Such transfers are generally legal, added the GAO report. However, it's illegal to transfer assets with the intent to hinder or defraud creditors, notes Greg Rogers, an environmental attorney and the author of Financial Reporting of Environmental Liabilities and Risks after Sarbanes-Oxley.

A fraudulent conveyance, as these illegal transfers are called can cause several ripple effects, Rogers observes. For instance, a subsequent distribution of dividends could be considered illegal. What's more, he says, executives of financially troubled companies could be personally at risk under bankruptcy law, as well as the certification provisions of Sarbanes-Oxley, if management hides, understates, or fails to disclose environmental liabilities.

To be sure, the GAO report is quite clear on assigning responsibility. In "Environmental Liabilities: EPA Should Do More to Ensure that Liable Parties Meet Their Cleanup Obligations," the GAO chastised the agency for being too lax in tracking and fining corporate polluters that hide behind bankruptcy and too passive in efforts to help the prosecute rulebreakers.

The GAO report notes, for example, that of the 231,630 businesses that filed for bankruptcy between 1998 and 2003, information on unpaid environmental liabilities is available only for the 136 companies that the DoJ has pursued. The agency suspects that many more bankruptcy filers have similar liabilities; the EPA counters that even if that's true, with its limited resources it cannot keep track of 30,000 to 40,000 bankruptcy filers each year.

The report also notes that the Comprehensive Environmental Response, Compensation and Liability Act gives the EPA authority to compel businesses that handle hazardous substances to demonstrate their ability to pay for potential environmental cleanups. So, says the GAO, the agency must be more aggressive in demanding financial assurances such as letters of credit or guarantees from a parent company. The EPA should also seek more tax offsets, adds the report, rather than allow tax refunds to flow, unhindered, to companies that have environmental claims outstanding.

The report acknowledges that it will be difficult for the EPA to pursue a parent company for a subsidiary's environmental liabilities. Corporate law, notes the GAO, states that while a corporation is liable for debts and obligations of its business, shareholders are liable only for what they have invested. It's a "common practice," continues the report, for companies to "take advantage of this limited liability principle to protect their assets by using a parent and subsidiary corporate structure" in which the parent is the subsidiary's shareholder. In most such cases, the parent would then not be responsible for the subsidiary's environmental liabilities should the subsidiary file for bankruptcy.

Additional revelations of environmental liability are expected after December, when the Financial Accounting Standards Board's Interpretation No. 47 goes into effect. Under FIN 47, managers are likely to disclose more information about environmental liabilities associated with underused or "mothballed" assets, says Jim Redwine, a senior vice president with Shaw Environmental Liabilities Solutions, in Baton Rouge, Louisiana.

Meanwhile, counsels Rogers, directors of companies that hide environmental liabilities can expect scrutiny from the Securities and Exchange Commission. He explains that while corporate and bankruptcy laws do not impose financial-reporting requirements on board members, securities law provides a "strong motivation" for understanding the new risks associated with reporting environmental liabilities.

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