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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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? 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? 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. 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. In addition to the individuals named above, Kate Bittinger, Mark Braza, Stephen Cleary, Evan Gilman, Kevin Jackson, Rich Johnson, Tom Melito, Lynn Musser, Cynthia Norris, and Judy Pagano made key contributions to this report. 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Summary: 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. 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.