Environmental Disclosure: SEC Should Explore Ways to Improve Tracking and Transparency of Information
Published: 2004-07-14T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: To help investors make informed decisions, the Securities and Exchange Commission (SEC) enforces federal securities laws requiring companies to disclose all information that would be considered important or "material" to a reasonable investor, including information on environmental risks and liabilities, in reports filed with SEC. To monitor companies' disclosures, SEC reviews their filings and issues comment letters requesting revisions or additional information, if needed. This report addresses (1) key stakeholders' views on how well SEC has defined the requirements for environmental disclosure, (2) the extent to which companies are disclosing such information in their SEC filings, (3) the adequacy of SEC's efforts to monitor and enforce compliance with disclosure requirements, and (4) experts' suggestions for increasing and improving environmental disclosure.
section_title: What GAO Found
paragraphs: Key stakeholders disagree about how well SEC has defined the disclosure requirements for environmental information. Some stakeholders who use companies' filings, such as investor organizations and researchers, maintained that the requirements allow too much flexibility and are too narrow in scope to capture important environmental information. Other stakeholders, primarily those who prepare or file reports with SEC, said that the scope of the current requirements and guidance is adequate and that companies need flexibility to accommodate their individual circumstances. Little is known about the extent to which companies are disclosing environmental information in their filings with SEC. Determining what companies should be disclosing is extremely challenging without access to company records, considering the flexibility in the disclosure requirements. Despite strong methodological limitations, some studies provide tentative insights about the amount of environmental information companies are disclosing and the variation in disclosure among companies. However, the problem in evaluating the adequacy of disclosure is that one cannot determine whether a low level of disclosure means that a company does not have existing or potential environmental liabilities, has determined that such liabilities are not material, or is not adequately complying with disclosure requirements. The adequacy of SEC's efforts to monitor and enforce compliance with environmental disclosure requirements cannot be determined without better information on the extent of environmental disclosure. In addition, SEC does not systematically track the issues raised in its reviews of companies' filings and thus, does not have the information it needs to analyze the frequency of problems involving environmental disclosure, compared with other types of disclosure problems; identify trends over time or within particular industries; or identify areas in which additional guidance may be warranted. Over the years, SEC and EPA have made sporadic efforts to coordinate on improving environmental disclosure; currently, EPA periodically shares limited information on specific, environment-related legal proceedings, such as those involving monetary sanctions. Using a Web-based survey of 30 experts that use disclosure information, including investor organizations and financial analysts among others, GAO obtained suggestions for increasing and improving environmental disclosure in three broad categories: modifying disclosure requirements and guidance, increasing oversight and enforcement, and adopting nonregulatory approaches to improving disclosure. Some of the experts offered comments about why particular proposals are unnecessary or unworkable. GAO also sought the views of representatives of companies that file reports with SEC, who questioned the value and feasibility of some suggestions.

section_title: Letter
paragraphs: Recent scandals in the business world have shaken investors’ confidence in  corporate financial reporting and the underlying accounting and auditing  practices, and have highlighted the importance of disclosing key  information to potential investors. Environmental risks and liabilities are  among the conditions that, if undisclosed, could impair the public’s ability  to make sound investment decisions. For example, the discovery of  extensive hazardous waste contamination at company-owned facilities  could expose a company to hundreds of millions of dollars in cleanup  costs, while impending environmental regulations could affect a company’s  future financial position if the company were required to shut down plants  or invest in expensive new technology. While not the primary impetus,  concern about environmental liabilities has also contributed to the growth  of “socially responsible” investor groups and mutual funds that invest only  in companies with a strong record in environmental compliance, worker  protection, and other social issues. Congress passed the Sarbanes-Oxley  Act of 2002 to protect investors by improving the accuracy and reliability of  corporate disclosures, which could lead to improved reporting of  environmental liabilities.
The Securities and Exchange Commission’s (SEC) primary mission is to  protect investors and the integrity of securities markets. Among other  things, SEC regulations require companies to disclose information that  would be considered “material” by a reasonable investor. A matter is  material if there is a substantial likelihood that a reasonable person would  consider it important. The omission or misstatement of an item in a  financial report is material if, in light of surrounding circumstances, the  magnitude of the item is such that the judgment of a reasonable person  would probably have been changed or influenced by the inclusion or  correction of the item. Information that might be considered material can  include, for example, significant changes in accounting practices or  potential risks or liabilities, such as the cost of a major environmental  cleanup, that could affect future earnings. SEC’s Division of Corporation  Finance monitors compliance with the disclosure requirements by  periodically reviewing companies’ filings and issuing comment letters to  the companies, if necessary, to request any additional information that  might be required. In addition, SEC’s Division of Enforcement may seek a  monetary penalty or take some other enforcement action when a  company’s failure to comply with disclosure requirements is particularly  egregious. While the Environmental Protection Agency (EPA) does not  have a direct role in monitoring environmental disclosures, the agency  encourages the disclosure of environmental legal proceedings by notifying  companies of potential disclosure obligations and periodically shares  relevant information with SEC.
You asked us to determine (1) key stakeholders’ views on how well SEC  has defined the requirements for environmental disclosure, (2) the extent  to which companies are disclosing environmental information in their  filings with SEC, (3) the adequacy of SEC’s efforts to monitor and enforce  compliance with the disclosure requirements, and (4) what actions experts  suggest for increasing and improving environmental disclosure. To obtain  views on environmental disclosure requirements, we reviewed SEC’s  disclosure regulations along with relevant standards and guidance from  SEC, the Financial Accounting Standards Board, and the American  Institute of Certified Public Accountants (AICPA). We also interviewed  representatives of groups with a stakeholder interest in environmental  disclosure, including investor organizations, financial services institutions,  environmental groups and consultants, business associations, credit rating  agencies, and public accounting firms. For information on the extent to  which companies are disclosing environmental information in their filings  with SEC, we reviewed 27 studies conducted from 1995 to 2003 and  assessed their methodologies. After eliminating 12 studies that either had  severe methodological limitations or did not address aspects of  environmental disclosure relevant to our objectives, we summarized the  findings of the remaining 15 studies. At the committee’s request, we  supplemented our analysis of existing studies with a limited examination of  disclosures related to potential future risks, focusing on the impacts of  potential controls on greenhouse gas emissions at 20 U.S. electric utilities  with relatively high emissions of carbon dioxide.
For information on SEC’s monitoring and enforcement of environmental  disclosure requirements, we reviewed SEC’s policies and procedures,  obtained agency statistics on relevant activities, and interviewed officials  within SEC and EPA. To obtain suggestions for increasing and improving  environmental disclosure, we conducted a Web-based survey of 30 experts  that use disclosure information, including representatives of the  accounting and auditing profession, environmental consultants and  attorneys, investment and financial services, the insurance industry,  environmental interest groups, public employee pension funds, and credit  rating agencies, among others. Some of the experts were also among the  stakeholders consulted about the disclosure requirements. To ensure  balance, we sought the views of representatives of reporting companies  regarding the experts’ suggestions. We conducted our work between  February 2003 and June 2004 in accordance with generally accepted  government auditing standards. (See app. I for a detailed description of our  scope and methodology.)
subsections: section_title: Background
paragraphs: SEC seeks to (1) promote full and fair disclosure; (2) prevent and suppress  fraud; (3) supervise and regulate the securities markets; and (4) regulate  and oversee investment companies, investment advisors, and public utility  holding companies. To ensure that all investors have access to basic  relevant information prior to trading, federal securities laws require certain  companies to register with SEC and make public particular information.  Among other things, these companies are required to file reports with SEC  about their financial condition and business practices when stock is  initially sold and on a continuing and periodic basis afterwards to help  investors make informed decisions. Each year, companies generally must  file, at a minimum, one annual report, called a 10-K, and three quarterly  reports, known as 10-Qs.
SEC promulgates regulations and issues guidance on what information  public companies must disclose in their filings. Beginning in 1982, SEC  integrated all of the required disclosures into one omnibus regulation,  regulation S-K. According to SEC, three sections of regulation S-K are most  likely to elicit environmental disclosures, either because of specific  environment-related requirements or common practice:   Under S-K item 101, companies must disclose the material effects of  compliance with federal, state, and local environmental provisions on  their capital expenditures, earnings, and competitive position;  Under S-K item 103, companies must describe certain administrative or  judicial legal proceedings arising from federal, state, or local  environmental provisions; and  Under S-K item 303, companies must discuss their liquidity, capital  resources, and results of operations. For example, companies must  identify any known trends, demands, commitments, events, or  uncertainties that may result in a material change in the company’s  liquidity. In this part of the filing, known as Management’s Discussion  and Analysis of Financial Condition and Results of Operations, SEC  expects to see information on any environmental matters that could  materially affect company operations or finances.
In addition to its own disclosure requirements, SEC relies on the standards  and guidance issued by the Financial Accounting Standards Board and the  Public Company Accounting Oversight Board to help ensure that  companies are properly accounting for and reporting on their financial  operations, including any environmental losses resulting from liabilities or  from permanent reductions in the value of company assets. For example,  SEC presumes that financial statements in company filings that are not  prepared in accordance with generally accepted accounting principles,  promulgated by the Financial Accounting Standards Board, are misleading  or inaccurate. Moreover, SEC regulations require companies to submit  audited financial statements with their annual filings. The audits are  performed by independent auditors, who are subject to professional  auditing standards, which until recently were promulgated by the AICPA.  Under the Sarbanes-Oxley Act of 2002, the new Public Company  Accounting Oversight Board, appointed and overseen by SEC, is now  responsible for issuing standards related to the preparation of audit reports  for publicly held companies.
To monitor compliance with disclosure requirements, SEC’s Division of  Corporation Finance periodically reviews companies’ filings and issues  comment letters to the companies, if necessary, to request additional  information, amendments of prior filings, or specific disclosures in future  filings. While Corporation Finance does not have direct authority to compel  companies to respond to its comment letters, companies know that failure  to do so could delay approval of filings that they need in order to raise  capital. In egregious cases, Corporation Finance can refer companies to  SEC’s Division of Enforcement. The Division of Enforcement can seek  sanctions against companies for the misrepresentation or omission of  important information about securities in civil or administrative  proceedings. Among the sanctions available to SEC are obtaining a  permanent injunction against an officer of the company; levying monetary  penalties; requiring the return of illegal profits, known as disgorgement;  and barring an individual from serving as an officer or director in a public  company. EPA encourages companies to disclose environmental legal  proceedings by notifying companies of potential disclosure obligations and  sharing relevant information with SEC.
Congress passed the Sarbanes-Oxley Act of 2002 to improve the accuracy  and reliability of corporate disclosures. While the act does not contain  provisions that specifically address environmental disclosure, some of  them could lead to improved reporting of environmental liabilities. These  provisions include requirements for SEC to more frequently review  company filings; for companies to make real-time disclosures of material  changes in their financial conditions; and for company officials to annually  assess the effectiveness of internal controls and procedures for financial  reporting and to certify that their SEC filings fairly present, in all material  respects, the company’s financial condition and results of operations. In  addition, the act authorizes an increase in SEC’s funding for, among other  things, additional professional support staff necessary to strengthen SEC’s  disclosure and fraud prevention programs.
The term “socially responsible investor” refers to individuals who screen  their investments based on companies’ environmental, labor, or community  practices. Beginning in the late 1960s, some investors consciously avoided  the securities of companies they perceived as polluting the environment,  engaging in unfair labor practices, or otherwise exhibiting poor corporate  governance, and sought out investments in companies perceived to have  better records on various social issues. Although initially a marginal  segment of the investing community, the dollar amount of assets in socially  screened accounts has increased significantly in recent years. The Social  Investment Forum, an organization of over 500 social investment  practitioners and institutions, estimated that in 2003, the total assets  invested in such accounts were about $2 trillion in the United States, or  about 11 percent of the $19.2 trillion in assets under professional  management.
section_title: Stakeholders Disagree on How Well SEC Has Defined Environmental Disclosure Requirements
paragraphs: While most of the disclosure requirements are designed for broad  application—and apply to the disclosure of all types of information,  including environmental matters—some of the regulations and related  guidance provide criteria specifically for determining whether and how to  disclose environmental information. (See app. II for a list of the principal  requirements and guidance applicable to environmental disclosure.) Key  stakeholders disagree about whether the flexibility and scope of existing  disclosure requirements for environmental information are appropriate.  Some stakeholders who use companies’ filings, such as investors and  researchers, believe that the existing environmental disclosure  requirements allow too much flexibility and are too narrow in scope to  capture important environmental information. Other stakeholders,  primarily those who prepare or file reports with SEC, hold the opposite  view, and said that the scope of the current requirements and guidance is  adequate and that companies need flexibility to accommodate their  individual circumstances.
subsections: section_title: Disclosure Requirements Are Typically Defined in Broad Terms, but They Also Include Specific Guidance for Environmental Information
paragraphs: In determining whether to disclose environmental information, public  companies generally must apply the same standards and guidance as they  apply to other information that is potentially subject to disclosure. SEC, the  Financial Accounting Standards Board, and the AICPA have issued broadly  applicable regulations, standards, and guidance related to determining the  likelihood and amount of potential liabilities; the materiality of information  relevant to the company, its results of operations, or its financial condition;  and the extent to which future risks must be disclosed.
Generally accepted accounting principles require companies to report  liabilities, including environmental liabilities, in their financial statements if  the liabilities’ occurrence is “probable” and their amounts are “reasonably  estimable.” A liability is reasonably estimable if company management can  develop a point estimate or determine that the amount falls within a  particular dollar range. According to generally accepted accounting  principles, companies should always accrue (and disclose) their best  estimate for a liability in their financial statements, given the range of  possible costs. If no one estimate is better than the others, the applicable  accounting standard specifies that companies should accrue the lowest  estimate in the range in their financial statements, although they must still  disclose the potential for additional liability in the footnotes to the statements. If the liability does not meet one or both of the criteria for  accruing in the financial statements, it must nonetheless be disclosed in the  footnotes if it is “reasonably possible.” The term “reasonably possible”  represents a range of possible outcomes that have a greater than remote  chance of occurring.
SEC regulations generally require disclosure of information only if it is  “material.” According to SEC officials, in determining whether information  is material, the agency relies on the Supreme Court’s statement that “an  omitted fact is material if there is a substantial likelihood that a reasonable  shareholder would consider it important in deciding how to vote.”  Guidance issued by the Financial Accounting Standards Board states that  the omission of an item in a financial report is material, if, in light of  surrounding circumstances, the magnitude of the item is such that it is  probable that the judgment of a reasonable person relying on the report  would have changed or been influenced by the inclusion or correction of  the item. In general, SEC and other standard-setting bodies recognize that  only those who have all the facts can properly make materiality judgments.  The Financial Accounting Standards Board believes that no general  standards of materiality could be formulated to take into account all the  considerations that enter into an experienced human judgment.
Concerning the disclosure of future risks, including risks related to  environmental matters, SEC regulation S-K item 303 requires company  management to discuss the company’s liquidity, capital resources, and  results of operations. For example, a company must identify any known  trends, demands, commitments, events, or uncertainties that may result in  a material change in the company’s liquidity. In addition, under item 303  companies are “encouraged” to include in their filings forward-looking  information, which SEC guidance defines as anticipating a future trend or  event, or anticipating a less predictable impact of a known event, trend, or uncertainty. In a 1989 interpretive release, SEC explained when companies  are obligated to disclose future risks. The guidance says that “a disclosure  duty exists where a trend, demand, commitment, event or uncertainty is  both presently known to management and reasonably likely to have  material effects on the registrant’s financial condition or results of  operation.”
Some reporting standards and guidance relate specifically to the disclosure  of environmental information or contain specific environmental  benchmarks. For example, the AICPA has issued comprehensive  supplemental guidance on the disclosure of environmental liabilities. For  determining whether environmental liabilities should be disclosed, this  guidance uses the terms “probable,” “reasonably possible,” or “remote,” as  benchmarks for determining the likelihood that a liability will occur and  includes some representative situations in which disclosure is warranted.  By way of illustration, the guidance suggests that companies use  notification by EPA that they are a potentially responsible party at a  hazardous waste site as an indication that a liability is probable and subject  to disclosure if material. The supplemental accounting guidance also  contains a chapter on measuring the amount of environmental liabilities,  given the uncertainties inherent in environmental sites. It identifies the cost  elements that should be included when estimating the dollar amount of a  liability—including litigation, risk assessment and planning, cleanup, and  monitoring—and it requires companies to use whatever information is  available.
Disclosure of environmental information is also specifically addressed in  SEC regulation S-K item 103. Although SEC’s regulations and guidance  generally do not establish numeric thresholds for determining materiality,  item 103 contains two exceptions related to environment-related legal  matters: Companies must disclose as material administrative or judicial  proceedings that involve (1) federal, state, or local environmental laws, if  the potential amount of the losses exceeds 10 percent of the company’s  current assets and (2) potential monetary sanctions of $100,000 or more, if  a governmental authority is a party to the proceedings. In each case, these  amounts are calculated exclusive of interest and costs. Companies must  report potential monetary sanctions of $100,000 or more whether or not the  amount would otherwise be considered material, unless the company  reasonably believes that the proceeding will result in no monetary sanction  or in sanctions of less than $100,000.
section_title: Some Users of Disclosure Information Said Existing Environmental Disclosure Requirements Are Too Flexible and Too Narrowly Scoped
paragraphs: Some users of company filings—including environmental interest groups,  investment analysts with an interest in socially responsible investing,  researchers, and others—said that existing requirements allow too much  flexibility and are too narrowly scoped to provide adequate disclosure of  environmental information. These stakeholders maintained that the  existing regulations give companies too much leeway in determining what  environmental information to disclose and limit the extent of disclosure by  defining environmental information narrowly. As a result, they believe,  companies’ disclosure of environmental information is inadequate,  hindering investors’ ability to assess companies’ overall financial condition  and the risks they face.
These stakeholders said that the relevant regulations and guidance are too  flexible in several areas. Regarding the point at which companies should  disclose a liability, stakeholders said that the current standards and  guidance are unclear; for example, opinions vary on whether a disclosure  obligation exists at the time the environmental contamination occurs or the  point at which a regulatory agency (or some other third party) has taken  action against a company to force a cleanup. In addition, some  stakeholders said that companies can use the apparent flexibility in judging  the likelihood of a liability to postpone or avoid disclosure.
Stakeholders also said that applicable regulations and guidance make it too  easy for companies to conclude that they have nothing to disclose or  cannot calculate an estimate, or to default to a known minimum amount  rather than develop a best estimate. Estimating the amount of  environmental liabilities involves several uncertainties, among them the  extent of contamination and required cleanup, the stringency of applicable  cleanup standards, the state of the art of available cleanup technology, and  the extent to which cleanup costs might be shared with other responsible  parties or offset by insurance recoveries. However, stakeholders believe  that companies have developed methods to account for such uncertainties  that yield better estimates than the known minimum, and they believe that  companies should be required to share this information with investors.
On assessing materiality, stakeholders expressed concern that the existing  regulations and guidance largely rely on the discretion of company  management and that the requirements generally do not establish minimum  thresholds for disclosure. Some stakeholders also said that the materiality  standard does not sufficiently emphasize the need to disclose intangible,  nonquantifiable factors, such as the impact of environmental  contamination on a company’s reputation.
Regarding disclosure of future risks, stakeholders said that SEC  regulations and guidance do not clearly distinguish between “known  information” that could cause reported financial information to not be  indicative of future results and “forward-looking information,” which may  be less certain but could have a greater potential impact. As a result,  companies have more flexibility in determining which risks can be  characterized as forward-looking and thus avoid disclosing the  information.
In addition to concerns about the degree of flexibility allowed in the  regulations and guidance, users of company filings also said that the  disclosure requirements are too narrowly scoped in some areas to ensure  that companies are making available all of the important environmental  information needed by investors. Stakeholders expressed the following  concerns, among others:  SEC’s definition of monetary sanctions does not include certain costs  related to the sanctions. Specifically, in determining when the $100,000  disclosure threshold has been met, SEC regulations and guidance  exclude costs associated with (1) environmental remediation and (2)  supplemental environmental projects conducted in lieu of paying  sanctions.
SEC’s regulations do not require companies to aggregate the estimated  costs of similar potential liabilities, such as multiple hazardous waste  sites, when assessing materiality.
Companies are not required to disclose information about their  environmental assets or environmental performance. A growing body  of socially responsible investors believes that such information could be  material to many investors or indicative of effective corporate  management.
SEC regulations do not require companies to disclose quantitative  information on the total number of environmental remediation sites,  related claims, or the associated liabilities. As a result, investors cannot  determine whether companies have enough reserves to cover current  and future liabilities.
section_title: Reporting Companies and Other Stakeholders Said That the Flexibility within Existing Disclosure Requirements Is Necessary and the Scope Adequate
paragraphs: Reporting companies and other stakeholders did not share concerns about  the flexibility and scope of the disclosure requirements; they said that the  flexibility is warranted and the scope adequate. In general, stakeholders  representing industry, independent auditors, financial analysts with general  investment interests, and others told us that the existing requirements are  sufficient to provide for the disclosure of material environmental  information and that requiring additional information would not improve  investors’ ability to make sound investment decisions.
In commenting on the inherent flexibility of existing disclosure  requirements, these stakeholders emphasized that reporting companies  need to have a framework that can accommodate a variety of  circumstances and that developing more specific guidance would not be  feasible. In particular, these stakeholders opposed requiring more  disclosure of future risks, such as the estimated costs associated with  potential environmental regulations, because of the degree of uncertainty  about the impact on companies’ financial condition and operations. In  addition, they pointed out that while the requirements allow some  flexibility in interpretation, there are clear benchmarks for those who  report or prepare filings.
Both reporting companies and financial analysts said that the scope of the  existing disclosure requirements is adequate to ensure that material  environmental information is reported, for several reasons:  Companies typically disclose nonfinancial information, including  information on corporate environmental performance, in other public  documents, such as press releases and separate environmental reports.  Including such information in SEC filings is generally not appropriate.
According to financial analysts with general investment interests,  environmental information is less important than other types of  information, such as executive compensation or the percentage of stock  owned by the Board of Directors, in assessing a company’s condition  and its desirability as a potential investment.
Asking companies to disclose more information in their filings, without  any assurance that such information is material to the company’s overall  financial condition, would not add value and might burden readers of  the filings with irrelevant data.
Environmental regulations and market forces—not SEC disclosure  requirements—drive companies to comply with environmental laws and  assess their environmental performance.
Requiring companies to aggregate similar types of environmental  liabilities would not necessarily be useful to investors because rolling up  the potential costs of individual sites—along with the uncertainties  associated with each of them—might distort the actual risks a company  faces.
Some stakeholders who believe the requirements are sufficient linked  problems with inadequate disclosure—to the extent such problems  exist—to inadequate oversight and enforcement. For example, while they  did not see a need to change the current standards and guidance, the  stakeholders said that SEC could improve companies’ environmental  disclosure with more thorough reviews of environmental information in  companies’ filings. Company representatives and auditors we contacted do  not share this concern, but rather they believe that SEC efforts are  adequate, given the relative importance of environmental information to  most companies’ financial condition.
section_title: Little Is Known about the Extent to Which Companies Are Disclosing Environmental Information in SEC Filings
paragraphs: Determining what companies should be disclosing in SEC filings is  extremely challenging without having access to company records and  considering the flexibility in the disclosure requirements. Existing studies  of environmental disclosure all have strong-to-severe methodological  limitations. Some of the studies provide tentative insights about the  amount of environmental information companies are disclosing but not the  adequacy. Our limited review of disclosures related to potential controls  over greenhouse gas emissions shows a wide variation in company filings  and also illustrates some of the challenges facing researchers.
subsections: section_title: Several Factors Make It Difficult to Determine Whether Companies Are Fully Disclosing Material Environmental Information
paragraphs: Assessing companies’ disclosure of environmental information is difficult,  primarily because researchers have no way of knowing what  environmental information is (1) potentially subject to disclosure and (2)  material in the context of a company’s specific circumstances, and  therefore required to be reported. Because company records are generally  not publicly available, it is virtually impossible for an external party to  know what information companies should be disclosing. In the case of  existing environmental contamination, for example, evaluating the  adequacy of companies’ disclosure may require information on the number  of sites, the nature of the contamination, projected cleanup costs, and the  extent to which the companies’ liability may be shared by others or  mitigated by insurance, among other things. Evaluating companies’  disclosures regarding potential future risks, such as the impact of potential  changes in environmental regulations, poses similar problems.
Another obstacle to assessing companies’ disclosure is the flexibility  inherent in certain reporting requirements and related guidance. A number  of key requirements use terms that are general enough to accommodate a  range of situations and allow company management to exercise judgment  regarding the amount and type of information they disclose. For example,  in determining whether an existing or potential environmental liability  should be reported in financial statements, company officials must  determine if the occurrence of such liabilities is “reasonably possible” and  the amounts are “reasonably estimable.”   SEC, the Financial Accounting  Standards Board, and the AICPA have all issued standards and guidance to  assist companies and their independent auditors in making these  determinations, but inevitably, some subjective judgments remain.  Similarly, in assessing the materiality of environmental information, SEC’s  guidance says that companies should consider information that a  “reasonable person” would need to make an investment decision.  Generally, SEC’s regulations and guidance do not establish any minimum  thresholds for materiality. Finally, in the case of disclosing future risks,  companies have some flexibility in deciding what qualifies as “known  material trends, events, and uncertainties” that would cause the companies’  reported financial information to not be indicative of future operating  results or financial condition.
One of the consequences of disclosure requirements that are subject to  interpretation—and of not having direct access to company records—is the  difficulty of determining with any certainty whether a low level of  disclosure indicates that the company does not have existing or potential  environmental liabilities, has determined that such liabilities are not  material, or is not adequately complying with disclosure requirements. The  varying formats used for disclosure pose another problem for researchers.  Much of the environmental information that is subject to disclosure can be  reported in a number of different sections of the 10-K filing, including the  financial statements, related footnotes, and various narrative sections of  the report. In addition, the information may be stated in general or specific  terms and companies often use different terminology to describe similar  issues.
section_title: While Limited and Not Generalizable, Existing Studies Indicate That the Extent of Disclosure Has Increased Over Time and Can Vary Substantially within Industries
paragraphs: We identified 27 studies and papers that (1) were published, presented at  conferences, or provided by the authors from 1995 to 2003 and (2)  contained original research on companies’ environmental disclosures. We  eliminated 12 studies that either had severe methodological limitations or  did not address aspects of environmental disclosure relevant to our  objectives. (App. III contains abbreviated descriptions of the studies we  identified, excluding those with severe limitations and those that were  outside our focus.) While the remaining 15 studies all contain strong  limitations, they provide tentative insights about the amount and type of  information being disclosed. For example, as several of these studies  acknowledged, the small sample sizes and focus on particular industries  prevent the study results from being generalizable beyond the specific  companies reviewed.   In addition, while the 15 studies shed some light on  the amount and type of information disclosed by selected companies—and  how it varied among them or changed over time—in some instances, the  researchers drew conclusions beyond what was supported by their  analysis.
Eleven of the studies found variations in the amount of information specific  companies were disclosing in their filings with SEC. Some of these studies  focused on the disclosure of existing environmental liabilities while others  examined disclosures related to future potential risks, ranging from  impending regulations to larger issues such as global climate change. For  example, a 1998 study on disclosure of Superfund remediation liabilities by  140 companies found that the amount of information they disclosed about  the number and location of the sites, the materiality of the liabilities, and  the estimated amounts varied substantially. Some of the companies did  not disclose any information and others did not provide enough  information to allow a meaningful assessment of the companies’ risks,  according to the authors. Six of the 11 studies found that variations among  companies within the same industry can be substantial. For example, a  2003 study that looked at how 38 coal-fired electric utilities reported on the  impact of the Clean Air Act Amendments of 1990 found wide variation in  the types of disclosures by these companies. Among other things, the study  found that in their filings for 1990, 22 of the utilities disclosed their  estimated compliance costs while 16 did not provide an estimate.
Five studies, including three from the previous group, indicated that the  amount and type of information specific companies were disclosing  increased over time. In two instances, researchers linked the increased  disclosure to the issuance of guidance that assisted companies in  determining what information should be reported. For example, a study of  nearly 200 companies that had been identified as potentially responsible  parties at multiple hazardous waste sites indicated that the number of  companies reporting environmental liabilities increased following the  issuance of SEC’s Staff Accounting Bulletin 92, which provided examples  of the types of information SEC expected to see regarding such sites.In  the other case, a 1995 study of environmental disclosures by 234 companies  found that the amount of information reported in 10-Ks and the companies’ annual reports to shareholders increased following the issuance of  guidance from SEC and the Financial Accounting Standards Board.
Nine of the 15 studies attempted to address the extent or adequacy of  companies’ environmental disclosure in terms of meeting SEC’s reporting  requirements. In most of these cases, the studies concluded that  environmental disclosures were inadequate. However, because the criteria  used to assess the disclosures may not have been appropriate, it is  impossible to validate the studies’ conclusions about how well or poorly  companies are meeting SEC reporting requirements. All of these studies  used criteria that either included items not required by SEC or reflected the  researchers’ interpretations of SEC reporting requirements and related  guidance. In several instances, the researchers acknowledged that their  interpretation of the requirements would not necessarily be consistent with  others’ views.
section_title: A Limited Review of Disclosures Related to Potential Controls Over Greenhouse Gas Emissions Shows Wide Variation in Company Filings
paragraphs: To supplement our analysis of existing studies, we reviewed disclosures by  20 U.S. electric utility companies that were among the largest emitters of  carbon dioxide, a major component of greenhouse gas emissions. While  various investor organizations, pension fund managers, and environmental  interest groups have called on companies to make more information  available on this subject, disclosures about the impact of potential  greenhouse gas controls are not necessarily required at this time, according  to officials at SEC’s Division of Corporation Finance, because controls do  not appear imminent at the federal level through ratification of the Kyoto Protocol or legislation. At the same time, the officials did not rule out  such disclosures, commenting that there may be circumstances in which a  company can identify a material impact and must disclose it in the filing.
Some companies have opted to include information regarding potential  controls over greenhouse gas emissions in their SEC filings, partly in  response to public interest. To the extent that companies make disclosures  regarding controls over greenhouse gas emissions or other potential future  risks, investors may find the information useful in deciding whether to buy  or sell individual securities. However, because disclosure of such  information is not necessarily required, investors cannot draw conclusions  about the lack of such information in a company’s SEC filing or compare  companies within an industry.
For each utility company, we reviewed the annual and quarterly SEC filings  for 2003 to determine whether and how the companies discussed the  impact of potential controls over greenhouse gas emissions and found that  the amount and type of information disclosed varied widely. Of the 20  electric utility companies included in our review, we found that 1 made no  disclosures regarding greenhouse gas controls in its filings. The filings for  18 of the remaining 19 companies described one or more potential controls,  including the Kyoto Protocol and other international requirements;  proposals for federal legislation requiring reductions in greenhouse gas  emissions; and current and proposed state requirements. In addition, while  all 19 companies referred to the potential impact of controls, the level of  detail varied among the companies. Moreover, while none of the 19  companies attempted to estimate the dollar value of the impact, citing  uncertainty over the specific nature of the requirements that might take  effect, they generally indicated that the impact could be material. Table 1  summarizes the types of information the electric utility companies  disclosed about the impact of potential controls over greenhouse gas  emissions.
In addition to differences in the level of detail companies provided, we  found considerable variation in where the disclosures were located within  the filings, posing a challenge for researchers trying to find information on  particular topics. Of the 19 companies that provided information on the  impact of potential controls over greenhouse gas emissions,   7 disclosed such information only in the S-K item 101, “Description of  Business” section of the company’s 10-K or 10-Q reports;  2 disclosed information only in S-K items 301 and 302, “Selected  Financial Data” and “Supplementary Financial Information” sections of  the company’s 10-K or 10-Q reports;  2 disclosed information only in S-K item 303, “Management’s Discussion  and Analysis of Financial Condition and Results of Operations” section  of the company’s 10-K or 10-Q reports; and   8 disclosed information in multiple sections of the 10-K, 10-Q, or the  company’s annual report to shareholders.
Ten of the 20 utility companies disclosed planned efforts to voluntarily  reduce their greenhouse gas emissions—or to avoid increasing them—over  the next several years. For example, one company reported that it had  joined the Chicago Climate Exchange, a pilot greenhouse gas emission  reduction and trading program, and had committed to reducing or  offsetting 18 million tons of carbon dioxide emissions by 2006. Two other  companies reported joining EPA’s Climate Leaders program, in one case  committing to an 18 percent reduction of greenhouse gas emissions from a  2001 baseline by 2008. Only one of the companies estimated its projected  spending on voluntary reduction efforts: the company reported that it  planned to spend $21 million between 2004 and 2010 on projects to reduce  or offset its greenhouse gas emissions.
section_title: Adequacy of SEC’s Efforts to Monitor and Enforce Compliance with Environmental Disclosure Requirements Cannot Be Determined
paragraphs: Without better information on the extent of environmental disclosure and  results of SEC’s reviews of companies’ filings, the adequacy of SEC’s efforts  to monitor and enforce compliance with environmental disclosure  requirements cannot be determined. SEC does not maintain a database on  the substance of its comments and company responses, and thus SEC  cannot use the information to identify trends or set priorities. Over the  years, SEC and EPA have made sporadic efforts to coordinate on improving  environmental disclosure. Currently, EPA periodically shares limited  information on specific, environment-related legal proceedings, such as  those involving monetary sanctions.
subsections: section_title: SEC Does Not Systematically Track or Analyze the Results of Its Oversight Efforts
paragraphs: SEC’s primary means to monitor and enforce requirements for the  disclosure of material information—including environmental matters—are  the review of companies’ filings and the issuance of comment letters to  obtain additional information, as appropriate. According to officials from  the Division of Corporation Finance, SEC relies on reporting companies  and their independent auditors to completely and accurately disclose  material information to investors; SEC’s role is to help companies ensure  that they are making the required disclosures and properly interpreting the  requirements. Even if SEC’s role were broader, SEC officials told us that  the agency does not have the resources to review all company filings or  conduct on-site examinations to proactively ensure that companies are  disclosing all material information.
Reviewers in the Division of Corporation Finance do a preliminary review  of companies’ annual 10-K filings to determine which reports warrant  further scrutiny and at what level. Of those reports, SEC usually conducts  either a full review, which covers all aspects of the filing, or a financial  review, which focuses primarily on the financial statements and related  material, such as the section including management’s discussion and  analysis. SEC may also choose to conduct a limited review of specific  issues that have been identified as needing attention. For example, a  limited review might focus on a company’s accounting policy for  recognizing revenue in its financial records and reports. As table 2 shows,  SEC reviewed about 8 to 20 percent of the annual filings each year from  1999 through 2003.
To ensure consistency across reviewers, SEC uses guidance that provides  an organizational structure for each review and the documentation that  supports it. The guidance identifies, as a reminder for the reviewers,  various aspects of the filing that should be covered in the review,  depending on the particular company and the industry it represents; among  other things, the guidance cites the adequacy of disclosures related to  environmental liabilities. If a reviewer questions the accuracy or  completeness of the filing and believes that further disclosures may be  warranted, SEC issues a comment letter requesting additional  information. SEC officials said that companies may sometimes be  reluctant to respond to the comment letters, claiming that providing the  requested information is too difficult or expensive or will hurt their  competitive position. In the case of time-critical transactional filings,  companies have an incentive to respond to SEC’s comment letters because  the companies cannot raise additional capital by issuing securities until  SEC has cleared the filings. Although the Division of Corporation Finance  does not have a similar “stick” to compel companies to respond in the case  of the 10-K or 10-Q filings, the companies generally comply, according to  SEC officials.
When a company’s failure to respond is particularly egregious, SEC may  refer the case to its Division of Enforcement. According to information  from the Division of Enforcement and other sources, we identified four  enforcement actions related to inadequate environmental disclosure since  1977, none of which were referred by the Division of Corporation Finance.  Enforcement officials were not aware of any additional cases and said that  while they track enforcement cases by broad program area, such as  broker-dealer fraud, insider trading, and issuer financial disclosure, they do  not track the number of cases in which environmental disclosure is the  primary issue. According to an official in the Division of Enforcement, most  enforcement actions are prompted by company whistleblowers or news  reports of company wrongdoing rather than referrals from the Division of  Corporation Finance.
SEC officials noted that reviewing company filings is an iterative process; a  single filing often generates multiple comment letters and responses before  SEC is satisfied that all matters have been resolved. In some instances, SEC  raises one or more questions about the disclosures in a company’s filing  and, based on the company’s response, is either satisfied with the  explanation or decides that the matter does not warrant additional  follow-up.
SEC’s Division of Corporation Finance does not systematically track the  issues raised in comment letters. According to SEC officials, they do not  have a database on the comment letters that would enable them to  determine the most frequently identified problem areas, analyze trends  over time or within particular industries, or assess the need for additional  guidance in certain areas. SEC officials told us that for the most part, they  rely on the reviewers’ knowledge and experience to get a sense of the most  common problem areas. While SEC did not have any statistics on the  frequency with which its comment letters questioned companies’  environmental disclosures, Division of Corporation Finance officials told  us that, based on their experience, environmental disclosure is rarely  among the issues cited if one considers all of the filings SEC reviews, partly  because of the nature of the businesses involved. Within particular  industries, however, SEC officials said that reviewers regularly and  frequently comment on environmental disclosure.
In the absence of a formal tracking system, an SEC study of annual 10-K  filings from the Fortune 500 companies for the year 2002 provided some  information on the most common disclosure issues. To conduct the study,  SEC screened the companies’ filings and then selected a substantial  number for further review; ultimately, SEC sent comment letters to more  than 350 companies. According to officials from the Division of  Corporation Finance, the type and frequency of comments identified in the Fortune 500 study were consistent with their observations generally.  SEC’s summary report noted that environmental disclosure prompted  comments more frequently in particular industries, such as oil and gas and  mining companies and certain manufacturing companies. The reviewers  questioned companies’ disclosure of critical accounting policies related to  environmental liabilities including, among other things, the adequacy of  information on estimates of potential losses and litigation costs.
Although SEC does not have a database of its comment letters and the  company responses, officials from the Division of Corporation Finance told  us that much of the information can be obtained from other sources. The  officials explained that at least one private company has been submitting  thousands of requests for the comment letters and responses under the  Freedom of Information Act and is making the information available to the  public for a fee. According to the officials, responding to these requests has  absorbed a considerable amount of SEC staff time and other resources.
SEC has taken steps to facilitate its ability to analyze the results of its  monitoring process. For example, SEC is establishing a new Office of  Disclosure Standards. Among other things, the office will be responsible  for ensuring the quality and consistency of reviews across reviewers and  different industry groups. As part of that effort, in March 2004, SEC began  to require reviewers to prepare a closing memorandum containing a listing  of all documents examined by SEC reviewers, a summary of the major  issues raised during their review, and how they were resolved. While these  memoranda are being prepared in electronic form, the information is  currently not coded or organized to facilitate analysis across multiple  filings. SEC is still determining how it might organize and use these data.
section_title: SEC and EPA Have Made Limited Efforts to Improve Environmental Disclosure through Coordination
paragraphs: Over the past 20 years, SEC and EPA have made sporadic efforts to  improve environmental disclosure through coordination, but the two  agencies have not formally agreed to share relevant information and the  extent of information sharing is currently limited. According to EPA,  information sharing began informally in the mid-1980s, and in February  1990, SEC and EPA reached an agreement under which EPA would provide  enforcement-related data to SEC’s Division of Corporation Finance on a  quarterly basis. As a result of the agreement, EPA began providing  information on recently concluded cases filed under federal environmental  laws as well as other information related to hazardous waste sites and  facilities. EPA officials indicated that their staff also assisted SEC by (1)  commenting on the accuracy of environmental disclosures by some  companies and (2) training Division of Corporation Finance reviewers to  understand the environmental statutes administered by EPA and interpret  the enforcement data from EPA.
Although the 1990 agreement was conceived as the basis for a formal  memorandum of understanding between the two agencies, agency  representatives never signed such a memorandum. While there are  conflicting reports on when the regular transfer of information halted,  officials from SEC and EPA agree that some problems arose because the  volume and complexity of the data that EPA was providing were not useful  to SEC reviewers. For example, SEC questioned the usefulness of some  data because they were facility-specific, and SEC could not readily identify  the parent company responsible for reporting to SEC.
Currently, information sharing occurs less frequently and is focused on  specific legal proceedings, such as those involving monetary sanctions for  environmental violations. SEC officials said that their reviewers use EPA  data only to raise “red flags” pointing them to situations in which  companies may not be disclosing potentially material information. Once a  reviewer identifies a potential disclosure problem, the next step is  following up with the individual company to request information. EPA  officials indicated that they would be willing to work with SEC to explore  options for improving the usefulness of the data. SEC officials said that  they were willing to work with EPA, but downplayed the need for  additional coordination, saying that the information in EPA’s Enforcement  and Compliance History Online database is sufficient for the purpose of  identifying potential disclosure problems.
section_title: Experts Suggest Changes to Requirements and Guidance, Increased Oversight, and Nonregulatory Actions to Increase and Improve Environmental Disclosure
paragraphs: The experts that we surveyed generally concur with the concerns identified  by stakeholders and offered a variety of suggestions for improving  disclosure or, in some instances, comments about why particular proposals  are unnecessary or unworkable. For the most part, the experts believe  that the identified concerns contribute to the inadequate disclosure of  environmental information, and a few experts identified lawsuits in which  shareholders alleged that their ability to make investment decisions was  impaired as a result of the concerns regarding inadequate environmental  disclosure. (See information on shareholder suits below.) The suggestions  we obtained fell into three broad categories: modifying disclosure  requirements and guidance, increasing oversight and enforcement, and  adopting nonregulatory approaches to improving disclosure. To gain the  perspective of companies that would be affected by the suggestions, we  contacted representatives of reporting companies, who asserted that some  of the suggestions would not improve disclosure of environmental  information and to some extent, might hinder the ability of investors to  make sound investment decisions.
Experts identified a few shareholder lawsuits alleging that corporate securities statements  have contained material misrepresentations or omissions concerning the companies'  potential environmental liabilities, thus leading shareholders to purchase the companies’  stock at artificially inflated prices. The courts did not rule on whether the alleged failure to  disclose actually caused whatever financial harm the shareholders may have suffered.To  prevail in such cases, shareholders must demonstrate that (1) the company intentionally  misled them by misstating or withholding material information about environmental risks  or liabilities and (2) the misstatements or omissions caused the shareholders to suffer a  financial loss. In some cases similar to those identified in our survey, the corporate  officers reached settlements with the shareholders.
subsections: section_title: Some Experts Suggested Modifying Existing Disclosure Requirements and Related Guidance
paragraphs: About half (13 of 30) of the experts who participated in our survey offered  suggestions on how SEC and other standard-setting bodies could improve  the current requirements and guidance for disclosing environmental  information. These suggestions are summarized below along with  contrasting views from a few of the experts we surveyed and  representatives of reporting companies, including the American Chemistry  Council, the Business Roundtable, the Edison Electric Institute, and the  U.S. Business Council for Sustainable Development.
On limiting the flexibility of existing requirements: Some experts  suggested that SEC or the Financial Accounting Standards Board, as  appropriate, clarify terms such as “probable,” “reasonably possible,” and  “remote” relative to the occurrence of environmental liabilities, or require  or recommend the use of expected value analysis in estimating the  amounts of liabilities, as advocated by ASTM International. In addition,  several experts commented on the need for more guidance on materiality,  calling for clarification or more specific criteria. One participant suggested  that SEC establish a presumption of materiality for environmental  liabilities, thus shifting the burden of proving that such liabilities are not  material to companies. In contrast, another expert commented that more  specific guidance on estimating the amounts of liabilities would lead to  rules not well suited for all companies and would mislead users of  company filings by making estimates appear to be more precise than they  really are. Company representatives made similar comments, saying that  uncertainties about the nature and extent of environmental contamination,  potential remediation costs, and the extent of the company’s liability all  affect the feasibility of deriving precise estimates. Company  representatives also objected to requiring the use of the expected value  method of cost estimation advocated by ASTM International, saying that it  would lead to misleading disclosures because, for example, the method  does not allow companies to factor in contributions from other potentially  responsible parties in estimating their own potential liabilities. Finally,  company representatives maintained that existing guidance on materiality  is sufficiently clear and necessarily flexible to accommodate companies’  individual circumstances.
On reporting existing environmental liabilities: A few experts suggested  that SEC or the Financial Accounting Standards Board, as appropriate,  clarify the accounting and disclosure procedures for unasserted but  enforceable claims related to the cleanup of environmental contamination  at current and former company facilities. This clarification would, among  other things, specify the point at which such liabilities occur (and a  disclosure obligation may exist)—when the release happens or when a  third party initiates action against the company. Representatives of  reporting companies did not agree with this suggestion. They said that  environmental laws require companies to study and remediate  contaminated sites, and disclosing possible sites—based merely on their  existence—does not advance investors’ understanding of a company’s  economic value. Company representatives pointed to guidance from the  Financial Accounting Standards Board, which notes that the existence of  an environmental liability becomes determinable and the related costs  estimable over a continuum of events and activities that help define the  liability. Once a third party intervenes and companies learn more about the  extent of the problem, they can make and disclose better estimates.
On disclosing future risks: Another suggestion from the experts was that  SEC issue guidance clarifying when certain potential environmental issues  should be disclosed, citing, in particular, the potential impacts of global  climate change and controls over greenhouse gas emissions. More  specifically, one expert commented that in the case of climate change, SEC  should issue guidance advising companies to report their internal  assessments of the impact of complying with pending environmental  regulations over a specified time period, including the range of possible  actions being considered by a company, how the actions might affect the  financial condition and operations of the company, and whether the effects  would be material to shareholders. Company representatives and a few of  the experts commented that it is inappropriate to single out particular  issues, such as climate change, for disclosure or to use SEC’s disclosure  requirements to advance the interests of particular groups. According to  one expert, the current rules and guidance for disclosing future  environmental risks are clear and companies know they cannot avoid  disclosure of such risks by categorizing them as “forward-looking”  information. Company representatives also questioned the value of  disclosing “speculative” information to investors. Moreover, the  representatives pointed out that such requirements could have significant  ramifications for disclosure in general, depending on where one draws the  line in deciding when the impact of potential legislation should be  disclosed.
On requiring companies to report environmental performance  information: Five of the experts we surveyed said that SEC should require  companies to provide information on their environmental performance  (e.g., pollutant releases and remediation expenditures) or issue guidance  stating that such information might be considered material by investors. In  one case, an expert suggested that SEC use the Global Reporting Initiative  as a model for the types of environmental performance measures that  should be disclosed. Some experts disagreed with proposals for reporting  requirements involving companies’ environmental performance, saying  that such information is publicly available outside of SEC filings. One  expert also questioned the justification for singling out environmental  performance as opposed to other potentially important social issues. While  some company representatives acknowledged that environmental  performance data and intangible assets such as environmental  management systems might be considered important by some investors,  they said that such information is already available to the public through  company Web sites; special reports on environment, health, and safety  issues; and federal and state regulatory agencies.
On changing requirements for reporting monetary sanctions and  aggregating liabilities: Some experts believe that SEC should (1) change  the definition of monetary sanctions to include supplemental  environmental projects that companies fund in exchange for reduced  sanctions so that investors have a more complete picture of companies’  potential costs and (2) issue guidance recommending that companies  aggregate the estimated costs of similar liabilities before assessing  materiality and the need for disclosure. Representatives of reporting  companies questioned the proposed inclusion of supplemental  environmental projects as monetary sanctions because companies are  generally not permitted to use dollar-for-dollar offsets when they agree to a  supplemental project. Some of the experts we surveyed commented that  the threshold for monetary sanctions should be updated or abolished  altogether. Company representatives also thought that the fixed thresholds  for disclosures related to legal proceedings were outdated. They  commented, for example, that the $100,000 threshold for monetary  sanctions should be raised to $1 million to reflect increases in penalty  amounts since the regulation was promulgated over 20 years ago.  Regarding calls for aggregation of similar liabilities, one of the experts and  some company representatives said that such a requirement would mislead  investors by portraying a company that is one of many potentially  responsible parties for several environmental remediation sites as  equivalent to a company that is likely to be responsible for one or two  larger cleanup sites, when the companies’ actual liabilities could differ  significantly. Other company representatives commented that although  aggregation of liabilities related by some common cause or probability  seems reasonable, aggregation of any and all environmental liabilities with  differing circumstances would be arbitrary and not very useful to investors  in analyzing a company’s risks.
On other regulatory approaches to improving disclosure: Experts’  suggestions included a call for SEC to issue new guidance that focuses  specifically on environmental disclosure as a way of underscoring its  importance. Another suggestion was that the Public Company Accounting  Oversight Board take action to improve procedures for evaluating the  effectiveness of companies’ internal control policies and procedures as  they relate to environmental matters, in connection with the annual  management assessment of internal controls required by the  Sarbanes-Oxley Act of 2002. Among other things, according to one expert,  the board should issue guidance calling for independent auditors to verify  environmental remediation liabilities during financial statement audits,  with the assistance of specialists as necessary. Regarding the suggestion for  guidance focusing on environmental disclosure issues, representatives of  reporting companies said that SEC should first determine if there is a  compliance problem and, if one exists, the agency could issue special  guidance to highlight the importance of environmental disclosure  requirements. Company representatives did not see a need for specific  guidance on assessing internal controls over environmental matters. They  commented that the Public Company Accounting Oversight Board has  already issued a number of proposed rules for the auditing of companies’  internal controls, which will encompass controls for environmental  information.
section_title: Some Experts Called for Better Monitoring and Targeted Enforcement Actions to Increase Environmental Disclosure
paragraphs: A similar number (14 of 30) of the experts who participated in our survey  had suggestions for enhancing SEC oversight of environmental disclosure  through increased monitoring, enforcement, or coordination with EPA.  Specifically, some experts said that SEC should review more filings in  industries for which environmental disclosure is more likely to be a  concern and issue more comment letters for problematic filings to force  companies to reexamine their internal controls for the reporting of  environmental information. Some experts also suggested that SEC put  more emphasis on enforcing environmental disclosure requirements to (1)  establish legal precedents for adequate disclosure, (2) achieve greater  consistency in company reporting of environmental liabilities, and (3)  ensure that companies take seriously the reporting of environmental  information. While the experts did not specify how SEC should increase its  enforcement, many of those that offered suggestions believe that  increasing the emphasis on enforcement—for example, by initiating a few  high-profile cases—would better deter nondisclosure of important  environmental information. Two of the experts we surveyed did not see a  need for increasing SEC’s monitoring and enforcement. They commented  that SEC is probably doing a reasonable job, given competing priorities and  the lack of evidence that disclosure of material environmental information  is inadequate. Representatives of reporting companies pointed out that the  frequency of SEC’s reviews of annual 10-K filings and the amount of  resources available to conduct such reviews has increased significantly as  a result of the Sarbanes-Oxley Act of 2002.
Another suggestion from the experts was for better coordination between  SEC and EPA and state environmental agencies to obtain information  useful for evaluating companies’ environmental disclosures. For example,  one expert suggested that SEC work with EPA to develop a protocol for  using EPA data on environmental remediation liabilities as an indicator of  whether companies are adequately reporting environmental information in  their filings. It was also suggested that SEC develop a mechanism for  comparing real-time information on environmental liabilities and their  related monetary sanctions with companies’ filings. Some representatives  of reporting companies believed that coordination between EPA and SEC is  already occurring to the extent that SEC has access to publicly available  databases such as the Enforcement and Compliance History Online and  Toxics Release Inventory. For the most part, company representatives did  not think increased coordination would yield much improvement in  disclosure because many environmental regulatory agencies do not have  expertise in financial disclosure.
section_title: Some Experts Said Certain Nonregulatory Approaches Could Increase and Improve Environmental Disclosure
paragraphs: One-third of the experts that participated in our survey (10 of 30) had  suggestions for improving environmental disclosure by nonregulatory  means. For example, they cited several voluntary disclosure initiatives,  such as the Global Reporting Initiative and the Carbon Disclosure Project,  in which companies might participate to demonstrate their commitment  toward good governance on environmental issues. Another potential  vehicle for improving environmental disclosure, according to some  experts, is secondary markets, such as insurance and financial services. If  these markets started incorporating environmental information into their  company assessments, then companies would be more likely to disclose  such information to improve their relative standing. One expert suggested  creating a public database of companies’ disclosure of environmental  performance measures, similar to the Toxics Release Inventory database  maintained by EPA. Such a database would allow investors to compare  companies’ environmental performance across industries, thus creating an  incentive for companies to compete on that basis. Finally, some experts  cited shareholder resolutions as a vehicle for encouraging companies to  disclose environmental information or issue reports on corporate  environmental performance by petitioning for a proxy vote on such matters  by the entire body of shareholders.
Representatives of reporting companies agreed that nonregulatory  approaches can be effective in making company management aware of  public interest in environmental disclosure. For example, some  representatives said that companies and trade associations have adopted  voluntary disclosure guidelines for environmental information, although  they also commented that projects such as the Global Reporting Initiative  do not inform investors with broad interests. According to the American  Chemistry Council, all of its members are required to publicly report on  their environmental management systems. While company representatives  acknowledged the growing number of socially responsible investors,  particularly among institutional investors, they said that investment  analysts have not demanded more information about environmental risks  and liabilities. The representatives also commented that secondary  markets would indeed prompt environmental disclosure if such  information were in demand. Finally, while company representatives  agreed that shareholder resolutions are one avenue for getting companies  to disclose certain information, particularly information that would not be  appropriate in SEC filings, the representatives believe that shareholders  and other interest groups should also pursue informal discussions with  company management.
section_title: Conclusions
paragraphs: Without more compelling evidence that the disclosure of environmental  information is inadequate, the need for changes to existing disclosure  requirements and guidance or increased monitoring and enforcement by  SEC is unclear. SEC is already taking steps to collect information on the  results of its reviews of company filings. As part of this process, we believe  that SEC should ensure that it has the information it needs to allocate its  oversight resources and determine where additional guidance might be  warranted. In addition, because SEC’s comment letters and the company  responses are already available to the public on a piecemeal basis as a  result of requests under the Freedom of Information Act, we believe that  SEC should consider making the information more readily accessible by  creating its own electronic database available through the agency’s Web  site. Doing so would have several benefits; it would (1) free up SEC  resources, (2) ensure that companies and investors are informed about the  nature and results of SEC’s oversight regarding the disclosure of  environmental and other information important to investors, and (3) enable  researchers to do more robust analyses of companies’ disclosures within  and across industries. Finally, despite previous problems with the  usefulness of EPA’s data, because environmental disclosure is one issue  that is specifically addressed in SEC’s regulations—and is important to a  growing number of investors—it makes sense for SEC to ensure that its  staff is taking advantage of relevant information available from EPA.
section_title: Recommendations for Executive Action
paragraphs: To improve the tracking and transparency of information on environmental  disclosure problems, we recommend that the Chairman, SEC, take the  following two actions, recognizing that they will also affect the amount of  information available to SEC and the public on other disclosure issues:   As SEC develops its new procedures for closing memoranda following  its reviews of company filings, take steps to ensure that key information  from the memoranda is electronically tracked and organized in a way  that would facilitate its analysis across multiple filings. Among other  things, SEC should consider organizing the information so that agency  officials can systematically determine the most frequently identified  problem areas, analyze trends over time or within particular industries,  and assess the need for additional guidance in certain areas.
Explore the creation of a searchable database of SEC comment letters  and company responses that would be accessible to the public.
We also recommend that the Chairman, SEC, work with the Administrator,  EPA, to explore opportunities to take better advantage of EPA data that  may be relevant to environmental disclosure and examine ways to improve  its usefulness.
section_title: Agency Comments
paragraphs: We provided a draft of this report to SEC and EPA for review and comment.  We received comments from officials within SEC’s Division of Corporation  Finance and EPA’s Office of Enforcement and Compliance Assurance. (See  app. VI for the full text of SEC’s comments.) SEC agreed with the report’s  recommendations and is taking some actions to implement them.  Regarding the tracking of key information from its reviews of company  filings, SEC said that it is creating a searchable electronic database that will  facilitate analysis across multiple filings. In addition, SEC agreed to make  its comment letters and the company responses available to the public and,  in late June, announced that the information will be accessible through its  Web site, beginning with August 2004 filings. SEC also agreed to consider  our recommendation for taking better advantage of relevant EPA data in its  future efforts to work with EPA. EPA generally agreed with the information  presented in the report but did not provide a letter. SEC and EPA provided  technical comments, which we have incorporated as appropriate.
Unless you publicly announce its contents earlier, we plan no further  distribution of this report until 30 days from the date of this letter. At that  time, we will send copies to appropriate congressional committees; the  Chairman of SEC; the Administrator, EPA; and the Director of the Office of  Management and Budget. We will also make copies available at no charge  on the GAO Web site at http://www.gao.gov.
Please call me at (202) 512-3841 if you or your staff have any questions.  Major contributors to this report are listed in appendix VII.
section_title: Scope and Methodology
paragraphs: To determine key stakeholders’ views on how well SEC has defined the  requirements for environmental disclosure, we first identified what  environmental information companies are required to disclose.  Specifically, we reviewed SEC’s disclosure regulations, generally accepted  accounting principles promulgated by the Financial Accounting Standards  Board, auditing standards issued by the AICPA, and applicable guidance  issued by all three entities. To confirm that we had identified all relevant  disclosure requirements and to clarify our understanding of them, we  interviewed officials within SEC’s Division of Corporation Finance and  Office of Chief Accountant. We met with a variety of groups that had a  stakeholder interest in the disclosure requirements because they (1) had a  particular interest in environmental disclosure; (2) used disclosure  information as investors, financial analysts, or researchers; or (3) were  involved in the disclosure process as reporters or preparers of SEC filings.  Our stakeholder contacts included representatives of investor  organizations, including those that identify themselves as socially  responsible and those with general investment interests; financial services  institutions; environmental groups, attorneys, and consultants; business  associations; credit rating agencies; and public accounting firms.
To determine the extent to which companies are disclosing environmental  information in their filings with SEC, we identified existing studies on  environmental disclosure and analyzed their results and methodology.  First, we conducted a literature search on the Internet, using the keywords  “SEC,” “disclosure,” and “environmental,” to identify references, including  studies, journal articles, and other material, that focused on the disclosure  of environmental information by publicly held companies. We identified  additional references by reviewing the bibliographies of the material from  the initial Internet search and through contacts with study authors. Overall,  we identified 152 references in material published from 1990 to 2003.
To zero in on the most useful material, we established two criteria: (1) the  reference had to be relatively recent, with a date of 1995 or later, and (2) it  had to contain original research. After eliminating 50 references that were  published prior to 1995 and 75 references that reviewed or summarized  research performed by others, we were left with 27 studies that met our  criteria. (The studies were published, presented at a conference, or  provided by the authors during 1995 to 2003.) We reviewed each of the  remaining 27 studies in detail and (1) assessed each study’s research  methodology, including its data quality, research design, and analytic  techniques and (2) summarized its major findings and conclusions. When a  study focused on compliance with disclosure requirements, we determined  whether the criteria used to assess the adequacy of companies’ disclosures  were consistent with existing regulations, standards, and guidance. We also  assessed the extent to which each study’s data and methods support its  findings and conclusions.
Overall, we eliminated 8 of the 27 studies from our analyses because they  had severe methodological limitations or provided little or no information  on key aspects of the study methodology. We eliminated another four  studies because they did not address environmental disclosure in terms of  SEC’s reporting requirements or examine the amount of environmental  information being disclosed. The latter four studies focused entirely on  other issues such as the impact of environmental disclosure on investor  behavior and the relationship between environmental disclosure and  market value. The remaining 15 studies had strong limitations, which  should be considered in interpreting the results, but the limitations were  not so severe as to preclude the studies’ use. Appendix III briefly  summarizes the objectives, scope, and limitations of the 15 studies  included in our analyses.
To supplement our review of existing disclosure studies, we also conducted  a limited examination of disclosures related to potential future risks,  focusing on the impacts of potential controls on greenhouse gas emissions  at 20 U.S. electric utilities with relatively high emissions of carbon dioxide.  We obtained emissions data from EPA’s EGRID2002 database, using  emissions in 2000 (the most recent data available), and identified 20  utilities with high emissions that are also publicly traded companies  subject to SEC disclosure requirements. These companies were the AES  Corporation; Allegheny Energy, Inc.; Ameren Corporation; American  Electric Power Company, Inc.; CenterPoint Energy, Inc.; Cinergy  Corporation; Dominion Resources, Inc.; DTE Energy Company; Duke  Energy Corporation; Edison International; Entergy Corporation;  FirstEnergy Corporation; FPL Group, Inc.; Mirant Corporation; PPL  Corporation, Inc.; Progress Energy; Reliant Energy, Inc.; The Southern  Company; TXU Corporation; and Xcel Energy, Inc. For each company, we  reviewed the most recent available annual and quarterly filings, namely, the  fiscal year 2003 forms 10-K and 10-Q filings (including any such filings that  were amended). We looked for disclosures related to the impact of  potential controls over greenhouse gas emissions, including any discussion  of estimated risks to the utilities’ operations or financial condition and the  estimated cost impact. To ensure that we identified all relevant disclosures,  we searched the documents for a number of key terms, including “global  warming,” “climate change,” “Kyoto Protocol,” “greenhouse gases,” and  specific elements of greenhouse gases such as “carbon dioxide.” We  focused on the sections of the filings most likely to yield disclosures related  to the impact of potential controls over greenhouse gas emissions,  including Forward-Looking Information (when it was included as a  separate section), item 1, Description of Business; item 3, Legal  Proceedings; item 7, Management’s Discussion and Analysis of Results of  Operations and Financial Condition; and item 8, Financial Statements and  Supplemental Data. When a company included its annual report to  shareholders in its filing by reference, we also reviewed that report in the  same manner as the filing. After extracting the relevant excerpts from the  filings, we created a table and categorized the disclosures by company and  type of disclosure.
To assess the adequacy of SEC’s efforts to monitor and enforce compliance  with the disclosure requirements, we obtained information from the  Division of Corporation Finance, which is responsible for reviewing  companies’ filings to check their compliance with disclosure requirements,  and the Division of Enforcement, which has authority to initiate civil or  criminal actions to enforce the requirements. Specifically, we obtained  information on SEC’s procedures for reviewing company filings, issuing  comment letters, and documenting the results; reviewed relevant  documents, including SEC’s analysis of annual filings by Fortune 500  companies; obtained available statistics on SEC’s monitoring and  enforcement process; and interviewed SEC reviewers responsible for  reviewing annual filings of companies in industries with a greater  likelihood of being affected by environmental disclosure requirements. We  also obtained information on enforcement actions by SEC’s Division of  Enforcement, including cases involving environmental disclosure, and met  with officials within SEC and EPA’s Office of Enforcement and Compliance  Assurance to obtain information on the nature of interagency coordination  on environmental disclosure.
To obtain suggestions on actions for increasing and improving  environmental disclosure, we conducted a Web-based survey of 30 experts  on environmental disclosure issues. We selected the participants from a  larger group of 52 widely recognized experts on environmental disclosure,  which we compiled by consulting organizations and individuals with a  stakeholder interest in environmental disclosure, relevant literature,  authors of reports on disclosure issues, and other sources. We also  obtained assistance from the National Academies of Science in identifying  experts on environmental disclosure.
In compiling our initial list of experts, we sought to achieve balance in  terms of various areas of expertise, including environmental laws and  regulations, accounting and auditing standards and guidance, SEC  disclosure requirements, the disclosure interests of socially responsible  investors, the disclosure interests of investors with general investment  interests; and the relationship between business strategy and corporate  governance. We also sought to achieve participation by experts from fields  that use the filings in some way, including auditing and accounting,  consulting, financial services, insurance, nonprofit advocacy groups, the  legal profession, public employee pension funds, credit rating agencies,  nonprofit research groups, and academia. Appendix IV lists the 30 experts  who participated in our survey.
Our questionnaire focused on concerns about SEC’s environmental  disclosure requirements, asking the experts for their views on the concerns  and for suggestions on how best to resolve them. To identify concerns, we  analyzed the results of 27 recent studies about environmental disclosure;  reviewed other relevant literature; and, as discussed earlier, interviewed  representatives of groups with a stakeholder interest in environmental  disclosure. In total, we identified 15 concerns, which we categorized into  five general areas: (1) addressing uncertainty regarding the likelihood and  amount of existing and potential liabilities related to environmental  contamination, (2) determining whether environmental information is  material, (3) disclosing future risks, (4) ensuring disclosure of important  environmental information, and (5) monitoring and enforcing  environmental disclosure. For each concern, we asked the experts about  the extent to which they shared the concern and thought that it contributed  to inadequate disclosure of environmental information. We also asked a  series of questions on the impact of inadequate disclosure and ways to  address problems related to inadequate disclosure.
We pretested the questionnaire with five experts in Boston, Massachusetts,  and Washington, D.C., revised it based on the feedback we received, and  posted the final version on GAO’s survey Web site. We notified the  participants of the availability of the questionnaire with an e-mail message,  which contained a unique user name and password for each. The  participants were able to log on and fill out the questionnaire but did not  have access to the responses of others. We obtained responses from all 30  experts for a response rate of 100 percent.
We analyzed the content of the responses given to the open-ended  questions to identify suggestions for increasing and improving  environmental disclosure. For each question, two coders independently  read the responses and identified broad categories for the responses. We  discussed these categories and reached agreement on which ones to use.  Each coder then worked independently to classify responses into the  categories. The coders then compared their classifications and resolved  any differences through discussion so that there was 100 percent  agreement.
Finally, we discussed the experts’ suggestions with representatives of  businesses responsible for filing reports with SEC, including industries  such as electric utilities and chemical manufacturing in which  environmental disclosure is more likely to be relevant. We met with the  American Chemistry Council, the Business Roundtable, the Edison Electric  Institute, and the U.S. Business Council for Sustainable Development to get  their views; in addition to the staff from these associations, representatives  from approximately 10 companies participated in the discussions.
section_title: Principal Requirements and Guidance Applicable to the Disclosure of Environmental Information in SEC Filings
paragraphs: Securities and Exchange Commission, Regulation S-X: Form and Content of and Requirements for Financial  Statements, Securities Act of 1933, Securities Exchange Act of 1934, Public Utility Holding Company Act of 1935,  Investment Company Act of 1940, Investment Advisers Act of 1940 and Energy Policy and Conservation Act of 1975,  37 Fed. Reg. 14592, codified at 17 C.F.R. Part 210.
Financial Accounting Standards Board, Statement of Financial Accounting Standards No. 5: Accounting for  Contingencies. Norwalk, CT: 1975.
Financial Accounting Standards Board, Interpretation No. 14: Reasonable Estimation of the Amount of a Loss: An  Interpretation of FASB Statement No. 5. Norwalk, CT: 1976.
Securities and Exchange Commission, Regulation S-K: Standard Instructions for Filing Forms under Securities Act  of 1933, Securities Exchange Act of 1934 and Energy Policy and Conservation Act of 1975, 47 Fed. Reg. 11401,  codified at 17 C.F.R. Part 229.
Securities and Exchange Commission, SEC Interpretation: Management’s Discussion and Analysis of Financial  Condition and Results of Operations; Certain Investment Company Disclosures [Release Nos. 33-6835; 34-26831;  IC-16961; FR-36], 54 Fed. Reg. 22427.
Financial Accounting Standards Board, Emerging Issues Task Force 90-8: Capitalization of Costs to Treat  Environmental Contamination. Norwalk, CT: 1990.
Financial Accounting Standards Board, Interpretation No. 39: Offsetting of Amounts Related to Certain Contracts:  An Interpretation of Accounting Principles Board (APB) Opinion No. 10 and Financial Accounting Standards Board  Statement No. 105. Norwalk, CT: 1992.
Financial Accounting Standards Board, Emerging Issues Task Force 93-5: Accounting for Environmental Liabilities.  Norwalk, CT: 1993.
Securities and Exchange Commission, Staff Accounting Bulletin No. 92, Topic 5.Y: Accounting Disclosures Relating  to Loss Contingencies, 58 Fed. Reg. 32843. Staff Accounting Bulletin No. 103 (listed below) amended SAB 92.
American Institute of Certified Public Accountants, Statement of Position 94-6: Disclosure of Certain Significant  Risks and Uncertainties. New York, NY: 1994.
American Institute of Certified Public Accountants, Statement of Position 96-1: Environmental Remediation  Liabilities. New York, NY: 1996.
Securities and Exchange Commission, Staff Accounting Bulletin No. 99: Materiality, 64 Fed. Reg. 45150.
Financial Accounting Standards Board, Statement of Financial Accounting Standards No. 143: Accounting for Asset  Retirement Obligations. Norwalk, CT: 2001.
Financial Accounting Standards Board, Statement of Financial Accounting Standards No. 144: Accounting for the  Impairment or Disposal of Long-Lived Assets. Norwalk, CT: 2001.
Securities and Exchange Commission, Action: Cautionary Advice Regarding Disclosure About Critical Accounting  Policies , 66 Fed. Reg. 65013.
Securities and Exchange Commission, Commission Statement about Management’s Discussion and Analysis of  Financial Condition and Results of Operations , 67 Fed. Reg. 3746.
Securities and Exchange Commission, Commission Guidance Regarding Management’s Discussion and Analysis of  Financial Condition and Results of Operations , 68 Fed. Reg. 75056.
Securities and Exchange Commission, Staff Accounting Bulletin No. 103: Update of Codification of Staff Accounting  Bulletins, 68 Fed. Reg. 26840.
Some of these documents have been amended since they were first issued.
section_title: Summary of Disclosure Studies Included in Our Analysis
paragraphs: Objective and scope (time frame)
Objective: To assess the potential impact of various  scenarios for (1) controls over greenhouse gas  emissions and (2) pressures to restrict access to oil  and gas reserves on shareholder value.
Small sample size within a single industry.
Estimates in study depend heavily on the accuracy  of various assumptions.
Scope: 16 oil and gas companies (forward-looking).
The authors attempted to incorporate input from  various experts into the assignment of probabilities  to final scenarios; however, the response rates from  these experts was quite low. The authors then  assigned probabilities on the basis of the limited  responses and using their best judgment.
Authors applied judgmental factors in attempting to  distinguish different refinery product mixes.
Objective: To identify factors that influence companies’  decisions to disclose information about environmental  liabilities.
No information on how the matching to produce  potentially responsible party sites was done or the  accuracy of the matching process related to the use  of industry data files.
Scope: 257 companies that have a high concentration  of Superfund exposure from four industries (1989  through 1993).
Study results not generalizable.
Objective: To assess the impact of environment- related disclosures in companies’ 10-K reports on the  market pricing of chemical firms.
Small sample size; no discussion of extent to which  selected companies are representative of the single  industry.
Scope: 30 public chemical companies (1994 through  1997).
Study results not generalizable.
Objective: To examine the extent of disclosures related  to emissions controls required under the Clean Air Act  Amendments of 1990.
Analyses may have been affected by differences in  collection of emissions data in 1990 and 1995.
Scope: 38 public companies that owned 88 coal-fired  electric utilities (1989, 1990, and 1995).
Small size of subgroups used in modeling affected  ability to draw meaningful conclusions and design of  subgroups relied on authors’ judgments.
Conclusions go beyond what is supported by the  analysis.
Objective and scope (time frame)
Objective: To examine the extent to which companies  identified as potentially responsible parties disclosed  information related to potential remediation liabilities in  their 1987 Form 10-Ks.
Criteria for assessing adequacy of disclosure not  consistent with the requirements.
Scope: 193 companies that were potentially liable for  Superfund remediation costs (1987).
No information on how companies were identified  for inclusion in the study or the extent to which the  companies are representative of others.
No description of the content analysis or steps  taken to ensure inter-rater reliability.
Objective: To determine whether the issuance of  additional guidance (American Institute of Certified  Public Accountants Statement of Position No. 96-1) led  to improved disclosure of Superfund liabilities in  companies’ annual filings with SEC.
Criteria for assessing adequacy of disclosure not  consistent with the requirements.
Limited time period covered by analysis.
Use of a “disclosure index” that is not defined.
Scope: 137 companies identified as potentially  responsible parties at 3 or more Superfund sites (1994  and 1997).
No information on data analysis techniques and  study does not include tables.
No information on methods used to measure  dependent variables, the statistical tests conducted,  the results of such tests, or methods used to  interpret the results.
Insufficient information to assess reasonableness of  study conclusions.
Objective: To determine whether companies’  disclosures about potential Superfund liabilities  changed as a result of EPA efforts to prompt increased  enforcement of disclosure requirements by SEC.
No justification for the particular weighting scheme  used in study, although finding of statistical  significance is heavily dependent on it.
Study results not generalizable.
Scope: 140 companies that were potentially liable for  Superfund costs (1987, 1989, and 1990).
Objective: To determine whether differences exist in  the disclosure of environmental liabilities by  companies identified as potentially responsible parties  at Superfund sites, depending on the companies’  involvement in initial public offerings.
Small sample size.
Initial sample of 45 was cut to 26 when some of the  selected firms could not be paired with comparison  firms; no discussion regarding the possible effects  of reduced sample.
Scope: 26 companies making initial public stock  offerings that were identified as potentially responsible  parties under the Superfund program (1984 through  1993).
Possible bias introduced because matching, in  terms of both standard industrial codes and assets,  is very imprecise.
No information on steps taken to ensure inter-rater  reliability of content coding.
Objective and scope (time frame)
Objective: To determine the relative quality of  disclosures over time and whether such information is  sufficient to satisfy stakeholders’ needs.
Criteria for assessing adequacy of disclosure not  consistent with the requirements.
Scope: 234 companies from 12 industries combined  into six industry groups selected from Standard &  Poor’s Compustat Services (1986 through 1991).
No information on how the companies were  selected.
Requirement that at least six companies remain  within an industry group could have influenced the  analyses.
No information on steps taken to ensure inter-rater  reliability of content coding.
Study results not generalizable.
Conclusions go beyond what is supported by the  analysis.
Objective: To examine the extent to which companies  disclosed environmental information in their annual  reports to shareholders.
Criteria for assessing adequacy of disclosure not  consistent with the requirements.
Scope: 645 Forbes 500 corporations (1991).
No information on how the sample was chosen or  the universe from which companies were selected.
Limited time period covered by analysis.
Study results not generalizable.
Conclusions go beyond what is supported by the  analysis.
Objective: To assess the adequacy of companies’  disclosure of material environmental exposures in  accordance with SEC rules.
Criteria for assessing adequacy of disclosure not  consistent with the requirements.
Small sample size.
Scope: 13 public pulp and paper companies (1998 and  1999).
No information on how the companies were  selected, the selection of experts who “identified  environmental pressures” on firms, how authors  identified these pressures, etc.
Estimates in study depend heavily on the accuracy  of various assumptions.
Conclusions go beyond what is supported by the  analysis.
Objective and scope (time frame)
Objective: To assess the potential financial impact of  projected environmental developments such as  pending air and water quality regulations. The study  also examined the extent of companies’ disclosures  related to future environmental expenditures and  contingencies.
Criteria for assessing adequacy of disclosure not  consistent with the requirements.
Small sample size.
Scope: 13 pulp and paper companies that will be  significantly impacted by near future environmental  developments (forward-looking).
No information on how the companies were  selected, the selection of experts who “identified  environmental pressures” on firms, how authors  identified these pressures, etc.
Estimates in study depend heavily on the accuracy  of various assumptions.
Objective: To examine the disclosure of environmental  remediation liabilities in companies’ financial reports  before and after a period in which the emphasis on  improving such reporting increased.
Criteria for assessing adequacy of disclosure not  consistent with the requirements.
Small sample size.
Scope: 17 corporations representing 20 Superfund  sites from EPA’s 1995 National Priorities List (1991  and 1994).
No information on criteria used to select sample.
No information on why study focused on 1991 and  1994.
Used dichotomous measures that ignore gradations  in quality and extent.
Study results are not generalizable.
Objective: To examine the quantity and quality of  environmental disclosures in the financial and  nonfinancial sections of corporate annual reports.
Criteria for assessing adequacy of disclosure not  consistent with the requirements.
Small sample size.
Scope: 53 companies in four industries (1989).
No specific information on sample selection (e.g.,  no elaboration on “leaders in their respective  industries”).
Possible sample selection bias cannot be  determined.
Study results not generalizable.
Objective: To examine the impact of SEC’s Staff  Accounting Bulletin No. 92 on the disclosure of  environmental remediation liabilities and associated  reserves.
Criteria for assessing adequacy of disclosure not  consistent with the requirements.
Scope: 199 nonfinancial firms from the 1994 Standard  & Poor’s 500 index (1991, 1992, and 1993).
Low number of cases used in some aspects of the  modeling raise questions of external validity and  potentially false negative results in tests of  significance.
No discussion of efforts to address possible issues  of autocorrelation in the multiple regression models  due to pooling of multiple years.
The overall objectives of some studies did not focus explicitly on disclosure of environmental  information under SEC rules. However, we included such studies in our analysis if they contained an  assessment of the amount or adequacy of disclosure in addition to their primary focus.
section_title: Experts Who Participated in GAO Survey
section_title: Survey Questions and Results
paragraphs: The Web-based questionnaire included six sections.  The first five sections began with an issue  statement and background material for the questions followed by a series of closed-ended  (radio button) questions and then, one or more open-ended (text box) questions.  The last  section also used a combination of closed-ended and open-ended questions, included general  questions about the impact of inadequate disclosure, and asked for suggestions on ways to  resolve concerns about disclosure.
Section I.  Addressing Uncertainty Regarding the Likelihood and Amount of Existing  and Potential Liabilities Related to Environmental Contamination  Issue Statement: Companies may not be providing enough information about environmental  liabilities in their financial statements because of uncertainties about (1) whether they have a  liability that must be disclosed and (2) if so, how to estimate the amount of the liability.  Without more specific standards and guidance, some companies conclude that they have  nothing to disclose, cannot calculate an estimate, or default to a minimum amount rather than  develop a best estimate.
Background: Under generally accepted accounting principles, companies must report  environmental and other types of liabilities in their financial statements if such liabilities are  “reasonably likely” to occur and the amounts are “reasonably estimable.” (In addition to  liabilities, losses may take the form of permanent reductions in asset value.) SEC, the Financial  Accounting Standards Board, and the American Institute of Certified Public Accountants have  all issued standards and guidance to assist companies (and their independent auditors) in  making determinations about when and what amount to disclose.
The standards and guidance on when to disclose a liability consider a range of probabilities  that the liability will occur—from “likely” to “remote”—and provide some benchmarks by  which companies can judge the likelihood of a liability resulting from environmental  contamination (for example, notification by the Environmental Protection Agency that they  have been identified as a responsible party at a hazardous waste site).
The standards and guidance on what amount to disclose specify the cost elements that should  be included in an estimate and require companies to use the best information currently  available. In addition, the guidance helps companies determine an appropriate amount to  disclose if they estimate that the liability will fall within a particular dollar range.
Concern #1:  The guidance on assessing the likelihood of an environmental liability  and determining when it must be disclosed is not sufficiently clear.  For example,  opinions vary on whether a disclosure obligation exists at the time the environmental  contamination occurs or the point at which a regulatory agency (or some other third  party) has taken action against a company to force a cleanup.
Q1.  Do you share this concern?
Q2.  Does the lack of clear guidance for assessing the likelihood of an environmental  liability contribute to inadequate disclosure of environmental information?
0.0 Concern #2:  The standards and guidance applicable to estimating the amount of environmental  liabilities are not specific enough to help companies deal with the uncertainties inherent in  deriving the estimates.  Such uncertainties include the extent to which cleanup costs might be  shared with other responsible parties or offset by insurance recoveries, the extent of  contamination and required cleanup, the state of the art of available cleanup technology, and the  stringency of environmental cleanup standards.
Q3.  Do you share this concern?
Q4.  Does the lack of specific standards and guidance for estimating the amount of  environmental liabilities contribute to inadequate disclosure of environmental information?
Q5.  Please provide any additional comments you have, or further elaboration on your  responses for Section I, “Addressing Uncertainty Regarding the Likelihood and Amount of  Existing and Potential Liabilities Related to Environmental Contamination,” in the space below.
subsections: section_title: Section II: Determining Whether Environmental Information is Material
paragraphs: Issue Statement: Companies may not be providing environmental information in their SEC  filings that would be considered material by “reasonable investors.”
Background: Applicable regulations and guidance generally define materiality in terms of  information that is important to investors’ investment decisions or necessary for the fair  presentation of the financial statements in accordance with generally accepted accounting  principles. For example, SEC’s regulations define material information as “matters about  which an average prudent investor ought reasonably to be informed.” As another example,  guidance issued by the Financial Accounting Standards Board states that the omission or  misstatement of an item in a financial report is material if, in the light of surrounding  circumstances, the magnitude of the item is such that it is probable that the judgment of a  reasonable person relying on the report would have been changed or influenced by the  inclusion or correction of the item.
SEC’s regulations and guidance generally do not establish numeric thresholds for determining  materiality. However, SEC Regulation S-K, item 103 “Legal Proceedings” contains two  exceptions: (1) losses resulting from any administrative or judicial proceeding involving  federal, state, or local environmental laws, if the amount of the losses exceeds 10 percent of  the company’s current assets and (2) monetary sanctions greater than $100,000, if a  governmental authority is a party to the proceeding.
Concern #3:  The regulations and guidance issued by SEC and other standard- setting bodies are not specific enough to ensure adequate disclosure of material  information, environmental or otherwise. For example, the regulations and guidance  lack any metrics that could serve as minimum thresholds for materiality and do not  sufficiently emphasize intangible, nonquantifiable factors in materiality  determinations (for example, the impact of environmental contamination on a  company's reputation).
Q6.  Do you share this concern?
Q7.  Does the lack of specific regulations and guidance for determining materiality  contribute to inadequate disclosure of environmental information?
Concern #4:  SEC's regulations do not require companies to aggregate the estimated  costs of potential environmental liabilities (for example, multiple hazardous waste  sites) when assessing materiality.
Q8.  Do you share this concern?
Q9.  Does the lack of a requirement to aggregate the estimated costs of potential  environmental liabilities contribute to inadequate disclosure of environmental  information Percent of respondents?
Concern #5:  The $100,000 threshold for monetary sanctions may be outdated. For  example, the threshold has not been adjusted since it was established in 1981.
Q10.  Do you share this concern?
Q11.  Does the outdated monetary threshold contribute to inadequate disclosure of  environmental information?
0.0  Concern #6:  The $100,000 threshold for monetary sanctions may be too restrictive.  For example, certain costs related to the sanctions, such as the costs associated with  (1) environmental remediation and (2) supplemental environmental projects conducted  in lieu of paying sanctions, are not counted in determining whether the threshold has  been met.
Q12.  Do you share this concern?
Q13.  Does the too restrictive definition of monetary sanction contribute to inadequate  disclosure of environmental information?
Q14.  Please provide any additional comments you have, or further elaboration on  your responses for Section II, “Determining Whether Environmental Information is  Material,” in the space below.
Section III: Disclosing Future Environmental Risks  Issue Statement: Companies may not be providing enough information on potentially  significant environmental problems or regulatory initiatives that could pose a future financial  risk.
Background: SEC’s regulations and guidance categorize companies’ disclosure of information  regarding their future condition, including environmental risks, in two different ways. SEC  Regulation S-K, item 303, “Management Discussion and Analysis” requires companies to  discuss in their filings with SEC any known material trends, events, and uncertainties that  would cause the companies’ liquidity, capital resources, and results of operations, as reported,  to not be indicative of future operating results or financial condition. On the other hand, SEC’s  instructions for this requirement encourage, but do not require, companies to discuss forward- looking information in their filings. According to SEC, reporting forward-looking information  involves anticipating a future trend or event, or anticipating a less predictable impact of a  known event, trend or uncertainty.
Concern #7:  SEC's regulations and guidance do not clearly distinguish between  “known information that might impact future operating results” and “forward-looking  information.”
Q15.  Do you share this concern?
section_title: Concern #8: SEC's regulations and guidance do not specify how far into the future companies should look in identifying and discussing “known” or “forward-looking” information (including information on environmental risks) and the potential impacts of such information.
paragraphs: Q17.  Do you share this concern?
Q18.  Does the lack of specific regulations and guidance on the timeframes for “known”  and “forward-looking” information lead to inadequate disclosure of environmental  information?
Q19.  Please provide any additional comments you have, or further elaboration on your  responses for Section III, “Disclosing Future Environmental Risks,” in the space below.
Section IV: Ensuring Disclosure of Important Environmental Information  Issue Statement: Existing standards and guidance from SEC, the Financial Accounting  Standards Board, and the American Institute of Certified Public Accountants do not require  companies to disclose certain types of information that some investors believe is important for  making investment decisions.
Background: According to SEC, the existing disclosure requirements focus on providing a  reasonable investor with sufficient information to assess the financial condition of a company.  Regarding environmental information, the standards and guidance issued by SEC and other  authorities require companies to disclose in their filings (1) material environmental liabilities  and other losses, (2) the impact of certain material trends, events, and uncertainties—including  those related to environmental risks—on the companies’ capital expenditures and results of  operations, and (3) certain legal proceedings involving environmental matters.
Organizations that promote socially conscious investments argue that SEC should expand its  requirements for corporate disclosure of environmental information because these  organizations believe such information could be material to many investors and serves as a  proxy for effective corporate governance. In response to litigation during the 1970s, SEC  concluded that it is authorized and required by the National Environmental Policy Act to  consider the promotion of environmental protection as a factor in exercising its rulemaking  authority. At that time, however, SEC argued that relevant statutes and legislative history  suggested that its disclosure authority be used to require the dissemination of “economically  significant” information. SEC also noted the lack of reliable evidence regarding the extent of  investor interest in expanded environmental disclosure.
Concern #9:  Companies are not required to disclose information about their  environmental assets (for example, emission trading credits) and environmental  performance.  A growing body of “socially conscious” investors want such information  because they believe many investors may find this information material or because it  indicates the effectiveness of corporate management.
Q20.  Do you share this concern?
section_title: Concern #10: Companies are not required to disclose quantitative information on the total number of their environmental remediation sites, related claims, or the associated costs.
paragraphs: Q22.  Do you share this concern?
Q23.  How important is it for investors to have quantitative information about the total  number of environmental remediation sites, related claims, or the associated costs  when making investment decisions?
Q24.  Please provide any additional comments you have, or further elaboration on your  responses for Section IV, “Ensuring Disclosure of Important Environmental  Information,” in the space below.
section_title: Section V: Monitoring and Enforcing Environmental Disclosure
paragraphs: Issue Statement: Companies’ management, their internal accountants and independent  auditors, and reviewers at SEC may not be adequately fulfilling their responsibilities for  ensuring that companies properly disclose material information, including environmental  information.
Background: In terms of environmental disclosure, companies’ managers are responsible for  establishing effective internal controls to gather and report information about environmental  liabilities and other losses. Companies’ internal accountants are responsible for recording and  reporting transactions, including those related to environmental liabilities, using generally  accepted accounting principles promulgated by the Financial Accounting Standards Board.  Independent auditors attest to whether a company has properly accounted for environmental  liabilities, actual or contingent, and other losses related to environmental contamination, in  accordance with auditing standards and guidance from the American Institute of Certified  Public Accountants and SEC’s regulations and guidance. To ensure that investors are  protected, SEC staff review company filings to determine if they comply with SEC’s disclosure  requirements and take action if necessary. In fulfilling its monitoring and enforcement role,  SEC has a variety of options available, ranging from making inquiries to issuing comment  letters to taking legal action.
Concern #11:  Companies' internal controls are not adequate to ensure that  environmental liabilities and other losses are brought to management's attention and  reported in companies' financial statements as appropriate.
Q25.  Do you share this concern?
3.33 Q26.  Do weak internal controls within companies contribute to inadequate disclosure  of environmental information?
Concern #12:  Companies' internal accountants may not be making an adequate effort  to identify and appropriately report all environmental liabilities and other losses in the  companies' financial statements.
Q27.  Do you share this concern?
Q28.  Does insufficient effort on the part of internal accountants contribute to  inadequate disclosure of environmental information?
Concern #13:  Independent auditors may not be exercising “due professional care” in  their efforts to verify the accuracy and completeness of information on environmental  liabilities and other losses that companies report in their financial statements.
Q29.  Do you share this concern?
Q30.  Does the lack of “due professional care” by independent auditors contribute to  inadequate disclosure of environmental information?
3.33 Concern #14:  SEC's monitoring and enforcement activities related to  environmental disclosure are limited.  For example, SEC infrequently conducts full  reviews of companies' periodic filings and, in particular, rarely focuses on  environmental disclosure.  Enforcement actions related to environmental disclosure  are also rare.
Q31.  Do you share this concern?
Q32.  Do SEC's limited monitoring and enforcement activities contribute to  inadequate disclosure of environmental information?
Concern #15:  SEC is not effectively using EPA's enforcement data or otherwise  coordinating with EPA.
Q33.  Do you share this concern?
Q34.  Does the ineffective coordination with EPA contribute to inadequate disclosure  of environmental information?
Q35.  Please provide any additional comments you have, or further elaboration on  your responses for Section V, “Monitoring and Enforcing Environmental Disclosure,” in  the space below.
Section VI: Additional Concerns, Impact, and Recommendations  This questionnaire has identified a number of concerns that may contribute to inadequate  disclosure of environmental liabilities or other losses. This section asks you to describe any  additional concerns you may have. In addition, it asks about the impact of inadequate  environmental disclosure on investors and how you would address inadequate disclosure.
Q36.  Please describe any other significant concerns that contribute to inadequate  disclosure of environmental liabilities or losses.
Did not write any  comments  Q37.  To what extent, if at all, does inadequate disclosure of environmental  information hinder investors' ability to assess the overall financial condition of a  company?
Q38.  To what extent, if at all, does inadequate disclosure of environmental  information hinder investors' ability to assess the overall future risks that a company  faces? 10.00  Q39.  To what extent, if at all, does inadequate disclosure of environmental information  hinder investors' ability to assess other aspects of a company's overall performance (for  example, corporate governance) that determine whether the company is a good  investment?
Q40.  To what extent, if at all, does inadequate disclosure of environmental information  hinder investors' ability to compare the overall performance of companies within an  industry?
Q41.  If you are aware of any specific examples in which the ability of investors to make  investment decisions was impaired as a result of the issues and concerns identified in  this questionnaire, please describe them here. It would be helpful to us if, in your  response, you could link each example to a specific issue or concern.
Q42.  How could problems related to inadequate disclosure be addressed? In your  answer, consider what entities would be the most effective or appropriate vehicle for  addressing the problems, including:  1) SEC;  2) other governmental entities, such as other federal agencies and the Congress; and  3) nongovernmental entities, such as the Financial Accounting Standards Board or  shareholder or public interest groups.
It would be helpful to us if, in your response, you could link each example to a specific  issue or concern.
Did not write any  comments  Q43.  Please provide any additional comments you have, or further elaboration on  your responses for Section VI, “Additional Concerns, Impact, and Recommendations,”  in the space below.
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