Daily Management Review

Ambiguous Accounting Rules could Pose Problems for Exxon Probe


Ambiguous Accounting Rules could Pose Problems for Exxon Probe
Accounting experts are of the view that due to the broad leeway that energy companies have enjoyed reporting under U.S. rules, New York Attorney General Eric Schneiderman faces an uphill climb in building a case against Exxon Mobil Corp for not writing down assets amid the oil-price slump.
A person familiar with the matter told Reuters that why Exxon has not taken writedowns even while oil prices have fallen and the oil giant’s accounting practices are being investigated by Schneiderman.
Exxon is the only major producer to hold off so far the writing down the value of their wells, leases and equipment which has been forced upon many integrated oil producers around the world by the price drop of more than 60 percent since 2014. Failing to write down unprofitable oil wells could give a misleading picture of a company's financial health as oil in many wells can no longer be profitably recovered.
Whether Exxon's lack of writedowns signaled any wrongdoing is still not clear to accounting experts. Writedowns can vary sharply based on the method used and other factors as accounting rules give companies a choice of methods for valuing and impairing their assets, they said.
"This is an extremely subjective area. Everyone will have a different pattern of writedowns depending on how old their fields are and how much they cost to develop," said Tom Selling, author of The Accounting Onion blog.
Doug Cohen, spokesman for the AG's office, declined comment.
The reporting standards for U.S. public companies is set by the U.S. Securities and Exchange Commission and the Financial Accounting Standards Board and the company’s accounting follows their rules, an Exxon spokesman told Reuters.
Brian Youngberg, oil company analyst at Edward Jones in St. Louis said that the largest U.S. oil companies have historically not taken large charges to write down the value of their assets when commodity prices tumble.
Larry Crumbley, accounting professor emeritus at Louisiana State University said that once assets are written down, they cannot be written up and that is why companies are reluctant to take writedowns because they reduce income and assets on the balance sheet.
Terry Crain, accounting professor emeritus at the University of Oklahoma says that the rules do not define the timeframe of a temporary slump even as accounting rules do not require companies to take impairments for a temporary drop in oil prices.
"Is it a month or two, or several years? It falls in a gray area " Crain said. "It falls in a gray area."
Crain said that Chevron Corp may not look at the current slump as temporary since it had taken $2.8 billion of impairments and other charges in the second quarter.
If companies believe prices will soon rise again, taking an impairment is the wrong move, said Robert McTamaney, a lawyer with Carter, Ledyard & Milburn. He added that for Exxon, making writedowns unnecessary as it may be already carrying many of its rigs and other equipment at much lower prices may be already carrying many of its rigs and other equipment at much lower prices as one of the nation's oldest oil producers.
"From glancing at it, I think Exxon has substantial arguments that their accounting is correct," he said.

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