ENVIRONMENTAL ACCOUNTING AND AUDITING
 L. Murphy Smith, D.B.A., CPA 

In some cases in years past, environmental issues were virtually ignored by both corporations and individuals. Hazardous waste and other such items were considered a cost of a growing economy. Times have changed as people now realize the effects of waste products that potentially could damage parts of the environment. Most people recognize that preserving clean air, water, and land is more important than lower-cost products for consumers or higher profits for business firms. Many people are willing to pay more for a product that is environmentally friendly. Many companies are now interested in being "green," as many investors place a high value on environmental responsibility. Regulations have been developed to govern "waste management" and to ensure that corporations are environmentally conscious. Some corporations have had to pay to clean up their past environmentally "un?friendly" behavior. However, most firms have established good reputations as environmentally “friendly.”

Federal regulations that govern the treatment of environmental protection and remediation have grown extensive. Regulations pertaining to environmental protection include the following: (1) Resource Conservation and Recovery Act of 1976 (RCRA), (2) The Clean Air Act, (3) The Clean Water Act, (4) Emergency Planning and Community Right to Know Act (EPCRA), and (5) The Toxic Substances Control Act.

Regarding remediation, the regulations include the following: (1) Comprehensive Environmental Response, Compensation, and Liability Act (CERCLA, also known as Superfund), (2) Superfund Amendments and Reauthorization Act (SARA), and (3) Resource Conservation and Recovery Act of 1976 (RCRA).

Industry accountants must ensure that their firms are in compliance with accounting standards, including those pertaining to environmental issues. Several rules governing environmental disclosures have been developed in recent years. At the highest level of generally accepted accounting principles (GAAP) are the Statements of Financial Accounting Standards (SFAS) which are issued by the Financial Accounting Standards Board (FASB). The FASB Emerging Issues Task Force (EITF) was formed in July 1984 to assist the FASB identify emerging issues affecting financial reporting and resolve problems in implementing authoritative pronouncements. A consensus position reached by the EITF is GAAP that must be followed unless it conflicts with a FASB Statement, Interpretation or Technical Bulletin, APB Opinion, Accounting Research Bulletin, SOP, or AICPA Industry Audit and Accounting Guide. EITF consensus positions generally are effective upon issuance. Statements of Position (SOP) are issued by the Accounting Standards Executive Committee of the American Institute of CPAs (AICPA). Some of the key accounting pronouncements that regard environmental reporting are the following:

(1) SFAS No. 5 states under "Accounting for Contingencies" that a liability should be recognized in the financial statements if a loss is probable and the amount is estimable. If the loss amount is not estimable which is often the case, the contingency must be described in the footnotes to the financial statements.

(2) ETIF Issue No. 90-8 required that all environmental contamination costs be expensed as incurred unless costs extend the life or increase capacity of the property, costs mitigate or prevent future environmental contamination (that would otherwise occur), or costs are incurred to prepare a property for sale.

(3) ETIF Issue No. 93-5 concluded that an environmental liability must be evaluated independently from any potential claim for recovery. This recovery claim can reduce the liability only if it is probable. Securities Exchange Commission (SEC) standards state that it is appropriate to net the asset and liability if the asset's recovery is recognized as probable. The asset and liability should be disclosed in the notes to the financial statements. The SEC approves discounting of liabilities to their present value. The Management Discussion and Analysis section of the annual report requires "forward looking" disclosures. The SEC in Interpretation No.14 states that registrants must take reasonable steps to identify the minimum end of the loss range with a higher priority on studying sites where a known problem exists. Registrants should assess the probability of an environmental obligation and any insurance recovery independently. Post-remediation monitoring approaches have been developed.

(4) AICPA Statement of Position (SOP) 96-1, "Environmental Remediation Liabilities," covers auditing and accounting topics dealing with environmental issues. It details the responsibilities of corporations involved in environmental cleanup, and responsibilities of corporations to avoid environmental destruction. SOP 96?1 is a comprehensive environmental issues guide.

U.S. publicly traded companies are required to be audited by an independent auditor (CPA firm) each year. The audited financial statements and audit report are filed with the Securities Exchange Commission. With regard to environmental issues, the auditor must first identify environmental risks and second, must check for compliance with related accounting standards.

The Financial Accounting Statements Board (FASB), the American Institute of Certified Public Accountants (AICPA), and the Securities and Exchange Commission (SEC) are addressing financial reporting questions associated with environmental costs and obligations. Their deliberations will have an impact on environmental reporting, accounting, and auditing. During the past two decades, corporations have significantly increased their voluntary disclosures of information about environmental matters and performance.  A large number of companies have adopted environmental guidelines expecting to gain valuable public relations dividends and to attract more investment opportunities.

Protecting the environment is widely regarded as a God-given responsibility of mankind. People must have clean air, water, and soil to survive. Business firms that do their part in protecting the environment benefit themselves and all of society. Additional information about environmental accounting is available at the author’s website (http://acct.tamu.edu/smith/env_acct/envmain.htm).