Environmental transparency: areas for concern; An attorney details some of the pitfalls that companies face in assessing the significance of their potential environmental liability--and failure to act properly to disclose it.

• Author: Rogers, Greg
• Position: Disclosure

In the aftermath of all the corporate scandals of recent years, CFOs should take a fresh look at potentially outdated policies and procedures for environmental disclosure. Here are five insights into the complex legal and accounting maze of environmental disclosure that every CFO should consider.

1 Conformance no longer ensures compliance. Conformance with generally accepted accounting principles (GAAP) does not ensure compliance with Section 302 of Sarbanes-Oxley.

According to the Securities and Exchange Commission (SEC), when the CEO and CFO certify that the company's financial statements "fairly present," in all material respects, the financial condition and results of operations of the company, this certification is not limited to a representation that the financial statements and other financial information have been presented in accordance with GAAP, and is not otherwise limited by reference to GAAP.

If GAAP does not require disclosure of material environmental information, what then? GAAP itself, and the independent auditor's assessment of the company's conformance with GAAP, provide no safe haven. The certifying officers are, therefore, individually accountable for determining whether disclosure "beyond GAAP" is necessary or prudent.

2 Contingent environmental liabilities may not be "contingent" after all. The generally accepted assumption that environmental cleanup obligations are "contingent" liabilities is inconsistent with applicable legal principles, recently adopted financial accounting standards and market reality.

Statement of Financial Accounting Standard No. 5 defines a "loss contingency" as an existing condition, situation or set of circumstances involving uncertainty as to a possible loss that will ultimately be resolved when one or more future events occur or fail to occur. Resolution of the uncertainty may confirm the loss or impairment of an asset or the incurrence of a liability.

Examples of contingencies listed in FAS 5 include a) pending or threatened litigation and b) actual or possible claims and assessments. Environmental liabilities are almost always considered to fall within one of these two categories. Prior to the initiation of formal legal action, FAS 5 provides that accrual of a liability is not required unless: a) assertion of a claim or assessment is probable; b) an unfavorable outcome is probable; and c) the amount of the loss can be reasonably estimated.

If assertion of a claim or assessment is not...