The Breadth of Environmental Issues
Hethcox, Kathleen Blackburn, Riley, Richard A., Williams, Jan R., The National Public Accountant
Part 1 of a 2-part series
Environmental laws at the federal, state and local level establish responsibility for handling hazardous wastes and clean up (i.e., remediation) of contaminated sites. These laws create financial exposure for public accounting clients in the form of capital and operating expenditures to comply with environmental laws and regulations, tort liability for personal injury or property damage and punitive damages for noncompliance. The implication for corporations is that environmental compliance may result in significant liabilities and other expenditures; the implication for accountants is that environmental reporting must ensure that financial statement information regarding environmental issues is reliable and timely.
This article is presented in two parts. In part one, various EPA settlements are reviewed to demonstrate the breadth of environmental issues and the role of the public accounting firm as a business advisor is considered. In part two, the details of AICPA Statement of Position 96-1, Environmental Remediation Liabilities, are presented to help practicing accountants ensure a client's environmental reporting is adequate for creditors, investors and other financial statement users.
Environmental costs have become a prominent factor in the planning and decision making of firms ranging from the small business proprietorship to the multinational corporation. Annually the United States Environmental Protection Agency (EPA) prepares the Enforcement and Compliance Accomplishments Reports where environmental remediation settlements related to investigations initiated by the EPA are discussed. An examination of this report for the 1992-1994 period revealed that only 200 of 1200 lawsuit resolutions were with public companies traded on the New York, American or NASDAQ stock exchanges, leaving the remaining 1,000 settlements to be with smaller, nonpublic companies and other entities. Yet the public perception is that the reporting of environmental liabilities and related disclosure is primarily restricted to large companies in the utilities, auto, chemical, manufacturing, and similar industries.
A further examination of the 200 EPA settlements with public companies found that 78 had material compliance costs where environmental remediation claims averaged 14.5% of operating income. These public companies spanned 19 industries including General Construction, Food and Kindred Products, Non-Durable Goods-Wholesale, and Business Services. This examination suggests that environmental remediation liabilities affect a more diverse group of companies than those from the immediately obvious chemical-related industries.
What Public Accountants Need to Know to Assist Clients:
#1: Small businesses are not immune from environmental lawsuits.
As the following example demonstrates, small businesses are not immune from environmental liabilities. On October 17, 1994, a lawsuit between the United States and Ken Ball and Phil McCreery was settled. Ball, a scrap dealer, had sold McCreery, a muffler shop owner, used, untested automobile catalytic converters. These converters were to be used as replacement parts on vehicles needing new converters. The sale violated the Clean Air Act because an improper or nonfunctioning catalytic converter can result in significantly greater emissions than would occur from the same vehicle with a proper converter. Both defendants made a showing of financial hardship and based on that hardship, the United States settled with Ball for $12,500 and with McCreery for $10,000 for the 39 violations.
#2: Businesses may be fined for seemingly small violations.
Companies may be fined for seemingly minor violations of environmental laws. The United States versus Enpro Contractors, Inc., Train Property, Inc. and Jimmy Patton Contractor, Inc. was settled on October 3, 1994, when the defendants agreed to pay $20,000, $12,270, and $10,000 respectively. …