ENVIRONMENTAL AUDIT



Environmental audits are reviews of a company's operations and processes for the purpose of assessing compliance with environmental rules and regulations. Environmental audits cover a broad spectrum of business activities and areas, including buildings and building sites; activities and procedures; industrial and commercial developments; and engineering hazard and operabilities studies. They can range from legally mandated reviews of plant safety or emissions to voluntary inspections of environmental practices.

Environmental audits are perhaps best known for their use in conjunction with real estate transactions. During the 1970s and 1980s, the passage of environmental protection laws and Superfund legislation created an enormous appetite for environmental audits for real estate purchases. Prospective purchasers of property increasingly conducted audits to ascertain whether there were hidden environmental problems or issues connected with the property that might require future expenditures. These real estate audits remain popular today. They are intended not only to identify environmental problems—such as chemical contamination—resulting from current or past practices, but also to quantify the costs associated with treating the problems so that the site meets local, state, and federal environmental guidelines. If an environmental audit does turn up issues of concern, the prospective buyer has the option of walking away from the purchase or asking for compensation from the seller toward future regulatory penalties or cleanup costs.

The scope and quality of other modern environmental audits vary dramatically from company to company. Some firms engage only in periodic or onetime inspections of major aspects of facility operations, or limit their compliance efforts to "paper reviews" of programs without engaging in physical inspections. Other companies, on the other hand, motivated by a sense of environmental stewardship and/or concerns about legal penalties associated with noncompliance, mandate far more detailed audits. Whatever your company's historical attitude toward this issue, the Environmental Protection Agency (EPA) states that an effective environmental auditing system operating in today's business world should include the following elements:

EXISTING AUDIT AND DISCLOSURE REQUIREMENTS

Many corporate studies on environmental and safety issues, whether conducted internally (by employees) or externally (by outside consultants/experts under contract), must be disclosed to appropriate government agencies and the general public. For instance, companies are required to submit permit applications, emission reports, and other information to government agencies under the Clean Air Act, the Clean Water Act, and other environmental laws. The Federal Community Right to Know Act is another law that places specific obligations on companies. Under this law, firms are obliged to disclose the size, nature, and identity of storage and releases of toxic substances.

Companies also often engage in a wide array of other environmental and safety evaluations to assess cost and level of compliance. But as Sanford Lewis noted in New Directions, the legal status of these types of audits "reside in a legal 'gray area."' Lewis cites compliance checklists, technical reviews, engineering studies, safety and health impact analyses, personnel performance reviews, maps and figures, sampling data, statistical and financial analyses, and various other documents and data containing information on environmental compliance issues as examples of this type of information. "To the extent that these documents are not specifically identified in a law or regulation, the ability of government and the public to secure access to these documents is often legally ambiguous."

ENVIRONMENTAL SELF-AUDITS AND PUBLIC DISCLOSURE

Many companies have embraced voluntary environmental audits, commonly known as self-audits, as a valuable business resource. Consultants and experts agree that the practice can be of enormous benefit to enterprises in all types of industries, for it addresses so many facets of a company's operations. For example, Barbara Ceizler Silver, author of Environmental Self-Audit for Small Businesses, described the self-audit as a valuable "diagnostic tool" that can be used by companies seeking to identify and address compliance problems relating to air, water, land use, solid waste, and hazardous materials prior to submitting formal permit applications or other business processes.

The practice of voluntarily checking compliance with environmental regulations through the practice of self-auditing has garnered considerable support from state lawmakers as well. As of 2000, environmental self-audits receive significant legal protections in 26 states. The body of law in these states maintain that companies can voluntarily test for violations and correct all previously undetected problems without legal penalty. Companies that report violations avoid financial penalties and receive additional time to rectify problems. Most significant of all, the results of self-audit tests and programs in these states receive significant legal protections from public disclosure.

These confidentiality privileges have been heavily criticized in some quarters. The Environmental Protection Agency (EPA), environmental groups, and other observers charge that environmental self-audit laws, when buttressed with secrecy protections, allow polluters to violate environmental statutes without suffering any adverse consequences. "Instead of promoting environmental excellence and the public's Right to Know, the new rights will encourage companies to pick and choose among pollution violations that they will rectify, and thus will undermine environmental progress and enforcement," claimed Lewis.

Detractors of secret audit privileges also contend that decreased visibility of environmental practices and decisions will produce increased "corner-cutting" in the realms of health and safety. "It is unclear why we should believe that polluters are likely to develop environmental consciences if legislation is passed allowing them to shield potentially damaging evidence contained in environmental audits," stated David Ronald in Chemical Waste Litigation Reporter. "[Only] a business with something to hide would benefit from a law that turns data gathered from environmental audits into secret information."

Supporters of increased audit secrecy privileges, however, claim that increased confidentiality would actually encourage greater stewardship of the environment. Advocates say that if businesses do not have to publicly disclose information found in internal compliance studies—which might otherwise be used by as "roadmaps" by litigants in civil or criminal cases—the company's owners and managers will be more likely to engage in thorough studies of their true level of compliance with environmental regulations.

Advocates also note that state courts are still permitted to privately review environmental self-audit documents in cases where companies have been charged with willful violations of environmental regulations or refusal to change practices to bring themselves into compliance. If the court determines that the company has failed with good faith efforts, the self-audit protection is waived and the company is subject to legal penalties. Proponents also point out that protections associated with self-audits do not extend to other environmental compliance testing and paperwork required by the Environmental Protection Agency and other government entities.

For its part, the EPA has adopted policies to encourage companies to conduct environmental self-audits, and it has stipulated that it does not request access to audit information except in extreme circumstances, such as when the audit contains the only available evidence of a "knowing and willful" criminal violation of environmental or safety law. It has also historically opposed efforts to expand audit secrecy privileges, which continue to be a source of controversy in business and conservation circles.

Meanwhile, most business consultants and observers urge companies to utilize environmental self-audits, whatever level of confidentiality treatment they receive. David Ronald, for instance, cited the following valuable incentives for companies to conduct environmental audits:

Finally, Ronald noted that "a credible [environmental audit] program may make the difference in both retaining the loyalty of the consumer at the retail level and in soliciting valuable contracts for corporations that have made environmental considerations part of their purchasing and contracting practices."

FURTHER READING:

Environmental Self-Audit for Small Businesses: A Quick and Easy Guide to Environmental Compliance. New York Department of Environmental Conservation, Empire State Development, March 1998.

Geltman, Elizabeth Glass. A Complete Guide to Environmental Audits. ABA, 1997.

Lewis, Sanford. "Corporate Environmental Audits and the Public's Right to Know." New Directions. 1995.

Powell, Frona M. "Recent EPA Enforcement Actions: The Environmental Audit." Real Estate Law Journal. Spring 1998.

Power, Michael. "Expertise and the Construction of Relevance: Accountants and Environmental Audits." Accounting, Organizations, and Society. February 1997.

Ronald, David. "The Case Against an Environmental Audit Privilege." Chemical Waste Litigation Reporter. January 1995.

Strauss, Stephen. "The Haze Around Environmental Audits." Technology Review. April 1992.

Ward, Angela. "Coming Clean About It." Acquisitions Monthly. December 1997.



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