Environmental Disclosure: Analysis and Policy

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2. Environmental Disclosure. What are the rules?What are the issues?What are the solutions?. 3. Financial Accounting Standard Board (FASB") Pronouncements . SFAS No. 5 Contingent LiabilitiesPotential loss must be probable" and can be reasonably estimated"AICPA SOP 96-1 Very narrow (ap

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Environmental Disclosure: Analysis and Policy

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1. Environmental Disclosure: Analysis and Policy Bruce-Sean Reshen MGP Environmental Partners LLC September 15, 2004

2. 2 Environmental Disclosure What are the rules? What are the issues? What are the solutions?

3. 3 Financial Accounting Standard Board (“FASB”) Pronouncements SFAS No. 5 – Contingent Liabilities Potential loss must be “probable” and can be “reasonably estimated” AICPA SOP 96-1 Very narrow (applies only to current costs incurred for mandated cleanups). Sets loose standards for estimating and reporting environmental liabilities. Superceded by SFAS No. 143 and SFAS No. 144

4. 4 FASB Pronouncements SFAS No. 143 – Accounting for Conditional Asset Retirement Obligations (including recent interpretation exposure draft-08/04): Clarifies that an entity is required to currently recognize a liability for the fair market value of an asset retirement obligation that is conditional on a future event Uncertainty of timing affects measurement not recognition of liability

5. 5 FASB Pronouncements SFAS No. 144 – Accounting for Impairment or Disposal of Long-Lived Assets Impairment recognition required if carrying value of asset is not recoverable from its cash flows Measurement of impairment loss is the difference between the carrying value of the asset and its fair market value

6. 6 Major Accounting Rules Existing SEC Rules Who Must Disclose? What Must be Disclosed? Official Pronouncements SEC Regulation S-K (Forms 10K & 10Q) Section 101 - Any “Material” Effects Section 103 – “Material” Legal Proceedings Section 303 - Management Discussion and Analysis (“MD&A”) Disclosures – Subject to “Reasonably Likely” Standard FASB: SFAS No. 5 – Contingent Liabilities SFAS No. 121 – Long-Lived Assets SOP 96-1 - Environmental Liabilities

7. 7 Major Accounting Rules Public Company Accounting Oversight Board (“PCAOB”) set up by Sarbanes-Oxley Law (“SOX”) FASB is now advisory to the PCAOB Section 302 & Certification by CEO & CFO Section 404 Auditing Requirements Direct Oversight by Audit Committee

8. 8 Widespread Environmental Liability Reporting Deficiencies Price Waterhouse LLP Report on Environmental Liability Disclosure (1992) GAO Report on Insurance Industry Disclosure Problems (1993) Tellus Institute Survey of Financial Analysis by U.S. Manufacturing Firms (1995) U.S. EPA Study of Environmental Compliance Reporting (1998) SEC Survey of Fortune 500 Companies (2002)

9. 9 Consequences of Environmental Nondisclosures Solutia, Inc. (Monsanto spin-off) – 60% drop in stock value and multiple lawsuits for dumping hazardous pollutant and covering up behavior U.S. Liquids, Inc. – 58% drop in stock value and shareholder suit for illegally dumping hazardous waste and falsifying records Lee Pharmaceuticals, Inc. – SEC enforcement proceeding and sanctions for not reporting Superfund liability Viacom, Inc. – SEC complaint filed by public interest organizations for not reporting Superfund liability

10. 10 Auditing Rules The Search for Truth: GAAS Materiality Professional Responsibilities Use of Outside Experts

11. 11 Accounting & Auditing Issues Only Known Environmental Liabilities Must Be Disclosed (“Don’t Ask, Don’t Tell”) “Materiality” is a Vague Concept –Aggregation Not Required by GAAP Qualifications for Auditing Environmental Liabilities – Accounting Expertise vs. Environmental Expertise Use of Outside Experts (“If Only We Knew”) Estimation of Environmental Liabilities (Misapplication of SOP 96-1)

12. 12 Life after SOX Establishment of Public Company Oversight Board Ethics Standards for Attorneys and Auditors Development and Maintenance of Disclosure Controls and Procedures Regular Evaluation of Disclosure Controls and Procedures Certifications from Company Heads (CEO & CFO) and Audit Firm “Real Time” Disclosures Minimum 7 Year Document Retention of Audit Work Papers Quality Reviews of Audit Firms Stringent Penalties

13. 13 Impact of SOX Auditors Provision of non-audit services (e.g. bookkeeping, appraisals, etc.) contemporaneously with audit services is unlawful Prohibits “improper” professional conduct & imposes severe penalties Attorneys New standards of qualifications & experience for attorneys practicing or appearing before the SEC Mandated “up the ladder” reporting of material violations

14. 14 Impact of SOX In addition to GAAP requirements, the “Fair Presentation” test under Section 302 requires: “…the inclusion of any additional disclosure necessary to provide investors with a materially accurate and complete picture of an issuer’s financial condition, results of operations and cash flows.”

15. 15 Potential Accounting and Auditing Solutions for Environmental Liabilities A Requirement for an Affirmative Responsibility to Evaluate Environmental Status of All Land Materiality Should Be Defined as an Aggregate Concept for Each Class of Assets Requirement of Environmental Expertise for Auditors of Financial Statements Standardizing Requirements for Environmental Disclosure (ASTM Standards)

16. 16 Impact of SOX On Real Estate Increased Financial Statement Disclosure of Environmental Liabilities Private Sector Need to “Clean Up” Financial Statements * Role of Insurance Products * Sale of Contaminated Properties Need for Neutral Third Party Long Term Stewardship of Contaminated Properties

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