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 Risk News Report

Donald Sutherland, a member of the Society of Environmental Journalists, is a freelance writer based in Hopkinton, Massachusetts. His previous RiskWorld articles are "Superfund Awakes in State Supreme Courts," "New Ruling Forces States, Cities to Reveal Environmental Costs as Incurred," and "International Companies Push To Enter U.S. Stock Exchanges Without Environmental Accounting Rules." He retains the copyright to this report and can be reached at

EPA Reveals U.S. Publicly Traded Corporations Hide
Billions in Environmental Debt

By Donald Sutherland

WASHINGTON, D.C. - While the United States Congress tries to unravel the Enron Corporation accounting scandal involving hundreds of millions of dollars of debt hidden illegally from shareholders, a U.S. federal agency charges that hiding billions of dollars in environmental financial debt is a common practice of many publicly traded corporations.

The U.S. Environmental Protection Agency (EPA) has disclosed that 74 percent of U.S. publicly traded corporations they surveyed openly violate the U.S. Securities and Exchange Commission's (SEC) environmental financial debt accounting regulations.

The findings are based on a 1998 EPA study of corporate compliance with the SEC's Regulation S-K mandating that all companies publicly traded on U.S. stock exchanges provide quarterly and annual financial reporting of significant corporate environmental liability and debt exposure in incidences of violation of U.S. environmental laws.

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.

A.M. Best Company, a global insurance service firm with corporate headquarters in Oldwick, New Jersey, reported in November 2001 that they expect the property-casualty industry to ultimately incur upwards of $121 billion in net asbestos and environmental (A&E) losses.

Officials at the EPA say the high percentage of publicly traded corporations hiding their environmental debt from shareholders and the lack of enforcement by the SEC of its environmental accounting filing regulation is rewarding corporate noncompliance to U.S. environmental laws.

"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. "Enforcement would give assurance disclosures are being made correctly and provide incentives for better performance."

In January 2001, the EPA Office of Planning, Policy Analysis and Communications and 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 (Guidance on Distributing the "Notice of Security and Exchange Commission Registrants' Duty to Disclose Environmental Legal Proceedings" in EPA Administrative Enforcement Actions) to promote environmental SEC disclosure with references to their 1998 study.

It is the SEC's job to administer and enforce the federal securities laws of the United States in order to protect investors and to maintain fair, honest, and efficient markets. But in the last 20 years the SEC has enforced Regulation S-K only once, setting a precedent for financial environmental accounting departures in the stock market.

Currently the threshold reporting requirements of Item 103 of SEC Regulation S-K mandates disclosure of:

  1. all environmental proceedings, including governmental proceedings, which are material to the business or financial condition of the registrant;
  2. damage actions, or governmental proceedings involving potential fines, capital expenditures or other charges, in which the amount involved exceeds 10 percent of current assets;
  3. governmental proceedings, unless the registrant reasonably believes such proceedings will result in fines of less than $100,000.

These requirements have been criticized by environmental organizations for allowing corporations too much leeway for interpretation of what is financially material when it comes to disclosure of environmental liability and cleanup costs to shareholders.

A coalition of more than 60 organizations is spearheading an effort to have the SEC strictly enforce and improve securities law requiring corporate filing of significant environmental material expenses. The group, called the Corporate Sunshine Working Group, covers the spectrum from money management firm Kinder Lydenberg & Domini to the United Steelworkers of America and Friends of the Earth.

The Corporate Sunshine Working Group argues the non-disclosure of environmental liabilities and cleanup costs by publicly traded companies does make a real difference in a company's share price. They cite 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 not-for-profit organization based in Washington, D.C., released reports in 2000 supporting 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 (SEC) rules and directly threatens investors in pulp and paper companies," said WRI economists Robert Repetto and Duncan Austin in their reports, Coming Clean: Corporate Disclosure of Financially Significant Environmental Risk and Pure Profit: The Financial Implications of Environmental Performance.

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 can't be qualified and the assessed financial risks are too small to spell out given the company's size. And the U.S. accounting auditing bodies issuing clean financial audit opinions for those firm's SEC filings agree with that stance.

In February 1997, three environmental groups (Friends of the Earth, 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 cleanup liabilities in their annual report to shareholders. Price Waterhouse LLP, who audited Viacom's annual report also issued a clean opinion for Viacom's financial report to shareholders minus the questionable Superfund liability figures. Viacom executives claim the EPA and environmental groups were over stating 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 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 SEC issued a bulletin for companies to abide more strictly by SEC rules in completely revealing corporate material expenses. The aim of the Commission's bulletin was to stop the practices of some corporations that seek by accounting strategies to cover up financial losses so these losses do not bring down share prices.

"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 in 1998, 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."

Four years after release of the bulletin SEC officials still maintain a reluctance 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 M. 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."

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.

According to Burns, "senior management in a lot of firms excuses departures from GAAP at 3 to 10 percent levels."

The Corporate Sunshine Working Group claims under these reporting conditions shareholders are often left out of the loop of unreported controversies which can ultimately affect the corporate financial position. "Our objective is to have the SEC uniformly enforce their current environmental accounting regulations and create more clarification for existing rules," says Sanford Lewis, an attorney and co-chair of the group.

"Part of the problem with the current SEC regulations is they are just vague enough that corporate council can easily provide boiler plate language that eliminates meaningful disclosure of these issues," says Lewis.

Does the SEC's non-enforcement of its financial accounting regulations undermine EPA operations to encourage corporate compliance with U.S. environmental regulations and laws?

"These financial environmental accounting departures affect 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.

ęDonald Sutherland 2002


SEC S-K regulations

October 1, 2001, U.S. EPA alert on SEC disclosure requirements

Notice on Public Company Requirements to Disclose Environmental Legal Proceedings

A.M. Best Company

Corporate Sunshine Working Group

WRI reports on financial environmental departures by U.S. publicly traded pulp manufacturers

Superfund Transaction Costs

Posted April 9, 2002.

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