The Greening of GAAP

Accordingly, says Little, companies continued to report lowball estimates. Among other studies, he points to a warning that the SEC's Division of Corporate Finance aimed at Fortune 500 companies. In December 2001, in the wake of the Enron scandal, the commission cautioned a number of oil, gas, mining, and manufacturing companies to properly disclosing environmental and product liabilities. The SEC didn't name the companies or provide a count, only stating that "many companies did not provide adequate disclosure" and that "companies could improve their disclosures required by SAB 92."

Possible Patches
In August 2002, the Rose Foundation — backed by SRI funds representing more than $1 trillion in assets — petitioned the SEC to adopt rules based on two voluntary best-practice standards proposed by the American Society of Testing and Materials (ASTM). The foundation hoped to tighten — if not altogether close — what it considered to be loopholes in FAS 5, FIN 14, and SAB 92 and to stop companies from wriggling out of detailed disclosure.

One of the two guidelines, ASTM standard E 2137-0 (Standard Guide for Estimating Monetary Costs and Liabilities for Environmental Matters) is a blueprint for using an expected-value methodology to calculate cost estimates of environmental liabilities. Essentially, it's a weighted-average calculation that takes into consideration both the likelihood of a remediation scenario and its cost.

The second, ASTM standard E 2173-0 (Standard Guide for Disclosure of Environmental Liabilities) assumes that users of financial statements would benefit if potential liabilities were expressed in the aggregate because the total would likely be considered material and therefore subject to disclosure rules. None of the GAAP or SEC regulations require that companies aggregate environmental liabilities. But under the ASTM standard, asserts Little, companies would no longer be able to segregate the cost of single-site cleanups into nonmaterial chunks that could be hidden from investors.

The idea that the SEC might adopt anything like these standards has been unpopular with corporate finance departments. A day before the GAO released its study, a 30-company coalition called the Corporate Environmental Enforcement Council issued a comment letter to the SEC outlining its opposition to the Rose Foundation's petition. The council contended, for example, that the petition's call for aggregate disclosures does not ensure that the information would adequately reflect the company's financial condition to investors.

Estimating the potential cleanup costs of 50 or 100 corporate sites (a typical number for a large company) would compound inaccurate guesses and render the information "useless to investors," asserts Ken Meade, an attorney who represents the CEEC.

CEEC companies — which include Alcoa Inc., Coors Brewing Co., General Electric Co., Halliburton Co., and Proctor & Gamble — promote the idea of full disclosure. Company executives, however, believe that the SEC already has adequate tools to enforce environmental liability disclosures. Meade says that the CEEC takes a "don't fix what's not broken" attitude, and he maintains that the petition's rule changes would impose a one-size-fits-all prescriptive framework on SEC rules.

Other experts argue that aggregating individual-site estimates would inaccurately balloon potential liability costs. That's particularly true in the case of estimating pending lawsuit damages, says senior bond analyst Phil Adams of Gimme Credit Research, since the legal outcomes of future damage claims can be highly uncertain. A company should mention the court case in filings but not gauge the cost of the settlement, he argues.

Further, it's unreasonable to expect executives to act against their companies' interests by disclosing a potential outcome of litigation, especially when the policy and politics affecting the outcome are moving targets, he adds. Adams reckons that there's no way to assigning worth to lawsuit damages before a case is settled, and in the long run "it's probably only worth a basis point or two on the spread, so there's nothing actionable for investors to do."

The CEEC comment letter also highlights a more fundamental argument. The group claims that the Rose Foundation petition "has more to do with driving environmental performance of public companies" than ensuring that investors have accurate and complete information.

Steve Lippman, a senior research analyst with Trillium Asset Management Corp. (whose Website describes the company as a "leader in socially responsible investing"), disputes the CEEC's claim. Lippman says the idea that "investors who care about environmental issues can't care about the investment is a specious argument," particularly when it refers to a very small part of a broader push by investors to unearth more material information.

Lippman doesn't see a difference between general liability disclosures that require a "fair representation" of a risk and environmental disclosures. "The fact that a risk affects the environment does not mean that the impact is less real," he says.

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