Assessing Environmental Risk; Financial Statement Users Are Carefully Scrutinizing the Adequacy of Environmental Cleanup Disclosures

Abstract

Faced with myriad potential sources of financial exposure from ever-increasing environmental regulation, companies are grappling with the substance and timing of shareholder disclosures about the effect of environmental laws and regulations. Equally challenged, financial statement auditors must assess whether environmental issues have beet) considered properly before reporting a company's statements are presented in accordance with generally accepted accounting principles. This article will help accountants and auditors assess the sources of a public or private company's financial risk and the adequacy of presentation or disclosure of environmental matters in financial statements. STATUTORY SOURCES OF ENVIROMMENTAL LIABILITY Companies are subject to a wide range of federal, state and local environmental laws and regulations. Major federal statutes include the Clean Water Act, the Clean Air Act, the Resource Conservation and Recovery Act of 1976 (RCRA), the Comprehensive Environmental Response, Compensation, and Liability Act of 1980 (CERCLA) as well as the Toxic Substances Control Act. The scope of current environmental laws is very broad. Under RCRA, for example, companies must track hazardous waste from cradle to grave. Environmental Protection Agency (EPA) regulations developed pursuant to RCRA impose strict standards for hazardous waste treatment, storage and disposal. RCRA also empowers the EPA to investigate potential violations and, if necessary, initiate legal proceedings against violators. Just four years after RCRA, Congress enacted CERCLA, the so-called superfund statute, which was extended and refined by the Superfund Amendments and Reauthorization Act of 1986 (SARA). Touted by environmental groups for its comprehensive scope, CERCLA imposes hazardous waste-site cleanup liability on a broadly defined group of potentially responsible parties (PRPS): * The current owner or operator of a facility identified as a hazardous site. * Anyone who at the time of disposal of hazardous substances owned or operated any facility at which such substances were disposed of * Generators of hazardous substances disposed of at the facility. * Anyone who transported hazardous substances to the facility. CERCLA liability defenses are limited and difficult to assert successfully. Due both to CERCLA'S extensive reach and the financial magnitude of cleanup costs, the statute has spawned considerable environmental litigation in recent years. Many states have adopted their own CERCLA-TYPE cleanup statutes. New York, for example, has an active state superfund program. New Jersey's Environmental Cleanup Liability Act (ECLA) requires industrial-establishment owners or operators planning to sell or transfer operations to notify state environmental authorities and provide either a negative declaration there are no hazardous substances or wastes on site or a cleanup plan to address any site contamination. Failure to comply is grounds for the buyer or the state to void the sale. POTENTIAL SOURCES OF FINANCIAL EXPOSURE Federal and state laws and regulations may result in a number of financial risks that CPAS must consider. One such risk is the possibility a company will be required to commit substantial funds to comply with environmental laws and regulations. For example, a manufacturing facility is required to install or upgrade devices to remove particulate matter from smokestack emissions or to remove chemicals or heavy metals from liquid or solid waste before disposal. The resulting capital expenditures will increase production costs-which cannot be fully passed on to customers and will lead to a decline in future earnings. CPAS must consider a company's exposure to toxic tort liability for personal injury or property damage due to chemical exposure. In toxic tort lawsuits, massive damages often are sought by victims of a company-caused environmental problem. …

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