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Disclosing past sins: financial reporting of environmental remediation.

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. A third step, the remedial action plan, included the cleanup standards applied to the site and the cost effectiveness of the best alternative cleanup method.

The fourth step included preparing a proposed remedial action plan that was open for general public review. After analyzing public comments, the EPA prepared a record of decision (ROD) specifying the remedy and time frames for completion. Remediation began with a remedial design, a remedial action, and the operation and maintenance of the remediated site.

A company may first learn of its potential remediation involvement when a site is included on the NPL or an equivalent state list. The EPA notified companies with some involvement at a site that the company had become a potentially responsible party (PRP). When a company was notified, it began the task of negotiating with the government concerning the company's specific liability for site remediation. Because most sites have more than one PRP, negotiations as to specific liability for each PRP can become difficult. A peculiarity of the procedure is that the negotiations do not require all PRPs to participate, only those invited by the EPA. Even when a hazardous waste legal action was filed against a corporation, there was a general reluctance to disclose a pending hazardous site lawsuit in the financial statements. By this time it was obvious corporations would resist financial statement footnote disclosure of a suit, as it might be viewed as an admission that the firm was involved with the waste site and it was reasonably certain the firm would lose the suit.(2)

However, remediation costs for past improper waste disposal practices were a principal component of CERCLA. The Superfund Amendments and Reauthorization Act of 1986 (SARA) began the formal legal codification of corporate financial responsibilities for activities which might adversely effect the soil or groundwater. SARA broadened the provisions of Superfund and increased the trust fund to $8.5 billion. The EPA was charged with recovering the costs of remediation whenever possible from potentially responsible parties.

The Superfund placed a liability on four different classes of responsible parties. They were:

1. Current owners or operators of sites where hazardous substances have been disposed.

2. Previous owners or operators of sites at the time of the disposal of hazardous waste.

3. Parties who arranged for disposal of hazardous materials at the sites.

4. Parties who selected and transported hazardous materials to the sites.

The liability applied regardless of questions of negligence, compliance with law at the time of disposal, or whether or not the party actually participated in the disposal of the hazardous waste. Courts have interpreted CERCLA to impose strict and joint liability. Responsible parties were liable regardless of fault.

Because the U.S. Securities and Exchange Commission (SEC) had the legal responsibility to set financial reporting standards for publicly held corporations, the SEC joined the environmental reporting issue by publishing a Financial Reporting Release. The Release required disclosure of all CERCLA liabilities in financial statements and required firms to disclose potential liabilities if they were reasonably likely to be assessed. A second environmental publication stated that contingent liabilities for items such as hazardous waste remediation must be displayed on the face of the balance sheet separately from amounts of claims for recovery from insurance carriers or other third parties. It was becoming more difficult for firms on the NPL to deny liability. Yet, even with disclosure requirements set forth, there were no penalties for failure to disclose environmental information.

In 1993, the FASB's Emerging Issues Task Force published Accounting for Environmental Liabilities. The Task Force reached a consensus that the costs of remedial liabilities should be based on a site-specific plan for the remediation of the contamination. The American Institute of Certified Public Accountants (AICPA) addressed similar financial disclosure concerns when they stated in their 1994 Statement of Position, Disclosure of Certain Significant Risks and Uncertainties, that an estimate should be disclosed if both (1) the included estimates will change in the near future, and (2) the effect of the change will be material to the financial statements. The sum total of financial reporting for these regulations, guidelines and laws still did not satisfy the corporation's need for a clear official accounting directive that applied to the specific problem of reporting significant financial remediation obligations. However, after nine years, some reporting progress was made because hazardous waste cleanup costs were more frequently shown in annual reports and a few larger corporations were following reporting guidelines. SEC Commissioner Richard Roberts had said in a 1994 speech that the environmental liabilities issue had brought "increased pressure on the SEC to ensure that publicly held companies are disclosing in a fair, full and timely manner the present and potential environmental costs of an economically material nature. My view is that the company owes this to the investing public."(3)

In addition to contamination of a specific site, area natural resources may be adversely impacted. Such damage liability from hazardous substance sites has been broadly interpreted by the courts under the Superfund legislation to include environmental restoration. Reasonable costs of restoration and lost use can be assessed against the PRPs. Total costs of using hazardous materials should include disposal costs made in a proper manner. Just because these costs are difficult to estimate is not an excuse to ignore them. Making management decisions without including hazardous waste disposal costs can lead to decisions based on incomplete cost data.(4)

By 1994, five corporations, Chevron Chemicals, E.I. Du Pont De Nemours, Exxon, FMC, and General Motors, were among the best in reporting estimated costs and liabilities in their annual reports for remediation sites; often outlining the environmental regulations to stockholders and explaining the corporate actions to remedy the situation.

Not only are corporations questioning the reportability of potential remediation, their CPAs are not in agreement on reporting requirements. In a 1995 survey of CPA firms, 37% of CPA respondents reported that disclosure should be made when a contingent liability is probable but not yet estimable.(5) Thirty-two percent believed that "disclosure is required when the liability becomes reasonably possible." Actually both situations require disclosure. On the income statement, the survey found that 43% of the CPA respondents considered environmental cleanup costs as an ordinary operating expense while 35% would .assign them to an extraordinary expense category and 18% would consider the costs as non-operating expenses. Four percent were undecided. Reasonable comparability of financial statements was very difficult.

New Proposed Remediation Statement of Position

In February 1997, the AICPA clarified the situation by issuing a Statement of Position on Environmental Remediation Liabilities. The statement does not provide guidance on current pollution control accounting or future hazardous waste site restoration; its focus is on site remediation. The statement applies only to operations in the United States. Its provisions include:

* Benchmarks for remediation liabilities recognition;

* Accruals (obligations that exist because of past activities) for environmental liabilities that include:

(1) Incremental direct costs of the remediation effort,

(2) Costs of direct employee compensation and benefits involving the remediation effort.

* Measurement of the liability that includes:

(1) Entities' allocable share of the liability for a specific site.

(2) Entities' share of site costs not paid by other responsible parties or the government.

* Measurement of the liability should be based on existing laws and technology.

* Measurement of the liability should be based on the reporting entity's cost estimates for all remediation effort and will be based on discounted cash flow concepts.

* Financial statement disclosure guidance for remediation liabilities and costs.

The effective date is December 15, 1996.

The statement of position (SOP) answered a perceived need by the AICPA for further accounting and reporting guidance for hazardous site remediation liabilities and costs. Required and recommended reporting criteria from the SOP can be summarized as:

1. Company identified as Potentially Responsible Party (PRP) for remediation of site;

2. Potential liability condition recognized;

3. Liability estimated amount disclosed;

4. Reliability of liability estimates discussed;

5. Comments on the applicability of current laws;

6. Existence of remedial action plan;

7. Whether the loss is deemed probable.

The inclusion of these seven proposed reporting criteria in corporate financial annual reports is an indication of the level of financial environmental waste site remediation reporting. The environmental remediation financial reporting of the five selected corporations had already reached the suggested acceptable level of the Statement of Position. Other corporations with sites on the Superfund list have not made the improvements suggested in the Statement of Position. Their reporting leaves much to be desired in the area of corporate environmental remediation exposure. Unfortunately, this may not change unless some public insistence or penalties for non-adherence is instituted.

Large Publicly-Held Corporate Superfund Sites

In 1995, the EPA reported 1,083 sites in the General (private sector) Superfund section of the NPL list and 155 in the federal facilities section. Of the 1,083 privately owned sites, 40 Superfund sites, at least partially owned by recognizable national corporations, have received EPA estimates of the capital expenditures required for cleanup.(6) Of these 40 sites, 17 corporations, representing 20 sites, were selected for further study. These were chosen because they were both principal PRP corporations with EPA estimated multimillion dollar potential remediation liability and they were included on the 1994 annual report Compact Disclosure data file. Five of these companies have significantly improved their financial environmental reporting. They are Chevron Chemicals, E.I. Du Pont De Nemours, Exxon, FMC, and General Motors. Each started with a minimum mention of environmental remediation exposure by stating that the environmental financial impact would not materially affect the corporate financial position, costs cannot be reasonably estimated, or the ultimate liability of the corporation could not be determined. However, these five have become models of reporting as more distinct methods were derived.

EPA estimated capital expenditures to eliminate the hazardous waste site condition as the one-time amount required at initial site cleanup. This does not include operations and maintenance monies required to maintain the site in a restored condition. For the 17 corporations and 20 sample Superfund sites, the capital expenditure amounts are listed in Table 1.

Environmental Disclosure

'Environmental disclosure in the financial reports was very uneven before the EPA began to publish estimates of Superfund cleanup capital costs for specific sites. In the 1994 financial reports, environmental disclosures in most cases began to reflect the national interest in hazardous waste site remediation. Footnote disclosures in the selected corporation's annual reports increased both in number and inclusiveness. An analysis of the annual reports for 1991 and 1994 was made with the value of one assigned for specific SOP inclusion (Yes) and a value of zero (No) for specific SOP exclusion. A comparison of the 1994 annual report disclosures to earlier disclosures on environmental remediation based on the seven SOP environmental reporting criteria is summarized in Table 3.

Table 3 contains the analysis of the seven SOP criteria for the two years (1991 and 1994) as a simple arithmetic average of the "Yes" and [TABULAR DATA FOR TABLE 1 OMITTED] "No" values.


Based on the required and recommended environmental remediation financial reporting criteria in the proposed SOP, designated PRP corporations with specified hazardous waste capital cost sites estimated by the EPA were analyzed for environmental annual report coverage (Table 1). The seven reporting criteria developed from the SOP showed that thirteen of the sample corporations improved their environmental reporting in their annual financial reports, one corporation maintained their near-perfect reporting score, one corporation reported no significant environmental information, and two decreased their reporting quality (Table 2).

Of the specific criteria, all seven environmental reporting criteria improved between 1991 and 1994 in the sample corporations (Table 3). Although the reporting quality was not uniform throughout all sample corporations, some improvements were noted throughout.
Table 2

Numerical Value Changes in Environmental Remediation Reporting

 1991 1994


Score 7 7

Ave. All

Corp. 1.9 5.4

Abex Inc. 2 6
Amer Cyan 3 7
Chevron 1 7
DuPont 1 7
Exxon 0 7
FMC 1 7
Gen Motors 1 7
Koppers 2 0
Mark IV 0 0
NL Ind 2 6
Occid Petrol 4 7
Pacificorp 0 5
Reyn Metals 4 7
SCE Corp 2 7
Teledyne 1 0
United Tech 6 6
Westingh 2 6

Note: The 1991 data includes three annual reports of other than 1991
but earlier than the 1994 reports. This was due to a lack of
reported annual reports for 1991 in the research data base.

Present financial reporting provides a variety of varying quality waste site remediation liability recognition. Adoption of the Statement of Position should provide more uniform environmental remediation liability information for the annual report user than presently available. Corporate disclosure of environmental financial remediation information is definitely improving, but the pressure for all corporations to follow the procedures is one that is likely to come from increased government regulation unless the individual firms can police themselves and positively respond to the reporting situation.
Table 3

SOP Environmental Reporting Criteria Comparison

 1991 1994

Ideal Reporting Response Score 1.0 1.0

1. Company Identified As PRP For Remediation of Site 0.41 0.82
2. Potential Liability Condition Recognized 0.53 0.82
3. Liability Estimated Amount Disclosed 0.24 0.76
4. Reliability of Liability Estimates Discussed 0.18 0.82
5. Comments on The Applicability Of Current Laws 0.18 0.82
6. Existence of Remedial Action Plan 0.12 0.53
7. Is The Loss Deemed Probable 0.24 0.82


1. Lavelle, M. "Superfund Studies Begin to Fill Hole in Data-Dry Field." Business Watch: The National Law Journal (1992): pp. 19-20.

2. Verrecchia, R. E. "Discretionary Disclosure." Journal of Accounting and Economics, Vol. 5 (1983): pp. 179-194.

3. "Corporations Pressed For SEC Disclosure." Risk Management, July (1994): p. 15.

4. Willits, S. D. And Giuntini, R. "Helping Your Company 'Go Green'." Management Accounting, February (1994): pp. 43-47.

5. Steadman, M. E., Green, R. F., and Zimmerer, T. W. "Advising Your Clients About Environmental Accounting Issues." Managerial Auditing Journal Vol. 10, No. 8 (1995): pp. 52-55.

6. Environmental Protection Agency. "National Priorities List for Uncontrolled Hazardous Waste Sites; Rules." Part V. April 25, 1995. Federal Register, Vol. 60, No. 79.
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Author:Schmidt, Richard J.
Publication:The National Public Accountant
Date:Jul 1, 1997
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