Corporate Finance

The Dangers in Coming Clean

Conflicting state and federal environmental audit laws are throwing companies into a quandary.
Lauren JohnSeptember 1, 1997

Last month, in the re-flection of a growing trend across the country, Alaska became the 21st state to enact a so-called environmental audit privilege law. Designed to encourage companies to come clean on environmental infractions, these laws offer partial immunity to businesses that voluntarily report current or potential environmental violations.

According to Alaskan Republican state senator Loren Leman, who sponsored the bill, the benefit of such legislation is that it stresses voluntary compliance rather than “command and control” enforcement. Instead of focusing on fines and punishment, he says, the laws encourage increased cooperation between government and industry to solve environmental problems early. As a result, corporate funding can be directed at remediation rather than litigation.

Nevertheless, environmental attorneys and regulatory affairs officers warn that these laws can be a double-edged sword. That’s because, on the federal level, the Environmental Protection Agency (EPA) continues to favor command and control, and objects vehemently to the “qualified privileges” offered by many states (see “The Privileged Few,” page 84). These privileges ensure that potentially damaging reports issued during an environmental self-audit will not be used against a company in civil, administrative, or, in some cases, criminal proceedings.

Drive Business Strategy and Growth

Drive Business Strategy and Growth

Learn how NetSuite Financial Management allows you to quickly and easily model what-if scenarios and generate reports.

The EPA’s opposition to such privileges means that companies that come clean to the states are then vulnerable to federal prosecution. “There’s a growing body of both state and federal case law that indicates that companies must put compliance systems in place,” says Paul Wallach, an environmental lawyer and senior partner at law firm Hale and Dorr LLP. But when it comes to leniency, there’s a mixed message. “You hope that the EPA works [cooperatively] with the state in joint enforcement, but there’s always a risk that the federal rules will be harsher,” says Doug Donegan, vice president of regulatory affairs at Anchorage and Seattle-based Trident Seafood, adding that such uncertainty “puts businesses in an uncomfortable position.”


Despite the risks, it was inevitable that companies would push for environmental amnesty, says Michael Silverstein, author of The Environmental Economic Revolution, given the availability of technology to identify environmental problems early, as well as shareholders’ vocal demands for compliance. And states were open to the proposition because it helped companies of all sizes correct problems, and promised to cut down on lengthy lawsuits.

The real impetus for these laws, however, can be traced to Colorado’s 1993 environmental investigation of Coors Brewing Co. The crackdown came after Coors’s own engineers voluntarily reported to state air-quality officials that Coors was emitting higher-than- permitted volatile organic compounds (VOCs) into the air. The state originally called for a $1 million fine, despite Coors’s initiative. Ultimately, Coors and the state settled on $237,000 in penalties and the brewery agreed to cut VOC emissions by 200,000 tons annually. However, having been stung by the self- disclosure process, Coors lobbied for an environmental amnesty law. In 1994, Colorado became the second state, after Oregon, to put a self-audit law on the books.

“The Coors company, which had already put a lot of money into environmental programs, was faced with penalties that clearly would have lowered profits,” says Silverstein. Many companies, including hard-hit oil firms, began to look for ways to reduce their own exposure, he adds. And the efforts were spearheaded by groups such as the Chemical Manufacturers Association and the Corporate Environmental Enforcement Council.

In the meantime, the EPA began to consider the value of environmental amnesty as a compliance tool. In March 1995, the agency announced a separate interim policy focused on fine reduction for companies willing to come forward.

To date, however, the watchdog agency is far less forgiving than the states. For one thing, EPA policy requires public disclosure, but it allows prosecutors to use potentially incriminating documents in non-EPA enforcement actions such as citizens’ suits and third- party tort actions, says Jerry Richartz, division manager for energy and environment at Portland, Oregon-based Oregon Steel Mills. “What we now have is two sets of rules, and a quagmire of incomplete protection,” adds attorney Wallach.

One company caught in that quagmire is Enron Methanol Corp. The Houston-based subsidiary of Enron Corp. is one of approximately 500 entities that have voluntarily conducted audits under Texas’s two-year-old self-audit law. Of those, more than 90, including Enron, disclosed violations. But instead of amnesty, Enron and four others–two Diamond Shamrock facilities, a Montell Polyolefins plant, and the Harrisburg Woolley division of Phoenix Energy Products–have been singled out by the EPA for the very violations they disclosed to the Texas Natural Resource Conservation Commission (TNRCC).

“The EPA has requested information about two potential Clean Air Act violations that we uncovered in 1996 during a voluntary environmental audit before the TNRCC,” says Enron spokesperson Carol Hensley. The EPA investigation began in December 1996, when the EPA sent Enron a 12-page questionnaire requesting information about plant facilities and pollution-control equipment. To date, no fines have been set, but the investigation is continuing.

Enron will get only so much protection from the state of Texas in negotiating a settlement, however. Part of the problem is the leverage the EPA has over many states, says John Riley, director of the litigation support division of the TNRCC. The EPA’s federal authority allows it to outsource the administration of state programs to the states themselves. But what the feds give, the feds can take away. As a result, even if a state has contributed significant funding to a program, the EPA can withdraw its authority at any time. “One of our biggest concerns,” Riley says, “is that if dissatisfied, the EPA can say to the state, ‘You’ve diluted your enforcement authority to the point where we can no longer delegate our programs to you.’”

Using this clout, the EPA has recently acted to force Texas, Colorado, Idaho, and Michigan to modify their laws–making these laws inapplicable in circumstances involving potential criminal liability and federally required information disclosures.


Given all the controversy and legislative shifts, should companies come forward and admit to wrongdoing? Yes, say most environmental attorneys and regulatory affairs officers. True, companies that come clean may be more exposed to federal scrutiny. But in the wake of such disasters as the Exxon Valdez, proactive environmental efforts are key, says economist Silverstein. “For us, the audit privilege rarely comes into play when making a decision to report,” says Bill Blackburn, vice president and chief counsel for environmental affairs at health-care giant Baxter International Inc. “This is not a game of hide-and-seek. In fact, we adopted an open reporting policy even before these [state] laws came on the books.”

Many environmental attorneys believe that companies that act in good faith will be treated in good faith, and that the real target of most EPA crackdowns are organizations known as “bad actors.” “These are the guys who get stopped speeding 95 m.p.h. on the highway and say, ‘Officer, I had no idea that I was going that fast, and besides, everyone else is going 100,’” says Derek Seal, general counsel to the Texas House of Representatives’s environmental regulation committee. Instead, what state self-audit laws offer, says Seal, is an opportunity to come forward and say, “Hey, I’ve got a problem with my speedometer. I need help fixing it.” In general, according to Seal, both the states and the EPA support that type of problem- solving approach.

Still, many environmental lawyers in Texas and elsewhere stress that organizations shouldn’t tell the state anything they do not want the EPA to know. “It is inevitable that the EPA will make inquiries about companies that disclose information to the state,” says Riley of the TNRCC.


There are ways that organizations can sidestep those inquiries, however, says Kinnan Golemon, a partner at Austin law firm Brown McCarroll & Oaks Hartline. For example, he says, the EPA is on the lookout for what it terms “the economic benefit of noncompliance.” So a company that reports that it has neglected to relabel oil barrels properly, as required in a month-old regulation, may receive at least some form of amnesty, attorneys say. But no one is going to protect a company that clearly saves money by improperly dumping hazardous waste.

In addition, companies that admit to problems and are willing and able to fix them quickly may also be granted amnesty. “If you do slip and fall, both the EPA and the state consider the speed of corrective action,” says Philip Hillman, Polaroid’s director of health, safety, and environmental affairs.

Such quick action can result in a reduction in fines, adds Nancie Johnson, vice president of state and government affairs at Dupont. “When a problem is first identified, the EPA often sets a high fine for focus,” she says. Such fines make headlines, she adds, but what the public often doesn’t learn is that as the companies and agencies begin to work together, they frequently find that the problem or potential damages aren’t as great as first anticipated. “Often these large initial fines are reduced,” she says.

In 1994, for example, Polaroid voluntarily reported to the EPA that it had accidentally exceeded low-level use of a new photographic chemical and thus violated a low-volume exemption agreement. Because Polaroid had already exceeded the limit, the EPA initially planned to assess a $160,000 fine. However, because the company had voluntarily offered the information and worked quickly to correct the problem, the fine was reduced to $80,000.

Says Dennis McCarthy, Polaroid’s director of corporate financial planning and analysis: “If a company doesn’t find the problem and the EPA does, it can be viewed as a cover-up and the fine can be heavy.” To guard against even the slightest hint of impropriety, he says, companies are well advised to keep up with the constantly changing federal regulations and state laws. In addition, he says, “companies should take a proactive role and work with both federal and state governments in their towns, routinely inviting them in and seeking advice. The community should be invited in, too, and given the sense that as neighbors we are all in this together.”

For their part, says Oregon Steel’s Richartz, “CFOs should work closely with their environmental managers to understand the economic impact of changing laws.” Traditionally, the CFO is consulted when it’s time to pay for cleaning up the mess, not before the mess is made, adds Weyerhaeuser’s director of finance and planning for the Hardwood Business Group, Karen Moll.

While corporate attorneys and government liaisons are at the forefront of environmental issues, senior financial executives could offer valuable input, such as what measures need to be taken to cover remediation costs, if consulted earlier in the process, Richartz says.


Going forward, however, the best way for companies to benefit from environmental amnesty laws may be to lobby for a uniform federal statute. “We would love to have a federal statute modeled on these [state] laws,” says Dupont’s Johnson. “It’s one of our priorities for this congressional session.”

Such uniformity would be especially welcomed by Oregon Steel, which is now working to implement a voluntary environmental compliance program across facilities in three states. “Because Oregon and Colorado have voluntary environmental audit protection laws and California does not,” says Richartz, “we are deterred from having the same program at all of our facilities.” Enacting a federal environmental audit law, however, would enable Oregon Steel to put such a program in place, he says.

Help is on the way. In June, Texas senator Kay Bailey Hutchinson introduced Senate Bill S- 582, which, if passed, would establish federal audit privilege and immunity standards. However, judging from previous political battles within the states, as well as between the state and federal agencies, this may not happen anytime soon. The Alaska state law, for example, vetoed initially by Gov. Tony Knowles, took two years to pass.

In the meantime, despite the pitfalls, companies should continue to lobby for amnesty at the state, as well as federal, level, says Richartz. “The federal government moves so slowly,” he says, “we need to attack the problem at both ends.”