companies try to hide environmental debt
article is reproduced on HudsonWatch.net with permission from the
DC - The U.S. Environmental Protection Agency launched a national campaign
in January 2001 to get publicly traded companies to disclose their environmental
debts to shareholders as required by regulation. Now, more than a year
later, a majority of public companies that have violated federal environmental
laws still do not make those disclosures.
The EPA is
attempting to stop the practices of some corporations that seek by accounting
strategies to cover up financial losses and liabilities so these problems
do not bring down share prices.
The findings are
based on a 1998 EPA study of corporate compliance with Regulation S-K issued
by the Securities and Exchange Commission (SEC) which mandates quarterly
and annual financial reporting of corporate environmental liability and
debt exposure as part of reporting legal proceedings on violation of environmental
Three of every
four publicly traded U.S. corporations surveyed openly violated the Securities
and Exchange Commission's environmental financial debt accounting regulations,
the EPA disclosed.
committees trying to unravel the Enron accounting scandal where hundreds
of millions of dollars of debt was hidden illegally from shareholders do
not appear to know about this concealment of environmental debt.
None of the
investigating House or Senate subcommittee personnel contacted by ENS were
aware of the EPA's charge of gross financial environmental debt departures
on the part of companies trading on the U.S. stock exchanges.
of corporate environmental debt from shareholders is a significant issue
in the stock market where corporate exposure to environmental financial
costs involving compliance, cleanup, and legal fees is estimated by the
insurance underwriting industry at over 100 billion dollars.
A.M. Best Company,
a global insurance service firm with corporate headquarters in Oldwick,
New Jersey, reported in November 2001 they expect the property-casualty
industry to ultimately incur upwards of $121 billion in net asbestos and
with U.S. environmental laws is being rewarded when the SEC does not vigorously
enforce its environmental accounting filing regulation, a top EPA legal
from SEC mandated disclosure puts good companies at a disadvantage in the
absence of reporting EPA legal proceedings," says Shirin Venus, attorney
for the EPA's Office of Planning, Policy Analysis and Communications (OPPAC).
would give assurance disclosures are being made correctly and provide incentives
for better performance," she says.
Dumping in a Pickaway
County, Ohio landfill exposed one company to Superfund expenditures (Photo
In January 2001,
directors of OPPAC together with Office of Regulatory Enforcement directors
sent the SEC's Division of Corporation Finance and Division of Enforcement
directors notice of the EPA's national campaign to promote environmental
SEC disclosure in a document entitled, "Notice of SEC Registrants' Duty
to Disclose Environmental Legal Proceedings."
It is the SEC's
job to administer and enforce the federal securities laws to protect investors
and to maintain fair, honest, and efficient markets. But in the past 20
years the SEC has only once enforced its Regulation S-K financial environmental
accounting regulation, setting a precedent for other financial debt departures
in the stock markets.
often hide their financial environmental risks from their SEC filings by
stating the costs and claims will not have a material adverse effect on
operations and financial position. Executives argue that pending litigation
cannot be qualified and the assessed financial risks are too small to spell
out given the company's size.
The U.S. accounting
auditing bodies issuing opinions for those firms agree with that stance.
all companies publicly traded on U.S. stock exchanges must file reports
on their significant environmental material expenses both quarterly and
annually to shareholders under SEC laws.
The SEC threshold
reporting requirements of Item 5 of SEC Regulation S-K mandates disclosure
Critics say these
definitions do not catch debts, fines and capital expenditures for smaller
amounts which can pile up to the point where they make a real difference
in the worth of a company that whould be reflected in its share price if
proceedings, including governmental proceedings, which are material to
the business or financial condition of the registrant
or governmental proceedings involving potential fines, capital expenditures
or other charges, in which the amount involved exceeds 10 percent of current
unless the registrant reasonably believes such proceedings will result
in fines of less than $100,000
metals contamination on a site in Denver (Photo courtesy USEPA)
allowed too much leeway for interpretation of what is financially material
when it comes to disclosure of environmental liability and cleanup costs
to shareholders according to the Corporate Sunshine Working Group.
coalition of more than 60 organizations is spearheading an effort to have
the Securities and Exchange Commission strictly enforce and improve securities
law requiring corporate filing of environmental material expenses.
includes from money management firms such as Kinder Lydenberg & Domini,
to labor organizations such as the United Steelworkers of America, to environmental
groups such as Friends of the Earth.
Sunshine Working Group cites a class action lawsuit filed by shareholders
of U.S. Liquids against the firm for concealing material environmental
information which resulted in an artificially inflated share price.
claimed that its liquid waste management services, which generated more
than 90 percent of the U.S. Liquids revenue, would result in 20 percent
earnings per share growth," said Michelle Chan-Fishel, international policy
analyst for Friends of the Earth.
investors know that the company was concealing its illegal dumping activities,"
she says, "and when one of the company's most important facilities was
heavily fined and temporarily shut down, share value fell by over 50 percent."
The World Resources
Institute (WRI), a nonprofit research organization based in Washington,
DC, released reports in 2000 that support the contentions of the Corporate
Sunshine Working Group showing pulp and paper companies reviewed are not
disclosing environmental risks that may significantly affect their financial
of disclosure infringes Securities and Exchange Commission rules and directly
threatens investors in pulp and paper companies," said WRI economists Robert
Repetto and Duncan Autin in their reports, "Coming Clean: Corporate Disclosure
of Financially Significant Environmental Risk, and "Pure Profit: The Financial
Implications of Environmental Performance."
1997, three environmental groups - Friends of the Earth, the Sierra Club,
and Citizen Action - sent a letter to the SEC, demanding an investigation
of the entertainment giant Viacom Inc. for failing to report an alleged
$300 million in Superfund clean up liabilities in their annual report to
LLP, whose personnel audited Viacom's annual report, issued a clean opinion
for Viacom's financial report to shareholders without including the questionable
Superfund liability figures.
claim the EPA and environmental groups were overstating the cleanup costs.
professor of accounting at the College of Business and Economics at Towson
University in Maryland, believes Viacom's Superfund accounting departure
is not unusual.
"My 1996 study
of the Environmental Protection Agency's list of 900 publicly traded potentially
responsible parties listed on the National Priority [Superfund] List found
most companies make little or no disclosure effort on environmental expense/liability
reporting," he says, "and it's getting more and more overt."
In 1998 the
Securities and Exchange Commission issued a bulletin asking companies to
abide more strictly by SEC rules requiring complete reporting of corporate
"The SEC sees
a growing problem with a lot of companies just passing off required generally
accepted accounting principles (GAAP) as immaterial right in front of our
faces," said Bob Burns, chief counsel in the SEC's Office of Chief Accountant.
"It's an attitude
which comes across as telling us keeping good books is immaterial, and
right now our primary focus isn't the environment, but in preparing financial
statements in general," said Burns in 1998.
sewer discharge to an unnamed tributary of the Cuyahoga River (Two photos
courtesy Ohio EPA)
Four years after
release of the bulletin, SEC officials are still reluctant to review corporate
failures to file 10-K form filings detailing significant environmental
of the Chief Accountant has not recently reviewed and is not in a position
to comment on the Environmental Protection Agency study," says John Morrissey,
deputy chief accountant for the SEC.
Division of Corporation Finance selectively reviews filings with the Commission
for compliance with the SEC's disclosure requirements, including disclosure
related to environmental legal proceedings," says Morrissey.
waste discharge, Mahoning River, Ohio
federal securities law, "material" information is anything that an average
investor ought reasonably to be informed of before buying a security.
of environmental materiality as anything affecting air, land, water or
public health is considered an old fashioned definition in many corporations.
auditors and their business clients today define environmental materiality
as any event or news which will affect a company's revenues by a 10 percent
"Senior management in a lot of firms excuses departures from GAAP at three
to 10 percent levels."
Sunshine Working Group claims that under these reporting conditions shareholders
are often left out of the loop. They never learn of unreported controversies
which can ultimately effect the company's financial position, and therefore
its share price.
Lewis, co-chair of the Corporate Sunshine Working Group, says, "Our objective
is to have the SEC uniformly enforce their current environmental accounting
regulations and create more clarification for existing rules."
"Part of the
problem with the current SEC regulations is there are inappropriate threshold
reporting requirements in Regulation S-K which limits SEC 10-K annual and
10-Q quarterly reporting to shareholders of ongoing legal controversies
and citizen actions," says Lewis.
environmental accounting departures effect the EPA's operations," says
Venus. "Market mechanisms which require full transparency are undermined
by these departures, and it sets a disincentive for others to comply if
competitors aren't," she says.
Sutherland is a member of the Society of Environmental
Journalists and a
consultant on environmental management systems based in Hopkinton,
MA.. He has served
as a member of U.S. Technical Advisory Group to TC207 on ISO14000, the
U.S. EPA Environmental Accounting Project, and the St. Louis, Missouri
Regional Commerce and Growth Association's Environmental Council.
Mr. Sutherland can be contacted at email@example.com
News Service (ENS) 2002. All Rights Reserved.