Accounting & Tax

Reporting on Environmental Liabilities

Should corporations start preparing for ''the greening of GAAP''?
Marie LeoneSeptember 9, 2004

Not all companies are disclosing their environmental liabilities as fully as they might. At least that’s the contention of many socially responsible investors (SRIs), the institutional investors and mutual fund groups that screen their portfolio companies for several social and environmental criteria. Some SRIs claim that while many companies comply with the letter of SEC and accounting rules, they fail to embrace the spirit of the law in not providing a full picture of their future liabilities.

Their attempt to focus more attention on such breaches of the legal spirit was bolstered in July, when the Government Accountability Office (formerly the Government Accounting Office) published a 75-page report on the state of corporate environmental disclosures. The study, which sparked partisan reactions from SRIs and corporate executives, didn’t take sides. Rather, the GAO study crystallized the underlying debate, underscoring SEC deficiencies in collecting and monitoring corporate environmental disclosure data.

As a result, SRIs and other like-minded stakeholders are renewing their two-year-old call for changes in generally accepted accounting principles (GAAP). The changes would require companies to disclose detailed estimates of their contingent environmental liabilities, among other things.

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Indeed, the advocacy for that point of view has grown formidable. SRIs now represent $2.2 trillion worth of assets and account for one in every nine dollars under professional management in the United States, according to the Social Investment Forum, a Washington, D.C.-based nonprofit group that promotes socially responsible investing.

The targets of this investor ire are two venerable rules of the Financial Accounting Standards Board, FAS 5 (Accounting for Contingencies) and FIN 14 (Reasonable Estimation of Loss). SRIs see loopholes in the FASB standards that “allow companies to hide the financial significance of environmental problems,” says Tim Little, executive director of the Rose Foundation for Communities and the Environment. (For more, see “The Greening of GAAP.”)