How to be lean, mean and green.

• Author: Buxton, Brian
• Position: Environmental auditing - Includes related article

Before you can rein in your environmental costs, you need to know what you're spending. New accounting standards and a cross-disciplinary team can help you keep score.

A 1993 United Nations report revealed many companies spent 1.1 percent to 2 percent of sales revenue, and often more than 25 percent of net income, on environmental measures. The inefficiencies of regulatory requirements dilute the effectiveness of every dollar earmarked for the environment. But a determined corporation can contain environmental costs if it can pinpoint what, where and why it spends. Although controllers and CFOs know how to mind the corporate piggy bank, when it comes to the environment, traditional cost-benefit analyses can be problematic, and the financial checks and balances most other activities are subjected to aren't well-defined.

Don't think so? Ask an accountant to assess the effectiveness of your firm's environmental programs. You'll probably get a run-down of capital costs, reserves, projected expenses and a suggestion to speak to the environmental staff for more details.

Because environmental spending isn't scrutinized as much as other activities, it's been hard to implement cost-containment efforts. Without precise information on the roots of environmental costs, companies can't accurately assess their true costs and liabilities. This, in turn, may limit their ability to make informed decisions, secure financing and obtain property, casualty and product-liability insurance.

Many cleanup and other environmental costs are presently off-balance-sheet items, and companies often don't disclose future costs. But accounting and reporting standards are now more clearly defined, as are the mechanisms for identifying, measuring and accounting for environmental costs. Recently, the Internal Revenue Service decided to allow the immediate deductibility (vs. capitalization) of certain associated cleanup costs. This ruling may lead to more complete environmental reporting, because the after-tax cost of remediation and compliance could be lower for some companies. But that's not true for every company, especially if it has significant direct remediation expenditures and monitoring costs that it must capitalize.

THE TAIL WAGS THE DOG

If you want to reduce environmental costs, consider developing a detailed environmental accounting policy with the collaboration of management and your environmental, accounting, legal, production and internal-audit departments. Although laws, such as the Comprehensive Environmental Response, Compensation and Liability Act, as well as the Resource Conservation and Recovery Act, ultimately drive environmental expenditures, customer requirements, products and services drive a corporation. Effective environmental cost containment integrates these competing interests, but at first, the environmental tail may wag the corporate dog.

It's doubtful the corporate legal and environmental staffs that initiate and oversee compliance programs understand the balance-sheet implications of the Financial Accounting Standards Board's Financial Accounting Standard 5. For publicly traded companies, both the architects and accountants of environmental policy also should understand Securities and Exchange Commission Staff Accounting Bulletin No. 92, "Accounting and Disclosures Relating to Loss Contingencies," which clarifies the SEC's position on environmental liabilities. Other accounting standards, particularly the 1993 Emerging Issues Task Force pronouncement 93-5, "Accounting for Environmental Liabilities," and the American Institute of Certified Public Accountants Statement of Position 94-6, "Disclosure of Certain Significant Risks and Uncertainties," are equally important in classifying and reporting environmental expenditures and liabilities.

Currently, some companies report only estimates of waste-disposal costs, pollution-control equipment, permit costs, environmental studies and salaries. Although quantifiable, these fall short in revealing the total environmental costs companies actually incur. If a corporate accounting function asks its business functions to provide cost data based on these factors, reporting variances may occur without clear guidance, since definitions of an environmental cost may differ. Even harder to define are future costs and adequate reserves associated with groundwater remediation...