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.
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