Academic journal article Academy of Accounting and Financial Studies Journal

Environmental Disclosures and Relevance

Academic journal article Academy of Accounting and Financial Studies Journal

Environmental Disclosures and Relevance

Article excerpt

ABSTRACT

Environmental disclosure is a type of social reporting that provides information to help users assess environmental risk. Environmental risk is the probability and amount of future expenditures for environmental liabilities. The SEC issued Staff Accounting Bulletin No. 92 (SAB 92) presenting detailed suggestions for environmental disclosures that integrated the current FASB standards and the SEC requirements. With specific guidance on environment reporting, and considering the SEC's enforcement power, SAB 92 should have had a significant impact on the amounts and types of environmental disclosure provided by firms. In addition, if the objectives of SAB 92 are fulfilled, the information provided should correlate with reporting firms' environmental risk.

This study investigated the expected correlation. First content analysis was used to compute environmental disclosure scores using the annual reports of firms of fourteen industries that are likely to have environmental information to report. Next, information content of the disclosure scores for the sample companies was investigated using regression with number of Superfund potential responsible party (PRP) citations as the dependent variable. PRPs are companies that the Environmental Protection Agency (EPA) designates as responsible for hazardous site cleanup costs. When the EPA becomes of aware of a hazardous site it conducts a study to: 1) determine the extent of the potential hazard; 2) estimate the clean up costs; and 3) identify the current and former owners of the area that are responsible for creating the environmental problem (i.e., the PRPs). Sites that meet the EPA's threshold level of potential hazard are included in the National Priority List (NPL) database Site Enforcement Tracking System (SETS) along with the names of the PRPs. Clean up activities for sites that are shown on the NPL are guided by the Comprehensive Environmental Responses, Compensation and Liability Act (CERCLA) (1980), also known as the Superfund, and the PRPs are jointly and severally liable for cleanup costs. The number of times that a company is designated as a PRP should be a good surrogate measure of environmental risk because the hazardous sites and the PRPs are not included on the NPL unless the responsibility for cleanup is certain and cost of cleanup has been estimated.

Analysis of the data shows positive significant associations between the variables suggesting that environmental reporting post issue of SAB 92 provides relevant information about environmental risk. The empirical evidence suggests that the overall disclosure practices have improved in that more information is provided as compared to previous studies conducted pre-SAB 92 and that it correlates with a measure of environmental risk.

INTRODUCTION

Environmental disclosure is a type of social reporting that provides information to help users assess environmental risk. Environmental risk is the probability and amount of future expenditures for environmental liabilities. Prior to 1993, the authoritative support for environmental disclosure was the Statement of Financial Accounting Standards No. 5, "Accounting for Contingencies." Firms recognize a liability when a loss is probable and its amount is reasonably estimable. Compliance with this rule required significant management judgment. Studies, such as Beaver (1991), and Reimers (1992), and Amer, Hackenbrack and Nelson (1994) have shown that financial statement preparers and auditors show inconsistent interpretations of the term "probable," which seems to support findings of inconsistency among firms' environmental reporting (i.e.,Krueze, Newell and Newell (1996), Mitchell (1995), and Gamble, Hsu, Kite, and Radtke (1995)). However, Barth and McNichols (1994) did show a correlation between firm value, which is influenced by environmental contingent liabilities and environmental risk, which they measured using number of times the firm was listed as a responsible party in Superfund cleanup sites. …

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