Failure to fully report environmental liabilities a growing business risk

Headnote

'Willful ignorance' less defensible, accounting standards changing

MADISON, Wis.- The days of corporate reticence toward environmental liabilities are numbered, according to an environmental legal and accounting expert.

While flexible interpretation of a three-decades-old Financial Accounting Standards Board rule, FAS 5, has resulted in widespread underreporting of environmental liabilities on most corporate financial statements today, more companies will be forced to recognize and assess such liabilities in the future as more stringent accounting standards are implemented, said C. Gregory Rogers, president of Advanced Environmental Dimensions L.L.C., a Dallas-based management consulting company that specializes in environmental financial reporting strategies.

And while companies may be reluctant to disclose their environmental liabilities and potentially open themselves up to third-party litigation, they will have little defense should a shareholder lawsuit arise for not doing so, Mr. Rogers said, noting that executives are required to sign off on their financial statements as a result of the 2002 Sarbanes-Oxley Act.

Furthermore, should such shareholder lawsuits arise in the future, companies likely will not have coverage due to the pollution exclusions contained in most directors and officers liability policies, he added.

"People need to think about a new type of risk in the environmental area and that's financial reporting risk, not the underlying environmental risk itself, but the fact that you haven't properly identified, assessed, measured and reported that liability or risk in your financial report," Mr. Rogers said.

"Willful ignorance" of an environmental liability will become less defensible and "a lot more liabilities" are going to be recognized as a result of new accounting standards and trends in environmental liability reporting, he added.

At a recent "Advanced Environmental Risk Management Strategies" seminar presented by the Environmental Risk Resources Assn. and the University...