EPA Challenges Privilege Issue in Environmental Self-Audits

Article excerpt

An environmental audit is a selfinitiated, voluntary inspection of a company's facilities and records to evaluate and identify compliance (or noncompliance) with environmental regulations. To encourage more companies to conduct these audits voluntarily, many states have enacted evidentiary privilege to protect information obtained during these engagements. CPAs need to be aware of the limitations of this privilege.

The scope of an environmental audit can vary greatly. Audits may be conducted to gauge compliance, including operational controls, with regulations protecting the air, water, and soil. An audit might be specifically dedicated to issues governed by a particular statute or review compliance with several statutes.

Company personnel, through an internal evaluation or external consultants (such as public accounting firms), can conduct environmental audits.

Public Disclosure Requirements

Many of the environmental laws require that companies discovering violations of environmental regulations report them to the Environmental Protection Agency. Also, many states are authorized by the EPA to administer the various Federal programs established under environmental statutes. In those states, documents containing sensitive information regarding violations must be turned over to the state agency in many situations.

Once submitted to a state agency, the documents can easily become public information through either state public access laws or the Freedom of Information Act if the documents are transferred to a Federal agency such as the EPA. Other audit documents, which may not have to be submitted to authorities under selfreporting requirements, can be obtained by agencies through the discovery process in a legal proceeding. Because of these requirements, companies may be hesitant to conduct environmental audits in order to assess compliance.

In 1986, the EPA issued a policy statement which encouraged voluntary audits and considered the practice a demonstration of management commitment to environmental protection. In 1991, the Department of Justice, which prosecutes criminal cases for the EPA, encouraged the practice of self-auditing by businesses.

Despite these assurances, many companies will not conduct a voluntary environmental audit because of the legal discovery issue.

The Privilege Issue

Addressing these concerns, several states have attempted to encourage self-audits by enacting evidentiary privilege to protect information obtained during audits.

Some companies hire environmental attorneys to conduct audits of their facilities and claim attorney-client privilege to protect audit findings if a third party, such as a state agency, attempts to gain access to the audit documents. …