months with work going in fits and starts. Finally the home is finished in November, at which time you are paid the remaining $100,000.
Looking at your financials, we will see a spike in revenue in January (initial deposit) and again in November (remaining balance). Such a cash flow pattern is the reality of almost every business, save for the very largest. In fact, booking revenue in this commonsensical manner has a name – “cash accounting,” which is the accounting method used by the vast majority of small businesses. BP now says that they would like you to use much more sophisticated “accrual accounting,” after all, as the 4th largest company in the world, that is what they do. Under accrual accounting principles, you “smooth” those volatile revenues out over the course of several months, even years. To be clear, accrual accounting is perfectly legitimate. It is simply more complex than cash accounting.
The fact is, 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. While they were well within their rights to negotiate a requirement that accrual accounting be used to calculate claim values, they simply did not. The best legal counsel in the world – $1,000 per hour Manhattan lawyers hired by BP – never brought the point up. BP’s hired gun financial experts with MBA’s and actuarial scientists with PhD’s never broached the subject. Out of those negotiations came a 1,200 page, highly detailed settlement document that dots every “i” and crosses every “t”.
Until yesterday, 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.”
So why is BP now so adamant that accrual accounting and “revenue smoothing” be required of claimants? Simply put, they screwed up in their calculations. There are more legitimate claims being filed and paid by the neutral and 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% 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. While we expect the Judge to issue a strong rebuke to BP’s attempt, at the very least, yesterday’s actions by the company will significantly delay payment of legitimate claims. And payment delayed is payment denied. Shame on BP.