AICPA convenes environmental issues roundtable.

Believing this is the appropriate time to evaluate the problems of applying accounting and auditing standards to environmental matters, the American Institute of CPAs accounting and auditing standards divisions convened a two-day environmental issues roundtable in New Orleans. The 30-plus participants included industry CPAs and representatives: of the AICPA accounting standards executive committee (AcSEC), the auditing standards board, the Financial Accounting Standards Board, the Securities and Exchange Commission, the American Bar Association and the Canadian Institute of Chartered Accountants (CICA) as well as AICPA technical staff. (Copies of the roundtable proceedings are expected to be available for purchase from the AICPA order department during the second quarter of 1993.)

Environmental obligations have reached a critical level in the United States. Since the Comprehensive Environmental Response, Compensation and Liability Act of 1980 (CERCLA) was adopted, U.S. entities have found themselves increasingly identified by the Environmental Protection Agency as potentially responsible parties in hazardous waste disposal site cleanups. This so-called superfund legislation maintains a strict liability standard--penalties are assessed without regard to fault. Entities failing to respond to EPA cleanup orders are subject to substantial penalties.

With cleanup costs reaching staggering proportions, CPAs need to advise clients on how to properly recognize, measure and disclose environmental costs. Little specific guidance exists currently, however, on how this should be done. Auditors must understand what responsibility they have, if any, to detect and report unrecorded envionmental liabilities and how to evaluate environment-related financial statement assertions.

Objectives

The roundtable's three specific objectives were to

* Examine problems CPAs have in practice applying generally accepted accounting principles to environment-related financial statement assertions.

* Identify environmental issues for which authoritative accounting and auditing guidance may be needed.

* Provide a starting point for developing guidance, including continuing professional education conferences and courses, on applying accounting and auditing standards to environmental matters.

Current status

To help them assess the need for new Or revised accounting and auditing guidance, roundtable participants heard presentations on

* The legal aspects of environmental liability.

* Perspectives on environmental accounting issues from the FASB, the SEC and industry.

* Auditing environmental liabilities.

Three accounting breakout sessions considered how to recognize, measure and display environmental obligations on an entity's balance sheet. Two auditing breakouts evaluated existing practice and auditors' acceptance of additional detection responsibilities.

Canadian perspective

Participants also heard a presentation on Canadian initiatives in accounting for environmental costs from Jo-Ann Longworth, manager of accounting research for Alcan Aluminium Ltd. in Montreal, who chairs the CICA study group on accounting for and disclosure of environmental measures within the existing financial reporting framework. In forming the study group, the CICA believed what little guidance there was specifically covering accounting for environmental measures raised more questions than it answered.

The group recently issued a report on accounting for environmental obligations, a subject Longworth called "more complex than any of us possibly imagined," which considers questions such as

* What are environmental expenses?

* What triggers an environmental liability (the violation itself or being held financially responsible for cleanup)?

* Should expenditures be capitalized or expensed?

The CICA report recommends changes to existing accounting rules. Even if no formal guidance results from the report, Longworth says the report itself should be helpful to Canadian practitioners.

Accounting guidance

Edward Trott, a partner of KPMG Peat Marwick in White Plains, New York, and chairman of the AcSEC environmental issues task force, found the roundtable successful and said input from participants would provide the task force with a starting point for doing its work, which may include issuing a statement of position on accounting for environmental obligations.

Following are some of the roundtable's key accounting findings:

* Accounting guidance is needed on recognizing environmental liabilities, with a focus on an entity's obligation to clean up environmental liabilities created in the past.

* Financial statement preparers and independent auditors should be more knowledgeable about the significant federal laws on hazardous waste cleanup and the concepts of strict liability and joint and several liability applicable to cleanup costs. Participants expressed concern that many CPAs are unaware that the nationally recognized problem of environmental cleanup costs affects them directly.

Auditing guidance

Participants agreed guidance may be needed to help auditors determine what responsibilities they have in the environmental arena. There was general agreement auditors currently do not perform extensive testing of compliance with environmental laws and regulations as part of a financial statement audit. However, auditors may be engaged to perform tests of environmental compliance, as a separate service, under the financial statement attestation standards.

A key observation of the roundtable was that Statement on Auditing Standards no. 54, Illegal Acts by Clients, is the applicable standard relating to auditors' responsibility to detect noncompliance with environmental laws and regulations and the resulting cleanup costs. However, auditors may need additional guidance on auditing environment-related financial statement assertions. In response to the roundtable, the auditing standards division will form a task force to evaluate the need for such guidance and the form it will take.

A challenge for the future

The cleanup of hazardous waste sites is expected to continue well into the next century, and entities will face the increased likelihood of being held responsible for some portion of the cleanup costs. Clarification of existing accounting and auditing guidance and development of new guidance will make it easier for CPAs to fulfill their obligations to clients and the public.

-PETER D. FLEMING is a senior editor of the Journal.