Early environmental legislation focused on punishing the polluter and stopping the pollution with restraining orders and abatement procedures (Rittenberg et al., 1992). As a response, companies' primary objective in performing the first environmental audits was compliance with regulations and the avoidance of regulatory sanctions. The U.S. Environmental Protection Agency (EPA) is rethinking its approach to compliance and enforcement and the role of environmental auditing. Rather than the prescriptive command and control approach, the EPA is allowing more flexibility in the way in which corporations manage environmental risks as long as environmental goals are achieved. This more collaborative approach provides management with an incentive to design environmental systems, which are cost effective, emphasize prevention, and continuously improve. The initial emphasis on assessing technical compliance led management to staff environmental audit teams with technical personnel such as scientists and engineers. The new emphasis on evaluating systems suggests a greater role for internal auditors who possess the necessary training and experience.
Several other changes have also motivated companies to reevaluate their approach to environmental auditing. One change is the consistent trend toward more stringent and comprehensive environmental legislation. For example, the EPA recently recommended tighter national standards for air quality (Cushman, 1996). Due to several highly publicized environmental disasters and the continual enactment of new and more comprehensive laws, an increasingly aware and skeptical public are prompting corporate management to reassess what it means to be environmentally responsible. Investors, observing the massive cleanup costs, litigation, and reputational damage resulting from environmental accidents such as Three Mile Island, Love Canal, the Exxon Valdez or the Bhopal chemical disaster, may favor companies that take preventative measures to minimize these downside risks. Interest in an effective environmental management system, which includes environmental auditing, is also motivated by the more stringent environmental standards in other countries. Corporations may soon find that developing such a system and meeting these more stringent standards are requirements of conducting international business. The EPA is currently participating in the development of the most comprehensive environmental quality standards ever undertaken, ISO 14000. These standards, developed by the International Standards Organization (ISO), resulted in part from the GATT talks which sought to promote free trade while establishing a global commitment to a clean environment. To obtain ISO 14000 certification, corporations must maintain environmental management systems and monitor these systems with environmental auditing. The EPA and other governmental agencies will consider a company's certification and compliance with these standards in enforcement actions. Furthermore, these uniform international environmental standards, and an organization's response to them, could potentially provide a basis for society to compare firms' sensitivity to environmental issues. In light of these new risks and opportunities, management needs to reevaluate how it approaches environmental auditing.
The purpose of this article is threefold. First, we identify and discuss changes in the risks companies face in managing environmental issues. Specifically, the discussion focuses on the new environmental standard ISO 14000 and changes in direction at the EPA. Second, we envision the implications of these changes on management's approach to monitoring these risks, and third, we suggest steps useful in adapting to these changes and encourage a reexamination of the internal auditor's role.
CHANGES IN PRESSURES AFFECTING ENVIRONMENTAL AUDITING
The Environmental Protection Agency was established in 1970 and several pieces of environmental legislation ensued in that decade, including The Clean Air Act of 1970, The Clean Water Act of 1972, and The Resource Conservation and Recovery Act of 1976. This legislation focused on punishing the violator and using administrative and court orders to achieve compliance. On the other hand, the Superfund legislation, namely the Comprehensive Environmental Response, Compensation and Liability Act (CERCLA) of 1980 and the Superfund Amendments and Reauthorization Act (SARA) of 1986, made companies potentially liable for cleaning up existing or future damage to the environment where existing damage might have been caused by a prior owner of the land. Numerous other federal, state and local environmental and worker safety laws have increased the complexity and extensiveness of regulatory compliance. As the resulting costs of complying with these laws, paying for violations, and cleaning up environmental damage have increased, so has the demand for environmental audits.
Although fear of regulatory enforcement was the primary force spurring the demand for environmental auditing, it alone is insufficient to explain why companies are choosing to go beyond compliance. For example, 1,300 companies voluntarily accepted EPA's challenge to reduce discharges of 17 toxic pollutants by 50 percent (EPA, 1996a).
A report published by the Institute of Internal Auditors Research Foundation, defined environmental auditing as "an integral part of an environmental management system whereby management determines whether the organization's environmental control systems are adequate to ensure compliance with regulatory requirements and internal policies." In practice, the nature of environmental audits is defined and implemented differently. Some corporations outsource this function to a third-party consultant; others rely on technical staff while still others employ internal auditors. Although the key benefit to an environmental audit is compliance with governmental regulations, it is especially beneficial in business planning, reporting, employee development, and public relations (Marsh and Johnson, 1995). The audit team is typically aware of environmental issues, risks and regulations and can analyze these risks, identify potential problems and recommend means of addressing the environmental risk exposures. Environmental auditors frequently encourage the development of an environmental policy statement, an environmental management system, and an environmental audit program. Since the acquisition of real estate can obligate a corporation for any pollution damage on that property occurring prior to its purchase, auditors are needed to assess the environmental risks and liabilities of property acquisitions and divestitures (Campbell and Byington, …