Public Companies Tweak Accounting to Hide Environmental …



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Public Companies Tweak Accounting to Hide Environmental Debt

By Donald Sutherland

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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