International Companies Push to Enter U.S. Stock Exchanges Without Environmental Accounting Rules

By Donald Sutherland

Under a 90-day review period ending May 23, 2000, the U.S. Securities and Exchange (SEC) Commission is considering whether to abolish its requirement that foreign companies traded on U.S. stock exchanges abide by American environmental generally accepted accounting principles (GAAP) (see http://www.sec.gov/rules/sros/ny9948n.htm). 

This is a move opposed by the environmental organization Friends of the Earth (FOE) (http://www.foe.org).  

"Friends of the Earth is opposed to the SEC allowing foreign issuers to come to U.S. markets without following the same environmental disclosure requirements as domestic companies," says Michelle Chan-Fishel, international policy analyst for Friends of the Earth. "This will be an erosion of current investor needs to arrive at a common denomination for environmental accounting globally."

Currently all publicly traded companies on U.S. stock exchanges must file their significant environmental material expenses quarterly and annually to shareholders under SEC and U.S. environmental accounting regulations (http://www.sec.gov).  

Under the review period, the SEC is asking companies whether the listing of foreign companies should be allowed on U.S. stock exchanges under accounting standards drawn up by the London-based International Accounting Standards Committee (IASC), which doesn't have specific environmental rules (http://www.IASC.org.uk). The United States and Canada are among the few countries that don't accept IASC rules for use by companies listing on their stock exchanges.

The U.S. Financial Accounting Standards Board (FASB) says IASC rules are not as stringent as U.S. rules (http://www.fasb.org). A 1993 study by the SEC of 444 foreign companies listed in the U.S. found that two- thirds of them reported earnings declines averaging 42% when they converted to U.S. accounting mandates.

"IASC does not have any standard which is entitled ‘environmental accounting’ and focuses entirely on environmental issues," says Sir Bryan Carsberg, secretary-general of the IASC. "However, many of our standards establish rules which show you how environmental issues should be dealt with."

Environmentalists and U.S. accounting standard bodies argue that without specific environmental accounting rules foreign companies under IASC rules can choose to loosely file environmental cleanup and liability costs.

Frederick Gill, senior technical manager of accounting standards at the American Institute of Certified Public Accountants (AICPA) (http://www.aicpa.org.hk), says, "The AICPA issued the standard Statement of Position 96-1, Environmental Remediation Liabilities, for two reasons:

“(1) to improve and narrow the manner in which existing authoritative literature (primarily FASB Statement No.5, Accounting for Contingencies, which is similar to IASC's contingencies rules) is applied to the specific circumstances of recognizing, measuring, and disclosing environmental remediation liabilities (i.e., liabilities for remediation of environmental pollution arising from some past act) in their financial statements, and

“(2) to make financial statement preparers and independent auditors more knowledgeable about the significant federal laws on environmental remediation.

“Reporting of environmental remediation liabilities (such as under Superfund laws) is important to users of financial statements for the same reason that any material liability is important to users of financial statements-to help investors, creditors, and others identify the enterprise's financial strengths, weaknesses, and assess its liquidity and solvency."

The Association of Chartered Certified Accountants (ACCA), an international professional body of accountants, doesn't believe U.S. environmental accounting by publicly traded companies to shareholders is significant (http://www.acca.org). Roger Adams, technical director of ACCA in London, says, "I agree that companies making U.S. filings do make more environmental information available than non-registrants, but I have yet to see any evidence these additional disclosures are sufficiently price sensitive in nature to result in pricing differentials to emerge. In terms of total balance sheet liabilities and overall exposure to risk, I doubt that the SEC environmental rules and U.S. environmental GAAP make a substantive difference."

Environmentalists argue the hiding or departure of environmental liabilities and cleanup costs by publicly traded companies from shareholders does make a substantive difference in a company's share price. One illustration they cite to represent the importance of environmental disclosure is the class action lawsuit filed by shareholders against the firm U.S. Liquids for concealing material environmental information which resulted in their purchasing shares at an artificially inflated price.

This company claimed that's its liquid waste management services, which generated more than 90% of the U.S. Liquids revenue, would result in 20% earnings per share growth," says Michelle Chan-Fishel. "Little did investors know that the company was concealing its illegal dumping activities, and when one of the company's most important facilities was heavily fined and temporarily shut down, share value fell by over 50%."

Friends of the Earth argues that the SEC is abdicating its responsibilities to investors if it settles for the vague international disclosure standards of IASC and the International Organization of Securities Commissions (IOSCO), where foreign companies can depart from reporting material environmental expenses.

"Basically, it's just a rollback of U.S. environmental GAAP and SEC environmental accounting regulations," says Michelle Chan-Fishel.

Posted April 14, 2000

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