Posted on 19-2-2002

Public Companies Tweak Accounting to Hide Environmental Debt
By Donald Sutherland from Environmental News Service

WASHINGTON, DC, February 18, 2002 (ENS) - 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 laws. 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.

Congressional 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. The hiding 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 environmental losses.

Corporate noncompliance with U.S. environmental laws is being rewarded when
the SEC does not vigorously enforce its environmental accounting filing
regulation, a top EPA legal official says. "This departure 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).
"Enforcement would give assurance disclosures are being made correctly and
provide incentives for better performance," she says.

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.

Corporations 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. Currently,
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 of:

* all environmental proceedings, including governmental proceedings, which
are material to the business or financial condition of the registrant

* damage actions, or governmental proceedings involving potential fines,
capital expenditures or other charges, in which the amount involved exceeds
10 percent of current assets

* governmental proceedings, unless the registrant reasonably believes such
proceedings will result in fines of less than $100,000

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 disclosed. Corporations are 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.

The nationwide 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. The coalition 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. The
Corporate 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. "This company 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. "Little did
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 performance. "This lack 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."

In February 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 shareholders. Price Waterhouse 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. Viacom executives claim the EPA and environmental groups
were overstating the cleanup costs.

Martin Freedman, 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 material expenses. "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. 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 material expenses. "The Office 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. "The Commission's 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.

Under current federal securities law, "material" information is anything
that an average investor ought reasonably to be informed of before buying a
security. The definition of environmental materiality as anything affecting
air, land, water or public health is considered an old fashioned definition
in many corporations. Instead, many 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 threshold level. Burns says,
"Senior management in a lot of firms excuses departures from GAAP at three
to 10 percent levels."

The Corporate 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. Attorney Sanford 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. "These financial
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.