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Cleaning Up Environmental Accounting

By Hochman, Joel A. | The National Public Accountant, June 1998 | Go to article overview

Cleaning Up Environmental Accounting

Hochman, Joel A., The National Public Accountant

(The following article presents a general background and summation of the emergence of environmental liabilities and the role accountants play in recognizing such liabilities. In subsequent issues we will present practical, everyday examples of small businesses facing environmental liability. If your client base includes such businesses as a gas station, dry cleaner or lawn service, you may find this information helpful in your practice.)

The problem of environmental pollution is a pervasive one for modern society. It is also a potentially expensive problem for modern businesses, which, under federal law, can be held financially liable for the effects of pollution they caused or to which they contributed.

For several years, the accounting profession has faced the dilemma of when and how potential environmental liabilities should be recognized, measured and disclosed on financial statements. There was little definitive guidance for accountants working in the industry, nor for practitioners who had businesses as clients.

In 1996, the American Institute of Certified Public Accountants (AICPA) issued a statement of position that addresses accounting matters associated with environmental liabilities. This SOP provides some of the most extensive guidance ever available to accountants on environmental accounting issues.

Regulation Begins

Environmental regulation began in the late 1950s when federal lawmakers considered the first laws aimed at decreasing the nation's water and air pollution. One of the first major environmental bills was the Clean Air Act of 1970, which established emissions standards for several primary pollutants. That same year, Congress set up the Environmental Protection Agency to enforce federal legislation regulating air and water pollution, solid waste and disposal, pesticide control, and radiation. Ten years later, lawmakers passed the Comprehensive Environmental Response Compensation and Liability Act (CERCLA), which established the Superfund, a pool of federal money used to pay for cleanup, or remediation, of some contaminated lands. All parties identified by the EPA as responsible for the contamination at a site must share costs for cleanup and ongoing remediation efforts. If any party refuses to do so, EPA has the authority, under CERCLA, to clean up the site using Superfund money, then demand payment plus treble damages from that party.

The move toward stronger environmental laws has continued in the 1990s. The Clean Air Act Amendment of 1990s, for example, set stringent new air quality standards. In a State of the Union Address, President Clinton urged toughening environmental regulations by asking Congress ". . . to pass my proposal to make big polluters live by a simple rule: If you pollute our environment, you should pay to clean it up."

What does this mean for business? It could mean significant additional expenses - expenses that must be accounted for properly. According to an article in the January 1993 issue of The CPA Journal, the nation's overall environmental liability as of early 1993 was estimated to be 2-5% of the gross domestic product. This figure includes costs for cleaning up air emissions, meeting water quality standards and removing asbestos. By the end of 1990s, the EPA had spent more than $4.8 billion to clean up some of the 1,200 sites it had designated as needing long-term remediation. (The EPA estimates that by the year 2000, it will add another 1,100 sites to its list of sites needing extensive remediation.) In The CPA Journal article, the current cost of cleaning up air emissions was put at around $25 billion a year. Meeting the standards of the Clean Water Act costs about $30 billion per year. An estimated $200 billion will be required to clean up asbestos in buildings across the nation.

Besides cleanup costs, companies face the possibility of paying huge awards in lawsuits filed over environmental pollution. In the 1990s, a Missouri jury awarded $16.

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Cleaning Up Environmental Accounting


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