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Identification, Documentation and Reporting of Environmental Liabilities in Light of the Sarbanes-Oxley Act of 2002

David E. Polter
Director of Compliance and Regulatory Services ARCADIS

For the last 20 years, the Securities and Exchange Commission has required publicly traded companies to identify and analyze their environmental liabilities, and disclose them where such liabilities are deemed "material" to the financial status of the organization. Such liabilities include environmental clean up and remediation costs, actual and threatened environmental litigation costs, and those expenditures expected from changing environmental and pollution control regulations. Organizations have established varying processes to identify, calculate and document these environmental liabilities. Following on the heels of the recent spate of corporate accounting scandals and increased calls for reform in the manner of corporate governance, Congress has adopted new legislation (the Sarbanes-Oxley Act of 2002) and the SEC is developing new regulations that will require the establishment of enhanced controls and procedures to insure the adequacy of financial disclosures and reporting. The Sarbanes-Oxley Act requires corporate CEOs and CFOs to (separately) file quarterly and annual certifications with their SEC filings, that among other things, certify to the establishment and maintenance of a system of disclosure controls and procedures designed to ensure timely and effective disclosures. CEOs and CFOs must also certify that the effectiveness of these controls on disclosures are evaluated within 90-days preceding the reports.

These new developments in conjunction with the adoption of new standards for estimating and disclosing environmental liabilities (published by the American Society of Testing and Materials (ASTM) in March of 2002) and a new Federal Accounting Standards Board (FASB) Statement No. 143 Accounting for Asset Retirement Obligations has caused environmental managers, CFOs and CEOs to revisit the practices and procedures used to identify, calculate, document and report environmental liabilities. In the conduct of these reviews, many companies have found inadequate estimating and documentation practices. Particularly in those industries that have seen dramatic consolidation through multiple acquisitions (such as the petroleum and petrochemical industries) acquiring firms are discovering the need to revisit or conduct anew, the inventorying, analysis and documentation of such environmental liabilities associated with newly acquired assets. This paper will summarize the various drivers behind these environmental liability disclosure requirements with particular focus on the recent developments. Additionally, this paper will discuss leading edge approaches, methodologies and tools that companies are using to satisfy these requirements. Recent case histories will be offered describing a step-wise approach to meeting these requirements.