Beyond Enron: The Next Scandal

How US Companies Hide Their Environmental Sins

World Reports

Washington - An EPA survey has disclosed that 74 percent of publicly traded US corporations openly violate the US 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 financial reporting requirements.

While the US Congress was beginning to unravel the Enron Corp. scandal, none of the investigating subcommittees contacted were aware of the EPA’s charge of corporate concealment of environmental liabilities.

Hiding environmental liability from shareholders is a significant issue. The insurance underwriting industry has estimated the costs of complying with all environmental cleanups and legal fees as more than $100 billion.

“This departure from SEC mandated disclosure puts good companies at a disadvantage,” says Shirin Venus, attorney for the EPA’s Office of Planning, Policy Analysis and Communications.

In January 2001, the EPA’s Office of Regulatory Enforcement sent the SEC’s Division of Enforcement notice of the EPA’s campaign to promote environmental disclosure. It is the SEC’s job to protect investors and to maintain fair, honest and efficient markets. But in the last 20 years, the SEC has only enforced its S-K environmental accounting regulation on one occasion.

Regulation S-K requires all publicly traded companies to report significant environmental material expenses to shareholders on a quarterly and annual basis. The required disclosures include:

• All environmental proceedings that are material to the business or financial condition of the registrant;
  
  
• All damage actions or governmental proceedings involving potential fines, capital expenditures or other charges where the amount exceeds 10 percent of assets;
  
  
• All governmental proceedings, unless the registrant reasonably believes such proceedings will result in fines of less than $100,000.

(Green groups argue that S-K gives corporations too much leeway to interpret what is “financially material.”)

Under current federal securities law, “material” information is anything that an average investor ought reasonably to be informed of before buying a security. However, many auditors and their business clients, define environmental materiality as any event or news that affects a company’s revenues by a 10 percent threshold level.

The Corporate Sunshine Working Group (CSWG - a coalition of more than 60 organizations, including the money management firm Kinder Lydenberg & Domini, the United Steelworkers of America and Friends of the Earth) is leading an effort to have the SEC hold corporations accountable for reporting significant environmental expenses.

The CSWG [www.foe.org/international/cswg] cites a class-action lawsuit filed by shareholders that accused US Liquids of concealing material environmental information that resulted in an artificially inflated share price. According to Michelle Chan-Fishel, international policy analyst for Friends of the Earth (FOE), investors never knew that “the company was concealing its illegal dumping activities.” When one of the company’s most important facilities was heavily fined and temporarily shut down, US Liquid’s “share value fell by over 50 percent.”

In Pure Profit, a 2000 report by the World Resources Institute, WRI economists Robert Repetto and Duncan Autin revealed that many pulp and paper companies were not revealing environmental risks. The authors warned that this “lack of disclosure infringes SEC rules and directly threatens investors.”

Corporations often hide their environmental risks from the SEC by stating that the costs and claims will not have a material adverse effect on their operations. The accounting firms that continue issuing clean financial audits for those firms apparently agree with that stance.

In February 1997, FOE, Sierra Club and Citizen Action wrote to the SEC to demand an investigation of the entertainment giant Viacom Inc., which had failed to report an alleged $300 million in Superfund cleanup liabilities.

In 1996, Martin Freedman, professor of accounting at the College of Business and Economics at Towson University in Maryland published a study of 900 publicly traded parties and concluded that “most companies make little or no disclosure effort on environmental expense/liability reporting - and it’s getting more and more overt.”

“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, the SEC issued a bulletin calling on companies to abide more strictly to the environmental disclosure rules but, four years later, SEC officials were still reluctant to review corporate reporting failures.

“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 Sanford Lewis, an attorney with the CSWG.

“The SEC’s non-enforcement of its financial accounting regulations undermines EPA operations to encourage corporate compliance with US environmental laws,” says EPA’s Shirin 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.”

Asked to respond to the EPA’s criticisms, John M. Morrissey, the SEC’s deputy chief accountant, stated that he was “not in a position to comment on the EPA study.”

(c)2000 Donald Sutherland. Donald Sutherland is a freelance writer based in Hopkinton, MA.


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