Exxon Mobil: Understanding "Record Profits"

From: Nagindas Khajuria 

To: The Editor Business 

Sent: Monday, 31 January, 2005 9:02:10 AM

Subject: Exxon Mobil Profit Record Profit of $24 billion

Sir

I read your headline article on Exxon Mobil record profit of $24bn in 2004 with great interest having worked as an accountant in the oil industry for 12 years. This figure is meaningless as petroleum accounting is very complex and can easily produce misleading results: the accounting postulates (going concern, periodic determination of income and financial position and monetary unit), the accounting principles (matching principle, realisation principle, cost principle and conservatism) and the accounting standards (revenue versus capital expenditure, deferred tax and many others) applied by various oil companies are wide apart and there are no universal petroleum accounting practices that all of them adhere to.

In addition, there are always annual accounting adjustments every year for one reason or another that would make Exxon Mobil’s past six years’ average perhaps only slightly more meaningful at $16 billion pa. But even that is meaningless except as a % of average turnover or average capital employed. Just one year before Enron collapsed, Mac Kinsey Quarterly Report stated that Enron was then growing at 20% p. a. over the previous five years and it was a company “to buy in” and how misinformed such a prestigious Consultancy Firm was? Their research was not thorough enough.

One example I would give you is petroleum reserves. I do not dispute that it is a major asset of a company, nor do I dispute that its value should be measured. However, firstly estimation of the quantity of reserves is a highly subjective process: a) because several years of operating a reservoir may be required and b) equally competent engineers may still arrive at substantially different estimates. Secondly, under present ‘proration practices’ (laws and/or agreed practices where quotas are made not to produce more than demand on a rolling monthly basis), a reservoir may produce as long as 50 years into the future at varied, and sometimes unknown, price levels. This alone makes the application of ‘value principle’, rather than ‘realisation principle’ a technique of limited use.

In its simplest form, the objective of standard accounting practices is accomplished by three closely related processes: (1) measurement of the effects of transactions, (2) arrangement of related data, and (3) communication of the results to interested parties. Exxon Mobil’s record to date on these issues has not been adequate. 

Nagindas Khajuria