Disclosing Past Sins: Financial Reporting of Environmental Remediation
Schmidt, Richard J., The National Public Accountant
Since the mid- 1970s, industrial corporations have struggled with the concept of reporting potential financial liabilities related to environmental cleanup. There has been a reluctance by corporations to recognize responsibilities for remediation (an action to correct a wrong) in their financial reports, although the total potential liabilities for cleaning up designated private industrial sites have been estimated to range from $500 to $750 billion. Some corporations have chosen a proactive financial reporting stance while others are waiting for a further directive to report existing obligations. Some corporations have decided to withhold information from their financial statement users about a significant financial obligation even after being identified as a participant in a major environmental pollution site. This article examines the history of such disclosure and reviews selected corporate environmental remediation financial reporting in annual reports before and after the recent emphasis on improving such reporting.
Early Corporate Financial Disclosure
When the nation became concerned about hazardous waste sites, the initial corporate financial response was one of little or no recognition that individual corporate responsibility existed for remedial cleanups. In 1975, the Financial Accounting Standards Board (FASB) issued a statement, Accounting for Contingencies, to help accountants recognize potentially costly future situations such as remedial cleanup. A loss contingency should be reported in the financial statements if it is implicit that future events will confirm a liability has been incurred, and the amount of the loss can be reasonably estimated.
Environmental remediation liabilities were loss contingencies although the difficulty in estimating cleanup costs was used as a justification for omitting any significant reference to them in annual reports. Industrial interpretations and applications of the FASB statement varied greatly. Concern developed about the comparability and completeness of environmental remediation disclosures. No corporations followed the guidelines, reluctant to admit participation in polluting.
Further reporting guidance was needed. In 1976, a FASB interpretation, Reasonable Estimation of the Amount of a Loss, stated that the previous statement's clause "the amount of loss can be reasonably estimated" does not provide any justification to delay the recording of a remediation cleanup cost estimate. National interest in hazardous waste cleanups increased the pressure for legal solutions. The congressional response to corrective action requirements was addressed in the Resource Conservation and Recovery Act of 1976. Still no corporations disclosed financial responsibility, believing that government help was needed to fulfill the legislated requirements. As a result, a second federal law, the Comprehensive Environmental Response, Compensation, and Liability Act of 1980 (CERCLA), provided for a $1.6 billion trust fund to cover the costs associated with abandoned hazardous substance sites, known as the Superfund sites.
The legislated procedure for reporting of corporate waste disposal practices and sites led to environmental site analysis by the U.S. Environmental Protection Agency (EPA) as the responsible federal evaluation agency. Beginning in 1981, the EPA had identified more than 30,000 sites for investigation. On-site and document information was used to rank the sites according to a mathematical rating system that combined the potential of a harmful hazardous waste with the magnitude of the potential harm. Sites receiving a high score were included on the National Priorities List (NPL) for remedial action. The EPA process included a risk assessment of the quantity and identity of hazardous substances at each proposed site. A feasibility study listed remedial alternatives and the cost of each alternative, and evaluated the alternatives for effectiveness. …