Over the last few decades, burgeoning environmental laws have pressured companies to internalize the costs of cleaning up the environment. The growing list of polluting items from the Environmental Protection Agency (EPA), the increasing costs of court procedures and settlements that run into billions of dollars every year, and the long-term potential of environmental responsibilities have created significant costs for many industries. New, complex and overlapping rules under the Clean Air Act Amendment (1990) including Compliance Assurance Monitoring, Credible Evidence and Title V Periodic Monitoring (PM) pose great potential costs to industry in terms of monitoring, record keeping, reporting, and enforcement liabilities. This article highlights current developments in this area and shows how accountants of various sized entities can plan now to meet this important area of responsibility.
The Complexity of Environmental Regulations
Because today's global businesses are accountable for their actions regarding hazardous waste and other environmental issues, they should be aware of their environmental disclosure liability requirements. In 1996, the Accounting Standards Executive Committee (AcSEC) of the American Institute of Certified Public Accountants (AICPA) issued Statement of Position (SOP) No. 96-1, Environmental Remediation Liabilities. Effective in 1997, the SOP provides guidance regarding when entities should recognize, measure and disclose environmental remediation liabilities to such financial statement users as creditors and investors and to such governmental agencies as the EPA. The SOP also expands the types of costs that may be appropriately accrued, and the ability to consider technologies under development in order to help assess the ultimate cost of remediation efforts more accurately. Potentially responsible parties (PRPs) must now use a more conservative approach than under the prior provisions of Statement of Financial Accounting Standards (SFAS) No. 5 to ascertain if they should accrue such liabilities. They must now recognize such liabilities when litigation has commenced or an assertion of a claim is probable--whenever the PRP is "associated" with that site. Moreover, PRPs must now accrue potential environmental remediation liabilities "up front," all at once; rather than when they are actually paid.
Impetus for the Standard
In 1993,  it was estimated that the nation's environmental costs (including clean-up costs) were about 2-5 percent of the gross domestic product. It also was estimated that annual costs to clean up our air, water and asbestos in buildings would he about 25, 30 and 200 billion dollars--respectively. The AICPA's 1993 Prospectus on environmental liabilities estimated cleanup costs of known hazardous waste sites at over $750 billion. It also noted that 67 percent of surveyed corporate counsels believed their companies had violated some federal or state environmental law in the preceding year, and 62 percent of other companies surveyed had known of environmental remediation cost liabilities that were unaccrued in their financial statements.
These costs and unreported liabilities affect both small and large businesses. For example, a physician or dentist who does not dispose properly of used syringes and other medical supplies faces potentially severe civil liabilities. Land surveys finding "old" pollution activities have halted the purchase of small business properties.
The public's general environmental consciousness has caused lenders, investors, corporate boards, management, underwriters, the Securities and Exchange Commission (SEC) and other governmental agencies--as well as CPAs--to focus on this important issue. Even businesses without formal environmental programs should seek to reduce their exposure to the adverse affects of such issues. Scott  notes that firms prepare financial records based on "owned" assets, but do not pay for using such environmental assets as air, water and land. Unlike financial assets, they generally do not assign positive values to environmental assets because they did not "buy" them. Vinten  adds that since firms spend much money managing waste streams to avoid incurring liabilities, they should understand that not investing in an effective environmental program might not save money.
Roussey  notes that polluters face several kinds of liabilities for non-compliance with laws and regulations--personal injury or property damage and remedial cleanup. Specifically, entities emitting or discharging pollutants into the environment face potentially large civil and criminal penalties, especially as the EPA has intensified its criminal and civil prosecution of potential violators. Employees, customers or neighbors claiming exposure to pollutants frequently file personal injury or...