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Case Study: Bhopal 1984

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1. Perceived Roles and Involvements of Management Accounting and the Decision
Process in Union Carbide Plant Prior to Disaster


Introduction

While it has been named as one of the greatest environmental disasters to ever hit the world,
its consequences were felt long after (BBC News 2010). It led to the exposure of over
500,000 people to methyl isocyanate gas and other chemicals. Bradford (1985) in his article,
expresses the fact its effects were still felt years later. While the death toll was officially
reported to have been 2,259, it is the effect that it left on those who survived that was even
more devastating. Bradford explains that for many more years, the number of children born
with deformities totaled too many to be accounted for. Such was the extent, that when a week
after the disaster occurred more than 8000 other people died with gas related ailments which
were also attributed to the disaster in the same period (Ingrid 2001).

Some of the main management accounting issues that can be learnt from this prior to the
disaster happening can mainly be attributed the fact that the courts found the management of
the UCIL(Union Carbide India Limited), the parent company responsible to be liable for
negligence. This lead to their ligation and consequently finding the ex-employees liable for
negligence fining them $2000 each (BBC News,2010). There were a number of cost
management issues that could be identified prior to the disaster.



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Disaster Was Avoidable
Bhopal was not an accident. It was a disaster waiting to happen- a textbook case of
corporate failure to meet even the most minimal standards of proper social performance with
regard to human safety and the physical environment ., said by Morehouse. At the beginning
of the 20th century, UCC(Union Carbide Corporation) had 130 subsidiaries in 40 countries
and UCIL was one of them which established in 1934 .UCC held 50.9% stock of UCIL while
the rest was owned by government and private investors. In order to increase the productivity
of agricultural sector, the government of India signed an agreement with UCIC that agreed
the Bhopal plant could produce 5000 thousand tons of pesticides a year.( Trotter 1989 )
Edward A. Munoz as the managing director of Union Carbide Ltd, thought that it was
dangerous to store large quantity of MIC ,the raw material of pesticides, on site and
suggested to store MIC in small individual containers instead of large bulk storage tanks. His
advice was rejected by UCC officials because they insisted on a design similar to their other
plants. ICFTU-ICEF 1984 He also against to build the factory near the overpopulated
area before. However, the UCC officials only concerned about their own profit and found it
was a good place because of the central location and transportation system. They did not even
mention that they would give off toxic emission in the light industry zone which is upwind of
the city during the application and finally ran the factory in 1979. ( Dutta 2002 ) Ingrid
(2001) explained that while the business continued to grow, there were few expansion
strategies put in place to deal with increased capacity that the plant needed to handle. This
was mainly more so with the increased requirement as far as the storage was concerned. The
effect was that the business was storing more pesticides within the same storage facilities and
ended up filling them beyond the recommended levels.


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Since the Bhopal plant started to produce MIC by themselves, it caused not only the pollution
but also several accidents. Ingrid (2006) reveals that there had been two trade unions who had
been quoted to have been complaining about the pollution within the plant. This means that
the plant had not put in place a proper waste and anti-pollution policies within the plan. The
result had been a worker losing their life after the employee was splashed with phosgene
while at work. Pollution management within any organization should be planned for and
priced by the management within the organization. While it is a cost that many organizations
may find easy to ignore, the consequences are especially dire for the employees who spend a
lot of their time within the organization. After a fatal gas leak in 1981, UCC sent three
American engineers to Bhopal to do the safety audit. Their report indicated that there was a
serious potential for sizeable releases of toxic materials in the MIC unit either due to
equipment failure, operating problems or maintenance problem, thus requiring various
changes to reduce the danger of the plant, there is no evidence that the recommendations
were ever implemented. A lot of equipment was in poor condition; items had been overused
for years instead of replacing periodically. Simple repairs within the firm were also avoided,
especially on the pressure gauge which was said to have reported faulty at least roughly once
every week and such issue was still not addressed. UCIL prepared an action plan in response
to the 1982 inspection and sent periodic progress reports to UCC. After that UCC never sent
a follow-up team to Bhopal again and the report was ignored by the managers of UCIL (
Labib 2012). Such costs are minor within any financial period, especially when servicing is
done quite often yet they could the company a great deal of money. However, it being an
avoidable cost in the short run could have led the budget makers to avoid it in the short run
creating heaps of problems with that issue.


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Cutting Costs
Ingrid (2005) notes that prior to the disaster, the demand for pesticides had fallen due to the
competition in local market. This is said to have attributed to the buildup of the gas within the
firm as there was reduced use of the gas for the pesticides manufacture. However, the firm
could not reduce the amount they were manufacturing could be mainly be associated with the
break even cost of the manufacturing. Manufacturing less as per the requirement at that time
could have to increased cost and thus the company decided to continue producing at that
higher rate even when less of the gas was required.

Under the pressure from UCC, UCIL finally accepted the suggestion for selling most of the
plants. The manager of UCIL planned to use up existing stocks and cut the cost. Most well
trained managing and supervisory staffs were asked to resign, which caused the workforce in
MIC unit to decrease by half. This resulted not only in an increased work load for the
remaining personnel but also the stationing of untrained personnel in various crucial sections
of the plant (Peterson 2009). The relation between employee and employer was also not
being looked into well, as it is reported that promotions within the plant were rarely done on
merit and that they had even been halted during the lead up to the disaster. Such activities
could have led to decreased employee morale as their goals to work for even career growth
had been shunned with the discontinued promotion. Staff management is a rather sensitive
cost management issue that cannot at any time be under emphasized. Organizations that do
not have a priority for their employees safety stand to lose so much since the employees are
their main asset. (Chouhan et.al, 1994, 2004).


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The other major problem regarded the management of the alarm systems that had been
installed. The difference between the design of safety system of UCIL and UCC was another
serious problem which caused the tragedy. Firstly, The Bhopal plant operated with only one
manual back-up safety system, compared to a four-stage computerised safety system used by
union carbide plant of USA. Secondly, the number of gas scrubbers ,which were designed to
neutralize any escaping MIC, were less than in USA. Thirdly, there was no emergency action
plans in Bhopal and no early warning systems . It is obvious that the safety standard of UCIL
was far more below than the similar facility in USA (Bhargava 1985). Furthermore, it was
reported that the safety system had not been working for four years prior to the disaster. It is
clear that the companys drive for making profits had been at the expense of safety and
wellbeing of its workers and the local citizens (Chouhan et.at, 1994, 2004).

Conclusion
Above all, the problems that could have been dealt with by management in order to lead to a
reduction in the incidence or even at least a reduction of the effect of the disaster includes:
the bad location of the site, huge storage of toxic material, insufficient maintenance, lack of
skilled operators and reduction of safety management. Had the top management planned
themselves fully in advance and managed their activities properly, there would have been few
costs incurred and the disaster could not have been as bad as it was if at all it still would have
happened. This goes a long way to explaining that while profit is important, it should be
done in a way to compromise other objectives of the firm.




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2. Full Cost Accounting of Bhopal Gas Leak

To estimate a Full cost of the Bhopal Disaster we must first establish the key stakeholders in
the crisis, these are; Union Carbide, the government and the community.
Union Carbide
Compensation- $470,000,000
This was the easiest figure to obtain when costing this terrible disaster. This amount was
deemed just, equitable and reasonable by The Supreme Court of India (Dutta, 2002). The
Indian Government had been seeking $3 billion in damages, yet settled for this amount.
Included in this figure is the interim relief payment of $5 million already paid by UCIL
(Bhopal information centre, 2013).
Legal - $50,014,875
The companys legal fees were reported to be $50 million (Bhopal.net). Eight employees of
UCIL were tried and convicted of crimes with regards to the Bhopal disaster. They were each
fined $2125, only seven were alive at time of conviction and so that is a total of $14875
(BBC, 2010).
Hospital Fund- $90,000,000
UCC and UCIL agreed to fund the capital for a hospital in Bhopal and pay operating costs of
8 years, at the request of the Supreme Court of India. UCC sold their assets relating to UCIL
and provided approximately $90 million.
Total Cost to Union Carbide- $610,014,875

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Government
Immediate Relief- $5,885,860
This figure is given by the Government of Madhya Pradesh. This amount covers the
immediate relief provided, which includes; economic relief, relief provided to low income
families, free food and milk, death of animal compensation and compensation to families of
the deceased.
Rehabilitation- $76,499,854.40
The Government of Madhya Pradesh also provides the figures of government spending on
rehabilitation up to March 2009. This includes figures for; Medical Rehabilitation
($59814264), Economic Rehabilitation ($4420521.60), Social Rehabilitation ($7463918.40)
and Environmental Rehabilitation ($4801150.40).
Total Cost to Government- $82,385,714.40

Community
Environmental - $60,000,000
The best way to cost the environmental damage is by asking what it would cost to fix the
damage. The estimate of $60 million is included in the NEERI Report of 2010. Their estimate
includes; the costs of soil remediation, pump and treat unit, and the operating costs
associated with such machinery (NEERI, 2010). This gives us our figure of $60 million in
terms of cost to the environment.

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Business Lost In Aftermath- $65,000,000
Experts approximate the lost business in the aftermath at $65 million (Shrivastava). This
figure is arrived at by; calculating the lost business days, which is set at 11 days, divided by
the total amount of working days in a year, set at 300 working days and then multiplying that
amount by the GDP of Bhopal, set at $2billon (De Grazia, 1985).
Loss of Earnings- $2,670,580,500
Using the compensation calculations provided by De Grazia (1985), we aim to establish the
cost of lost working hours. Not for any revaluating of compensation, but more to price the
injuries sustained and the effects on the victims ability to provide.

The figures shown in Table 1, with regards to death and severity of disability, are the official
figures according to the government (Dubey, 2010). The wage shown is the wage given by
De Grazia in his book which he qualified by saying considered a good wage in India and
equal to operators pay and benefits at Union Carbide. Next we need an estimate of the age-
group division of the dead and injured. Research shows Age distribution; excess in under 5
and over 60 year age groups (age/sex estimates based on crude rates) (Rao, 1993). De
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Grazias calculations concur with this research and he estimates the dead at; 1500 children,
500 adults and 1000 senior citizens. For the purposes os this calculation, we follow the
general idea but account for the most recent death and injury statistics. De Grazia provides
the figures for productive years lost for children, adults and elderly, as shown in Table 1.
Total cost to Community- $2,795,580,500

Full cost of Bhopal Leak
Cost to Union Carbide-$610,014,875
Cost to Government-- $82,385,714.40
Cost to Community- $2,795,580,500
Full Cost- $3,487,981,089.40








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3. Reasons why present-day accountants are called upon to account for
environmental factors in their daily activities and the appropriateness

Introduction
Sustainable development is a relatively recent economic and social concern as policy makers
become increasingly aware of the effect of methods meet current needs on the ability of
future generations to meet their own (World Commission on Environment and Development,
1987). This concern has impacted social preference which now favouring pursuits of
sustainable development, and consequently is changing the nature of business (Shocker and
Sethi, 1986). This shift in business comes from the appraisal of social institutions that they
operate in society via a social contract, and as market competition increase the preferences
of society have become increasingly important to business success (Shocker and Sethi ,1986,
p.97).

In particular the development of corporate social responsibility has seen businesses extend
their considerations from the stakeholders with direct economic connections to a wider
encompassing consideration of their impacts on social and environmental stakeholders
(Mathews, 1996). This development has meant that the role of accountants is changing, as
disclosures and measurements are now expected to internalise the wider externalities of the
business operations (Mathews, 1996). Therefore, in the pursuit of sustainable development
accounting has become a vital tool in the implementation of sustainable practice.

Responsibilities
As the social and wider responsibilities of accountants increases, it raises the question, how
does accounting contribute to sustainable development? Present day accountants are
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responsible for the environmental factors as they discharge their day-to-day activities due to
the following reasons. To begin with, accountants have their role in corporate social
responsibility. This encompasses a number of things surrounding the companys role in
interacting with the society around it. These issues range from ethics, corporate governance,
social and interactive activities for example community engagement, safety of their products,
and respect for human rights as well as environmental activities (Tilt, 2009, p. 12) In the
event of a disaster like the one that happened in Bhopal, India, accountants and the entire firm
can take the responsibility of rescuing the victims.

It is the responsibility of the accountants to be responsible for any accounting discrepancies
in a company. They should not dissociate themselves in case of any discrepancy but rather
they should take responsibility. The pesticide plant in Bhopal, India tried to dissociate itself
from an incident that killed over 3,800 people but after the Supreme Court ruling, they ended
up paying a compensation of $470 million.


International Standards
Another reason why the accountants are called upon to account for the environmental factors
is the adherence to the International standards. Over the last 30 years, special attention has
been drawn to the establishment of standards, procedures, and policies that governs the way
in which business enterprises contribute towards environment sustainability. A number of the
rules are now worldwide standards of measuring quality. International Organization for
Standardization (ISO), non-governmental organizations (N.G.Os) ensures that international
standards are adhered to. ISO 14000 standard for example contains the clauses that supports
environmental and sustainable development (Cooper, 2005, p. 4) After the Bhopal incident,
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the government of India saw a need to have enforceable international standards to safeguard
the environment as a strategy to prevent similar occurrences in the future (Broughton, 2005,
p.1)

As part of the managerial role, accountants are involved in the strategic planning of an
organization. Managers should consider the integrity and ethics of human beings. Industries
that emit smoke in the nature of their activities should consider the environmental safety.
During the strategic planning meetings, managers including the accountant should consider
the locating the industry in a place where there will be minimal harm to the people. In the
case of the pesticide plant in Bhopal, India, managers should have considered locating the
industry far away from the city.

Management accountants roles include the organizational problem solving. Organizational
problem-solving roles focus on providing departmental managers with the required
information for making decisions (Lambert, 2011, p. 3) A typical accountants daily activities
revolve around fund management and financial decision-making. In the incident of the
pesticide plant, the accountant provided financial information so that the managers can use it
deciding how much to offer to the victims as compensation.

In todays accounting, environmental reporting is compulsory and must be adhered to by the
accountants. In United Kingdom for instance, companies are required to adhere to the
environmental reporting, which encompasses the following. Firstly, that information about
the business entity and its environmental interactions must be provided. Secondly, those
organizations must make and adhere to the environmental policy and indicate the steps in
place to implement the policies. Thirdly, the organizations must produce information on the
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environmental targets about issues such as emissions, resource utilization, and waste
management. Finally, is the report on the nexus between financial and environmental
sustenance of the organization (Gray et al, 2009, p. 9) this is appropriate in the sense that
every organization especially manufacturing will have to consider the environmental effects
in whatever they do.

Conclusion
Given that environmental Accounting practices and standards are well established, how
appropriate is this field in contributing to the overarching goal of sustainable development?
Environmental accounting has been used as a tool to implement environmentally aware
policy, by focusing on adding environmental costs to the balance sheet (Herath, 2005).
Environmental accounting achieves this goal by developing frameworks to quantify the value
of business operations on the wider environment and society. This framework allows policy
makers to implement strategies and policy which aims to have corporations and institutions
internalise their externalities, by doing so giving economic incentive to pursue sustainable
development (Mathews, 1996). This regulatory trend makes environmental accounting an
appropriate allocation of resources within institutions. However environmental accounting
transcends further than simply adhering to regulatory and accounting standards, it offers
institutions with the opportunity to find innovative solutions to manage their costs by auditing
their environmental processes. Therefore as institutions become increasingly aware of the
cost cutting benefits of pursuits of sustainable development, accounting for environmental
factors has become a vital managerial focus.



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4. Experience in Completing Assignment

As this company closed up 20 years ago, it is quite difficult to find out the annual report on
Internet. The data and details are different between various journals. So there are no exactly
conclusions and reasons for the disaster. What we learn from this assignment is critically
thinking and data analysing. For instance, we pick up the most important evidence from
journals and articles.

There were multiple barriers to research when trying to find data regarding the Bhopal
Disaster of 1984. Such conflicting views and wildly fluctuating ideas of death tolls and
disability. It was saddening to read through the articles comparing the compensation for the
Bhopal Victims to compensation awarded to similar cases in more developed countries. It is
hard to put a value on human life, and therefore, the full costing provided in this report does
not account for the suffering the families of the victims must have experienced.

It is encouraging, however, to realise how much corporate responsibility and sustainable
development has progressed. I gained a lot experience when completing this assignment. To
begin with, I learnt that the accountant and the company at large must be responsible with the
environmental factors in discharging their duties of the Corporate Social Responsibility. For
instance, in the event of a disaster like floods, the company may allocate some funds to
support the affected; the accountant must approve the funds.



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I also learnt that it is the responsibility of the accountant to comply with the international
accounting standards spelt out by the International Organization for Standardization (ISO). A
clause spelt out that accountants must be responsible for the environmental factors. They
have to comply with these standards.

I also learnt that there are environmental factors surrounding the business in an economy. A
number of environmental factors influence businesses in a particular economy. These factors
are broadly classified as external and internal business environment. Internal business
environment are those factors that are found within the business and the company has full
control over it for example companys culture, leadership, and governance among others. The
company does not have full control over the external factors such as the International
standards, environmental conditions among others. This is the reason as to why the
companys accountant must comply with the standards.

One of the challenges that I faced is to cite an example of a situation where an accountant or
a specific business enterprise was held responsible for the Union Carbide Pesticide Plant in
Bhopal, India on 3
rd
December 1984. My wish was to cite one of the accountants held
responsible for the disaster that affected the environment as well as the local people.







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