EPA Reveals US Publicly Traded Corporations Hide Environmental DEBT

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Sutherland

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EPA Reveals US Publicly Traded Corporations Hide Environmental

Debt in SEC Filings to Shareholders By Sutherland

WASHINGTON, D.C., February 12, 2002 -The US Environmental

Protection Agency (EPA) has disclosed seventy four percent of US

publicly traded corporations they surveyed 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 mandating quarterly

and annual financial reporting of corporate environmental liability

and debt exposure in incidences of violation of US environmental

laws.

While the US Congress tries to unravel the Enron Corporation

accounting scandal where hundreds of millions of dollars of debt

was hidden illegally from shareholders, none of the investigating

House or Senate investigating subcommittees contacted were

aware of the EPA's charge of gross financial environmenatal debt

departures in the US 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 one hundred 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 (A & E)

losses.

Officials at the EPA state the high percentage of publicly traded

corporations hiding their environmental debt from shareholders and

the lack of enforcement by the SEC for its' environmental

accounting filing regulation is rewarding corporate noncompliance

to US 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, " she says.

In Jan.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 SEC 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 twenty years the SEC has only once enforced its'

Reg.S-K financial environmental accounting regulation, setting a

precedent for other financial debt departures in the stock market.

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: 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

This requirement has 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 Securities and Exchange Commission (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, to 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

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 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.

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 cann't be qualified and the

assessed financial risks are too small to spell out given the

company's size.

And the US 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 clean up

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 clean up costs.

Freedman, professor of accounting at the College of

Business and Economics at Towson University in land

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,

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.

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 postion to comment on the Environmental Protection

Agency study, " says M. sey, 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 sey.

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 Bob 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 effect 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 , an attorney and of the

Corporate Sunshine Working 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 .

Does the SEC's nonenforcement of its financial accounting

regulations undermine EPA operations to encourage corporate

compliance with US environmental regulations and laws?

" 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 disinsentive for

others to comply if competitors aren't, " she says. ©

Sutherland 2002

References:

SEC S-K regulations

http://www.law.uc.edu/CCL/regS-K/index.html

October 1, 2001 US EPA alert on SEC disclosure

http://es.epa.gov/oeca/ore/sec.pdf

Notice on Public Company Requirements to Disclose

Environmental Legal Proceedings

http://es.epa.gov/oeca/main/strategy/oppac_notice.html

http://es.epa.gov/oeca/oppa/secguide.html

http://es.epa.gov/oeca/oppa/notice.html

http://es.epa.gov/oeca/oppa/17cfr229.html

A.M.Best Company

http://www.ambest.com/

Corporate Sunshine Working Group

http://www.foe.org/international/cswg/

http://gnp.enviroweb.org/secpress.htm

WRI report on financial environmental departures by US

publicly traded pulp manufacturers

http://www.wristore.com/pureprofit.html

http://www.wristore.com/comingclean.html

Superfund Transaction Costs

http://www.bergen.org/AAST/Projects/ES/SF/trans.html