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The environmental audit.

The Environmental Audit

The Wall Street rhetoric of the late 1980s concerned enhancing shareholder value. Little was said, however, about the mounting environmental liabilities being incurred by industry and how this might impact shareholder value. Moreover, the deal frenzy of the past five years overshadowed the ground swell taking place in the public's attitude toward environmental protection and the mounting efforts by governments around the world to implement more comprehensive and expensive pollution avoidance and control requirements.

Some less enlightened corporations felt that they were being blindsided. In reality, they simply failed to see the growing erosion of the public's trust in industry's ability to adequately control its effects on the environment. In turn, some of these corporations learned fisthand how environmental liabilities can adversely impact their business assets.

In the aftermath of the Bhopal disaster in India and the Exxon Valdez incident in Alaska, the pressure on industry to assume greater responsibility for its activities escalated in some dramatic ways. Today, shareholder initiatives to place environmental proposals to a vote at annual meetings are becoming more common. This year alone, over 40 Fortune 500 companies will be faced with accepting or rejecting the Valdez Principles at their annual shareholder meetings.

Corporate officers and directors are being pounded not only by the public but also by enforcement agencies that are increasingly seeking to impose criminal sanctions against corporate polluters, including officers and other individuals. As one enforcement official recently stated, "One criminal prosecution is worth 1,000 enforcement orders." Environmental regulations around the world are also beginning to specifically identify corporate officers and directors as having direct responsibility for environmental compliance, with ignorance not being an acceptable defense. As one management consultant aptly stated, "The new rule for directors and officers concerning environmental hazards is caveat diribetor, or let the director beware."

A Total Environmental

Risk-Management System

The more proactive companies accurately judged the mounting governmental and public attention being focused on environmental protection and, in response, began placing greater emphasis on environmental risk management as an effective tool to evaluate, monitor, and control the environmental externalities of its activities. Many of these companies extended the concept beyond plant operations to consideration of the entire product life cycle, from raw material supplies to product packaging and ultimate disposal by the end user.

Environmental auditing is a management tool for taking a systematic and objective inventory of a company's environmental assets and liabilities. By monitoring the adequacy and effectiveness of a company's management control systems and equipment to achieve compliance with company environmental policies and regulatory requirements, auditing has been shown to be an effective technique to reduce the company's overall exposure to environmental risks. In some ways, the environmental audit serves as a complement to the more formal financial and planning systems found in most corporations.

Auditing should not be viewed as a substitute for sound, day-to-day environmental management practices, however. Instead, auditing helps to reinforce such practices and goes hand in hand with other, related corporate programs which together form a total environmental management system. Other components include activities discussed in the accompanying box.

Integrating environmental considerations into the total range of corporate management, planning, control, and evaluation systems makes long-term economic sense. It also provides an internal system of checks and balances so that important issues do not fall through the cracks.

Four Characteristics Of a Good Audit Program

There is no "right" way to conduct environmental audits because corporate organizations and cultures differ as to their internal resources and commitment. However, there are certain characteristics that are shared by successful audit programs, including: * Top Management Support: Senior management must actively and visibly support the program, including providing the financial and human resources to implement an auditing program and committing to correcting identified problems expeditiously. * Independence and Objectivity of the Auditing Team: The auditing team should be composed of competent professionals who are objective and, at the same time, sensitive to the organizational culture. Members of the team normally should be free of any organizational constraints that may compromise their objectivity. The audit function in many corporations resides outside of the traditional plant management structure, often reporting directly to corporate management. * Well Organized: Audits should be performed in a systematic manner that is consistently applied from plant to plant. Objective and measurable criteria are used in evaluating conformance with regulatory requirements and corporate environmental goals and policies. Formal procedures are established for planning and implementing each of the three phases of the audit: pre-audit activities, the audit itself, and post-audit activities. The actual audit often is conducted using formal protocols which are specific to the facility's location and operational activities and the various environmental regulations that apply. * Constructive Feedback: Audit findings are not intended to serve as finger pointing exercises but rather to provide the basis for continually improving plant operations and corporate management systems. Audit teams should encourage a sense of participation by facility management by not only discussing the audit program with them beforehand but also conducting a pre-exit interview where audit findings are presented and discussed with facility management.

A corporate auditing program must be carefully planned and implemented, with positive encouragement and commitment from the top and acceptance from below. A properly developed auditing program can enhance a company's external image, increase employee awareness, and exert a positive influence on a company's health, safety, and environmental performance.

Audits Are Not Risk-Free

Implementing an environmental auditing program is not risk-free, particularly when serious violations are uncovered. However, it is generally agreed that the benefits and the potential liability avoidance costs outweigh the perceived risks - even in the U.S., where there is a vigorous enforcement program, an abundance of active public interest groups, and an aggressive plaintiff's bar.

There are ways in which a company can minimize any perceived risks, however. Paramount among these is a commitment to immediately establish a plan to correct problems found and ensure that the plan is satisfactorily implemented. The U.S. Environmental Protection Agency has been encouraging industry to use audits as a way to improve compliance and to, perhaps, keep ahead of the game. The agency would be sending the wrong message to the regulated community if it then went on "fishing expiditions" for potentially incriminating audit reports.

Some companies implement auditing programs through legal counsel in order to provide a further level of protection against possible public access to confidential auditing documents. Other companies believe that the corporate commitment to auditing is compromised when the function is hidden within or controlled by attorneys. There is some truth in both approaches. An alternative strategy would be to maintain the audit function outside of the direct control of a company's legal department but involve the company attorneys in the development of a corporate audit program and in the training of auditors, particularly in the pitfalls associated with preparing audit reports and recommendations.

Audits Outside

Of the U.S.

After Union Carbide's Bhopal incident, U.S. multinationals began to seriously question whether they could maintain a double standard of environmental protection - one for their U.S. facilities and the other for their foreign operations.

The hardliners argued that outside of the U.S., environmental regulations and enforcement were either ill-defined, less substantial than in the U.S., or both. Moreover, treating all of a company's plants equally was going to cost a great deal of money.

The proactive multinationals took the opposite view, expressing a need to go beyond existing country regulations and establishing a common operating standard for all facilities, regardless of location or level of sophistication of the prevailing regulations.

There is no question that environmental regulations and enforcement outside of the U.S. are less developed. However, changes are rapidly taking place. In Europe, for instance, the European Community (EC) currently is contemplating the proposed EC directive on Civil Liability for Damage Caused by Waste. This proposals provides for joint, several, and strict liability for environmental damage created as a result of hazardous waste problems.

Strict, or no-fault, liability for environmental problems already exists in many European countries, including France, Germany, the Netherlands, Spain, and Greece. The EC also is considering whether to issue a draft proposal making periodic environmental audits mandatory for certain industrial activities - and the current thinking of the EC is that such audits should be made publicly available.

Finally, the EC passed a directive last year on the Freedom of Access to Information on the Environment. This will provide environmental activist groups and the public at large with increasing opportunities to expose the environmental problems of industry.

There are a number of complicating problems that make it more difficult to conduct U.S.-style environmental audits at international locations. Obtaining regulations in English is nearly impossible in most countries. Keeping information current is equally difficult, particularly given the rapid changes in legislation now taking place. Moreover, most international regulations are goal-oriented, with little to no mention of expected performance standards and quantitative limitations. The latter largely is left to the discretion of regional or local authorities to develop or negotiate.

As a result, many multinational corporations do not conduct regulatory-specific environmental audits outside of the U.S. but rather focus on good management practices, which often are modeled after their U.S. policies and procedures.

Finally, some companies do not audit all facilities but rather focus on a representative number of them to see whether there are any systematic problems that may affect a larger number of plants. This procedure can reduce the number of plants subject to a formal audit but has the disadvantage of possibly missing major and expensive problems that may be unique to a particular plant or group of facilities not considered as part of the sample. Similarly, many companies phase their audit programs so that those facilities considered most critical to the business or having the highest environmental risks are audited first and on a more frequent basis than other, less sensitive locations.

Every Case Is Different

Companies vary tremendously in their development and organization of auditing programs. Those with extensive staff resources and capabilities develop and implement corporate audit programs entirely within their organization, with no outside assistance. At the other end of the spectrum, some companies rely wholly on outside consultants. Still other companies use a combination of internal and external resources, sometimes using a consultant to develop a corporate program and then training company employees to implement it. Another variation is the periodic use of consultants as a "reality check" - pertaining either to the overall program itself or to specific plant audits.

There are benefits and costs to each of these approaches. Ultimately, companies should strive to conduct audits themselves, for they know their facilities, corporate culture, and operating procedures best. However, the judicious use of external consultants has its benefits, particularly when there may be questions concerning organizational objectivity and the third-party comfort that good consultants often can provide.

Getting the Most

From Your Consultant

As one environmental attorney once said, "There are three ways to distinguish good consultants from bad ones. Unfortunately, nobody knows what they are."

Selecting a good environmental consultant is not much different than finding a good attorney or financial auditor. While the firm's reputation can be important, your ability to obtain quality service tends to be more related to the individuals involved on your behalf and their respective ability to understand your needs and apply the appropriate resources to resolve your problem in a timely and cost-effective manner. The good environmental consultant will exhibit a flexibility of approach and method, and not just resort to "off-the-shelf" solutions. While price may be important to you, don't select a consultant solely on costs. As with most professional services, you get what you pay for.

One major problem in selecting an environmental consultant, as opposed to an attorney or a financial adviser, is the greater level of unfamiliarity that you may have with the subject matter. A good environmental consultant will be able to cut through the acronyms and jargon and clearly explain his purpose and mission in terms that you understand. Try reading some sample reports to see whether the consultant communicates in writing as well as he most likely markets his services.

One final comment about environmental consultants concerns professional liability matters. As with most professional services, liability has become an increasingly important issue to corporations and consulting firms alike. With the escalation of litigation and the parallel increases in premiums for professional liability insurance, often referred to as errors and omissions policies, environmental consultants are wary about clients who seek to use them as an inexpensive form of insurance. Most environmental consulting firms cannot obtain adequate levels of professional liability coverage and most opt to self-insure instead. This suggests the use of larger and better capitalized consulting organizations, particularly when issues of strategic importance are involved or where the financial risks are particularly high.

A good client-consultant relationship is one that is built upon mutual confidence and trust. Continually switching consultants in an effort to get the best price possible is unlikely to achieve such a relationship and ultimately will be counterproductive. This is not to say that you should not monitor the performance of your consultant, but it does suggest that quality relationship-building takes time and effort on the part of both consultant and client.

Halley I. Moriyama is a Vice President of ENSR Consulting & Engineering, where he is responsible for the Acton, Mass.-based company's environmental due diligence and audit practices worldwide. He has served over the past 17 years as an environmental consultant to major industrial, commercial, and financial clients throughout the United States and Europe, and specializes in providing advice on the environmental liabilities associated with mergers and acquisitions.
COPYRIGHT 1991 Directors and Boards
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Copyright 1991 Gale, Cengage Learning. All rights reserved.

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Title Annotation:Chairman's Agenda: Managing Environmental Responsibility; includes related article
Author:Moriyama, Halley I.
Publication:Directors & Boards
Date:Jun 22, 1991
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