The Fillups Company has chosen the full cost method for accounting of drilling costs. It was
later proven that all the incurred expenditure related to dry holes. Nevertheless, the company
has decided to capitalize the whole amount of $10 million spent on drilling. The purpose of this
report is to highlight the ethical considerations implied in the rationale of management’s
decision. In addition, it is considered weather accounting alternatives should be selected solely
on the basis of financial statement effects.
There are two possible options in cost accounting for companies involved in the exploration and
development oil gas- the "successful efforts" (SE) method and the "full cost" (FC) method. The
chosen method has a prevailing impact on reported net income and cash flow figures (ACCA,
2015). Ethical standards require that “accountants present information in the clearest and most
accurate way possible, with the expectation that the information constitutes an independent
report of a business' financial situation (Investopedia, 2017)”. On the other hand, large
companies like Fillups are often facing with the burden to succeed at many levels, which puts
pressure on the management to achieve (and/or report) satisfactory performance.
The primary responsibility of the management is to maximize profits of the company to the
benefit of its shareholders. All users of financial statements rely on the ethical collection and
credibility of financial information. The question that arises in this particular situation is whether
non-recognition of expenses in the period when they are incurred could lead to misleading
decisions. If the shareholders base their decisions by putting strong emphasis on reported
profits-how will management be ensured that they have taken into account all relevant
information? Ethical standards require that accountants present information in the clearest and
most accurate way. The general requirement is not only to adhere to professional rules, but also
to recognize the potential for harm and to use reasoning and judgement to resolve ethical
conflicts. In this particular situation, the management is aware of the fact that there will be no
future revenues related to drilling costs and omitting this figure from the income statements
creates a distorted image of the company’s profit.
Reported financial performance is only one of major concerns of companies in the oil and gas
sector. They are usually expected to operate in public interest because not all their stakeholders
are represented by accounting calculations. Reputation of companies like Fillups is determined
by perception with which is viewed by a range of interested parties. They will consider
expenditure incurred on drilling dry holes as hidden losses and, in this way, the positioning of an
organization in its environment in terms of society’s trust can be jeopardized. In addition,
comparison of Fillups’s financial position and performance with the one of the company using
different cost method could lead to uninformed decisions.
As a conclusion, it is important to emphasize that professional accountants have a primary duty
to the public interest and that accounting alternatives should be selected in a way that maintains
their position of trust. The balanced assessment of reporting alternative includes social and
reputational costs together with economic benefits.


1. BPP Learning media (2015) ACCA approved Paper P1 Governance, Risk and Ethics pp
60-77. London: BPP Learning
2. Schroeder R., Clark M., Cathey J., 2011, Financial accounting, theory and analysis-text
and cases 10th edition, John Wiley and Sons
3. Accounting For Differences in Oil and Gas Accounting, 2017, Investopedia. Available at:

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