Environmental Disclosure
SEC Should Explore Ways to Improve Tracking and Transparency of Information Gao ID: GAO-04-808 July 14, 2004To 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.
RecommendationsOur recommendations from this work are listed below with a Contact for more information. Status will change from "In process" to "Open," "Closed - implemented," or "Closed - not implemented" based on our follow up work.
Director: Team: Phone:GAO-04-808, Environmental Disclosure: SEC Should Explore Ways to Improve Tracking and Transparency of Information
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Report to Congressional Requesters:
July 2004:
ENVIRONMENTAL DISCLOSURE:
SEC Should Explore Ways to Improve Tracking and Transparency of
Information:
[Hyperlink, http://www.gao.gov/cgi-bin/getrpt?GAO-04-808]:
GAO Highlights:
Highlights of GAO-04-808, a report to congressional requesters
Why GAO Did This Study:
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.
What GAO Found:
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.
What GAO Recommends:
GAO is recommending that SEC take steps to improve the tracking and
transparency of information related to its reviews of companies‘
filings, and to work with the Environmental Protection Agency (EPA) to
explore ways to take better advantage of EPA data relevant to
environmental disclosure. SEC agrees with GAO‘s recommendations and is
taking action by, for example, making comment letters and company
responses available on its Web site, beginning with August 2004
filings.
www.gao.gov/cgi-bin/getrpt?GAO-04-808.
To view the full product, including the scope and methodology, click on
the link above. For more information, contact John B. Stephenson at
(202) 512-3841 or stephensonj@gao.gov.
[End of section]
Contents:
Letter:
Results in Brief:
Background:
Stakeholders Disagree on How Well SEC Has Defined Environmental
Disclosure Requirements:
Little Is Known about the Extent to Which Companies Are Disclosing
Environmental Information in SEC Filings:
Adequacy of SEC's Efforts to Monitor and Enforce Compliance with
Environmental Disclosure Requirements Cannot Be Determined:
Experts Suggest Changes to Requirements and Guidance, Increased
Oversight, and Nonregulatory Actions to Increase and Improve
Environmental Disclosure:
Conclusions:
Recommendations for Executive Action:
Agency Comments:
Appendixes:
Appendix I: Scope and Methodology:
Appendix II: Principal Requirements and Guidance Applicable to the
Disclosure of Environmental Information in SEC Filings:
Appendix III: Summary of Disclosure Studies Included in Our Analysis:
Appendix IV: Experts Who Participated in GAO Survey:
Appendix V: Survey Questions and Results:
Appendix VI: Comments from the Securities and Exchange Commission:
Appendix VII: GAO Contacts and Staff Acknowledgments:
GAO Contacts:
Staff Acknowledgments:
Tables:
Table 1: Disclosures Related to Potential Impacts of Current or
Proposed Requirements to Reduce Greenhouse Gas Emissions:
Table 2: SEC's Reviews of Companies' Annual 10-K Filings, Fiscal Years
1999 through 2003:
Abbreviations:
AICPA: American Institute of Certified Public Accountants:
EPA: Environmental Protection Agency:
GAO: Government Accountability Office:
SEC: Securities and Exchange Commission:
Letter July 14, 2004:
The Honorable James M. Jeffords:
Ranking Minority Member:
Committee on Environment and Public Works:
United States Senate:
The Honorable Jon S. Corzine:
United States Senate:
The Honorable Joseph I. Lieberman:
United States Senate:
Recent scandals in the business world have shaken investors' confidence
in corporate financial reporting and the underlying accounting and
auditing practices, and have highlighted the importance of disclosing
key information to potential investors. Environmental risks and
liabilities are among the conditions that, if undisclosed, could impair
the public's ability to make sound investment decisions. For example,
the discovery of extensive hazardous waste contamination at company-
owned facilities could expose a company to hundreds of millions of
dollars in cleanup costs, while impending environmental regulations
could affect a company's future financial position if the company were
required to shut down plants or invest in expensive new technology.
While not the primary impetus, concern about environmental liabilities
has also contributed to the growth of "socially responsible" investor
groups and mutual funds that invest only in companies with a strong
record in environmental compliance, worker protection, and other social
issues. Congress passed the Sarbanes-Oxley Act of 2002 to protect
investors by improving the accuracy and reliability of corporate
disclosures, which could lead to improved reporting of environmental
liabilities.
The Securities and Exchange Commission's (SEC) primary mission is to
protect investors and the integrity of securities markets. Among other
things, SEC regulations require companies to disclose information that
would be considered "material" by a reasonable investor. A matter is
material if there is a substantial likelihood that a reasonable person
would consider it important. The omission or misstatement of an item in
a financial report is material if, in light of surrounding
circumstances, the magnitude of the item is such that the judgment of a
reasonable person would probably have been changed or influenced by the
inclusion or correction of the item. Information that might be
considered material can include, for example, significant changes in
accounting practices or potential risks or liabilities, such as the
cost of a major environmental cleanup, that could affect future
earnings. SEC's Division of Corporation Finance monitors compliance
with the disclosure requirements by periodically reviewing companies'
filings and issuing comment letters to the companies, if necessary, to
request any additional information that might be required. In addition,
SEC's Division of Enforcement may seek a monetary penalty or take some
other enforcement action when a company's failure to comply with
disclosure requirements is particularly egregious. While the
Environmental Protection Agency (EPA) does not have a direct role in
monitoring environmental disclosures, the agency encourages the
disclosure of environmental legal proceedings by notifying companies of
potential disclosure obligations and periodically shares relevant
information with SEC.
You asked us to determine (1) key stakeholders' views on how well SEC
has defined the requirements for environmental disclosure, (2) the
extent to which companies are disclosing environmental information in
their filings with SEC, (3) the adequacy of SEC's efforts to monitor
and enforce compliance with the disclosure requirements, and (4) what
actions experts suggest for increasing and improving environmental
disclosure. To obtain views on environmental disclosure requirements,
we reviewed SEC's disclosure regulations along with relevant standards
and guidance from SEC, the Financial Accounting Standards Board, and
the American Institute of Certified Public Accountants (AICPA). We also
interviewed representatives of groups with a stakeholder interest in
environmental disclosure, including investor organizations, financial
services institutions, environmental groups and consultants, business
associations, credit rating agencies, and public accounting firms. For
information on the extent to which companies are disclosing
environmental information in their filings with SEC, we reviewed 27
studies conducted from 1995 to 2003 and assessed their methodologies.
After eliminating 12 studies that either had severe methodological
limitations or did not address aspects of environmental disclosure
relevant to our objectives, we summarized the findings of the remaining
15 studies. At the committee's request, we supplemented our analysis of
existing studies with 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.
For information on SEC's monitoring and enforcement of environmental
disclosure requirements, we reviewed SEC's policies and procedures,
obtained agency statistics on relevant activities, and interviewed
officials within SEC and EPA. To obtain suggestions for increasing and
improving environmental disclosure, we conducted a Web-based survey of
30 experts that use disclosure information, including representatives
of the accounting and auditing profession, environmental consultants
and attorneys, investment and financial services, the insurance
industry, environmental interest groups, public employee pension funds,
and credit rating agencies, among others. Some of the experts were also
among the stakeholders consulted about the disclosure requirements. To
ensure balance, we sought the views of representatives of reporting
companies regarding the experts' suggestions. We conducted our work
between February 2003 and June 2004 in accordance with generally
accepted government auditing standards. (See app. I for a detailed
description of our scope and methodology.)
Results in Brief:
Key stakeholders disagree on how well SEC has defined the requirements
for environmental disclosure, with some saying that certain aspects of
the requirements provide too much flexibility and are too narrowly
scoped, while others maintain that the flexibility is warranted and the
scope adequate. The stakeholders who cited concerns generally included
groups with an interest in environmental protection or socially
responsible investing. These stakeholders said, for example, that
companies may not be disclosing some potential environmental
liabilities or may be minimizing the amounts reported because SEC's
guidance is not specific enough in certain areas, such as (1)
disclosing liabilities when their occurrence or amount is uncertain,
(2) assessing the materiality of liabilities and potential risks, and
(3) disclosing potentially significant environmental problems or
regulatory initiatives that could pose future financial risks. In
contrast, stakeholders who viewed the existing requirements for
environmental disclosure as sufficiently well defined generally
represented entities responsible for reporting information to SEC and
groups with general investment interests. Among other things, these
stakeholders commented that the flexibility in the requirements is
necessary to accommodate the variability in companies' circumstances
and that developing more specific guidance would not be feasible. For
some of these stakeholders, the problems with inadequate disclosure--to
the extent such problems exist--are linked to inadequate oversight and
enforcement rather than to the nature of the requirements. However,
this view was not shared by representatives of businesses responsible
for filing SEC reports, who believe that SEC's oversight is adequate.
Little is known about the extent to which companies are disclosing
environmental information in their filings with SEC, despite many
efforts to study environmental disclosure over the past 10 years. The
primary impediments to conducting such studies lie in determining for
specific companies (1) what environmental information is potentially
subject to disclosure and (2) whether the information should be
considered material--thus meeting the reporting threshold--given the
companies' particular circumstances. While disclosure studies can
summarize the information included in companies' SEC filings,
determining what should have been reported may be impossible without
direct access to company records. The studies included in our review
had other serious limitations as well, including small sample sizes and
narrow focus. While the results of these studies are very limited and
not generalizable, some indicate that the extent of environmental
disclosure has increased over time and that, within a particular
industry, it can vary considerably in terms of the amount and type of
information provided. Our own analysis of a limited number of
disclosures related to the future risks posed by potential controls
over greenhouse gas emissions similarly revealed substantial variation
in the information that companies are reporting to investors. However,
because of the flexibility in some aspects of the requirements, it is
impossible to determine whether differences in the level of disclosure
reflect differences in the risks companies face or differences in the
extent to which companies are disclosing these risks.
The adequacy of SEC's efforts to monitor and enforce compliance with
environmental disclosure requirements cannot be determined without more
definitive information on the extent of environmental disclosure and
the results of SEC's oversight process. SEC's primary means of
overseeing disclosure are reviewing companies' filings and issuing
comment letters to request revisions or additional information. In each
of the past 5 years, SEC's Division of Corporation Finance reviewed
about 8 to 20 percent of companies' annual filings. SEC does not,
however, track the nature of the division's comments on filings to
identify the most common problems, analyze trends, or determine where
additional guidance may be warranted. Agency officials said that based
on their experience, the adequacy of companies' environmental
disclosure rarely prompts comments, partly because of the nature of the
businesses involved, although such comments are more prevalent in
industries such as manufacturing and oil and gas. In keeping with this
observation, an SEC review of annual filings from Fortune 500 companies
in 2002 found relatively few problems with environmental disclosure
overall, compared with other types of disclosure. Despite sporadic
efforts to coordinate on improving environmental disclosure, SEC and
EPA do not have a formal agreement to share relevant information. At
one time, EPA was providing enforcement-related data to SEC's Division
of Corporation Finance on a quarterly basis, but SEC questioned the
usefulness of the data because they were facility-specific and SEC
could not readily identify the parent company responsible for filing
reports with SEC. Currently, information sharing occurs less frequently
and is focused on specific legal proceedings, such as those involving
monetary sanctions for environmental violations.
Experts' suggestions on ways to increase and improve environmental
disclosure fell primarily into three broad categories: (1) modifying
the disclosure requirements and improving guidance for reporting
entities (2) stepping up SEC's monitoring and enforcement of existing
requirements, and (3) adopting nonregulatory approaches to improving
disclosure. In the first category, some experts that we surveyed
suggested additional guidance to clarify specific requirements and
terminology and to rein in flexibility. For example, some experts
suggested that SEC clarify its requirements for when environmental
liabilities must be disclosed and require either the use of a specific
cost-estimation method or, at a minimum, disclosure of more information
about the method used and related assumptions. In the second category,
some experts suggested that SEC put more emphasis on corporate
compliance with environmental disclosure requirements by, for example,
reviewing more filings in relevant industries, and improve coordination
between SEC and EPA on environmental matters. Some experts also
advocated that when the opportunity exists, SEC initiate a few high-
profile enforcement cases to emphasize the seriousness of not
disclosing material environmental information and to establish legal
precedents for interpreting current requirements and guidance. In the
third category, suggestions included pressure from investor groups and
financial institutions for better disclosure of environmental
information through shareholder petitions and voluntary environmental
reporting initiatives. Some experts offered comments on why particular
proposals are unnecessary or unworkable. Representatives of reporting
companies also believe that some of the suggestions would not improve
disclosure of environmental information, but agreed that nonregulatory
approaches can be effective in making company management aware of
public interest in environmental disclosure.
We are making recommendations to increase the amount of information
available to SEC and the public on the results of SEC's filing reviews
and to improve the level of coordination between SEC and EPA. In
commenting on a draft of this report, SEC agreed with our
recommendations and, in particular, said that the agency is taking
steps to increase the tracking and transparency of key information. EPA
generally agreed with the information presented in the report.
Background:
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.[Footnote 1] 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.[Footnote 2]
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.[Footnote 3]
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.[Footnote 4]
Stakeholders Disagree on How Well SEC Has Defined Environmental
Disclosure Requirements:
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.
Disclosure Requirements Are Typically Defined in Broad Terms, but They
Also Include Specific Guidance for Environmental Information:
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.[Footnote 5] 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."[Footnote 6] 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.[Footnote 7] 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."[Footnote 8]
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.[Footnote 9] 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 Disclosure Information Said Existing Environmental
Disclosure Requirements Are Too Flexible and Too Narrowly Scoped:
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.[Footnote 10]
* 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.[Footnote 11] 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 Said That the Flexibility
within Existing Disclosure Requirements Is Necessary and the Scope
Adequate:
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.
Little Is Known about the Extent to Which Companies Are Disclosing
Environmental Information in SEC Filings:
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.
Several Factors Make It Difficult to Determine Whether Companies Are
Fully Disclosing Material Environmental Information:
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.
While Limited and Not Generalizable, Existing Studies Indicate That the
Extent of Disclosure Has Increased Over Time and Can Vary Substantially
within Industries:
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.[Footnote 12] 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.)[Footnote 13] 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.[Footnote 14] 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.[Footnote 15]
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.[Footnote 16]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.[Footnote 17]
Nine of the 15 studies attempted to address the extent or adequacy of
companies' environmental disclosure in terms of meeting SEC's reporting
requirements.[Footnote 18] 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.
A Limited Review of Disclosures Related to Potential Controls Over
Greenhouse Gas Emissions Shows Wide Variation in Company Filings:
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.[Footnote 19] 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.[Footnote 20] 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.[Footnote 21] Table 1 summarizes the types of information the
electric utility companies disclosed about the impact of potential
controls over greenhouse gas emissions.
Table 1: Disclosures Related to Potential Impacts of Current or
Proposed Requirements to Reduce Greenhouse Gas Emissions:
Number of utility companies reporting potential impact: 8;
Impacts related to Kyoto Protocol: Description of potential impact:
U.S. operations only: Compliance costs could require significant
capital, operating, or other expenditures and/or have materially
adverse impacts on generating facilities or future financial position,
results of operations, or liquidity, if associated costs cannot be
recovered from customers.
Number of utility companies reporting potential impact: 3;
Impacts related to Kyoto Protocol: Description of potential impact:
U.S. and international operations: Compliance costs could be material
and/or there could be far-reaching and significant impacts on
operations.
Number of utility companies reporting potential impact: 2;
Impacts related to Kyoto Protocol: Description of potential impact:
International operations only: Significant compliance costs may affect
operations.
Number of utility companies reporting potential impact: 1;
Impacts related to Kyoto Protocol: Description of potential impact:
U.S. operations only: Specific impacts on operations could not be
identified because of uncertainties.
Number of utility companies reporting potential impact: 6;
Impacts related to Kyoto Protocol: Description of potential impact:
None.
Number of utility companies reporting potential impact: 5;
Impacts related to current administration policy on voluntary
reductions: Description of potential impact: The company stated it was
unable to determine the potential impact.
Number of utility companies reporting potential impact: 4;
Impacts related to current administration policy on voluntary
reductions: Description of potential impact: Compliance costs could be
significant or material, and/or possible impacts on operations.
Number of utility companies reporting potential impact: 11;
Impacts related to current administration policy on voluntary
reductions: Description of potential impact: None.
Number of utility companies reporting potential impact: 5;
Impacts related to other current or proposed federal, state, or
international requirements: Description of potential impact: Federal
requirements only: Compliance costs could have a significant or
material impact (either positive or negative) on the company's
generating facilities and/or future financial position, results of
operations, liquidity, or cash flows, if the costs are not recoverable
from customers.
Number of utility companies reporting potential impact: 5;
Impacts related to other current or proposed federal, state, or
international requirements: Description of potential impact: Federal
and state requirements: Compliance costs could have a significantly or
materially adverse affect on the company's operations, consolidated
financial position, results of operations, cash flow, or profitability,
if associated costs cannot be recovered from customers.
Number of utility companies reporting potential impact: 3;
Impacts related to other current or proposed federal, state, or
international requirements: Description of potential impact: Federal,
state, and international requirements: There are substantial or
material implications for the company's costs;
plants; global business operations; or future consolidated results of
operations, cash flows, or financial position.
Number of utility companies reporting potential impact: 1;
Impacts related to other current or proposed federal, state, or
international requirements: Description of potential impact: General
statement only: The company may incur liabilities because of its
emission of gases that may contribute to global warming.
Number of utility companies reporting potential impact: 1;
Impacts related to other current or proposed federal, state, or
international requirements: Description of potential impact: Federal
requirements only: The company stated it was unable to determine the
potential future impacts on its financial condition and operations.
Number of utility companies reporting potential impact: 1;
Impacts related to other current or proposed federal, state, or
international requirements: Description of potential impact: Federal,
state, and international requirements: The company stated it was unable
to determine the potential future impacts on its financial condition
and operations.
Number of utility companies reporting potential impact: 4;
Impacts related to other current or proposed federal, state, or
international requirements: Description of potential impact: None.
Source: GAO analysis.
[End of table]
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.
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
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 Does Not Systematically Track or Analyze the Results of Its
Oversight Efforts:
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.[Footnote 22] 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.
Table 2: SEC's Reviews of Companies' Annual 10-K Filings, Fiscal Years
1999 through 2003:
Annual filings;
1999: 13,460;
2000[A]: 14,280;
2001: 14,060;
2002: 13,550;
2003: 12,830.
Annual filings reviewed by SEC;
1999: 2,345;
2000[A]: 1,160;
2001: 2,305;
2002: 2,695;
2003: 2,170.
Percentage of filings reviewed;
1999: 17.4;
2000[A]: 8.1;
2001: 16.4;
2002: 19.9;
2003: 16.9.
Source: GAO analysis of SEC data.
[A] SEC's reviews declined in fiscal year 2000 because the high volume
of filings related to initial public offerings limited the agency's
ability to review other filings.
[End of table]
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.[Footnote 23] 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.[Footnote 24] 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.
SEC and EPA Have Made Limited Efforts to Improve Environmental
Disclosure through Coordination:
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.
Experts Suggest Changes to Requirements and Guidance, Increased
Oversight, and Nonregulatory Actions to Increase and Improve
Environmental Disclosure:
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.[Footnote 25] 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.
Shareholder Suits Allege Inadequate Environmental Disclosure:
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.
Some Experts Suggested Modifying Existing Disclosure Requirements and
Related Guidance:
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.[Footnote 26] 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.[Footnote 27] 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.
Some Experts Called for Better Monitoring and Targeted Enforcement
Actions to Increase Environmental Disclosure:
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.[Footnote 28] 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.
Some Experts Said Certain Nonregulatory Approaches Could Increase and
Improve Environmental 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.[Footnote 29] 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.[Footnote 30]
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.
Conclusions:
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.
Recommendations for Executive Action:
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.
Agency Comments:
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 [Hyperlink,
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.
Signed by:
John B. Stephenson:
Director, Natural Resources and Environment:
[End of section]
Appendixes:
Appendix I: Scope and Methodology:
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.[Footnote 31] 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.[Footnote 32] 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.[Footnote 33]
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;[Footnote 34] 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.
[End of section]
Appendix II: Principal Requirements and Guidance Applicable to the
Disclosure of Environmental Information in SEC Filings:
Document[A].
Issue date: 1972; Document[A]: 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.[B].
Issue date: 1975;
Document[A]: Financial Accounting Standards Board, Statement of
Financial Accounting Standards No. 5: Accounting for Contingencies.
Norwalk, CT: 1975.
Issue date: 1976;
Document[A]: 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.
Issue date: 1982;
Document[A]: 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.[C].
Issue date: 1989;
Document[A]: 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.
Issue date: 1990;
Document[A]: Financial Accounting Standards Board, Emerging Issues Task
Force 90-8: Capitalization of Costs to Treat Environmental
Contamination. Norwalk, CT: 1990.
Issue date: 1992;
Document[A]: 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.
Issue date: 1993;
Document[A]: Financial Accounting Standards Board, Emerging Issues Task
Force 93-5: Accounting for Environmental Liabilities. Norwalk, CT:
1993.
Issue date: 1993;
Document[A]: 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.
Issue date: 1994;
Document[A]: American Institute of Certified Public Accountants,
Statement of Position 94-6: Disclosure of Certain Significant Risks and
Uncertainties. New York, NY: 1994.
Issue date: 1996;
Document[A]: American Institute of Certified Public Accountants,
Statement of Position 96-1: Environmental Remediation Liabilities. New
York, NY: 1996.
Issue date: 1999;
Document[A]: Securities and Exchange Commission, Staff Accounting
Bulletin No. 99: Materiality, 64 Fed. Reg. 45150.
Issue date: 2001;
Document[A]: Financial Accounting Standards Board, Statement of
Financial Accounting Standards No. 143: Accounting for Asset Retirement
Obligations. Norwalk, CT: 2001.
Issue date: 2001;
Document[A]: Financial Accounting Standards Board, Statement of
Financial Accounting Standards No. 144: Accounting for the Impairment
or Disposal of Long-Lived Assets. Norwalk, CT: 2001.
Issue date: 2001;
Document[A]: Securities and Exchange Commission, Action: Cautionary
Advice Regarding Disclosure About Critical Accounting Policies
[Release Nos. 33-8040; 34-45149; FR-60], 66 Fed. Reg. 65013.
Issue date: 2002;
Document[A]: Securities and Exchange Commission, Commission Statement
about Management's Discussion and Analysis of Financial Condition and
Results of Operations [Release Nos. 33-8056; 34-45321; FR-61], 67 Fed.
Reg. 3746.
Issue date: 2003;
Document[A]: Securities and Exchange Commission, Commission Guidance
Regarding Management's Discussion and Analysis of Financial Condition
and Results of Operations [Release Nos. 33-8350; 34-48960; FR-72], 68
Fed. Reg. 75056.
Issue date: 2003;
Document[A]: Securities and Exchange Commission, Staff Accounting
Bulletin No. 103: Update of Codification of Staff Accounting
Bulletins, 68 Fed. Reg. 26840.
Source: GAO.
[A] Some of these documents have been amended since they were first
issued.
[B] SEC adopted Regulation S-X in 1940 and issued a comprehensive
revision in 1972. Provisions of Regulation S-X relevant to
environmental disclosure include 17 C.F.R. §210.3-01(a), which requires
annual submission of consolidated audited balance sheets; §210.3-02(a),
which requires annual submission of consolidated statements of income
and cash flow; and §210.4-01(a)(1), which provides that financial
statements filed with SEC that are not prepared in accordance with
generally accepted accounting principles will be presumed to be
misleading or inaccurate.
[C] In 1982, SEC consolidated all existing uniform disclosure
requirements under the federal securities laws, including those related
to environmental information, into an integrated disclosure system
under Regulation S-K. As part of this effort, SEC included interpretive
releases issued prior to 1982, such as those related to the disclosure
of environmental compliance costs (Conclusions and Final Action on
Rulemaking Proposals Relating to Environmental Disclosure [Release Nos.
33-5704; 34-12414]) and environment-related legal proceedings (Proposed
Amendments to Item 5 of Regulation S-K Regarding the Disclosure of
Certain Environmental Proceedings [Release Nos. 33-6315; 34-17762]).
The provisions of Regulation S-K most directly relevant to
environmental disclosure include 17 C.F.R. §229.101 (Description of
Business), §229.103 (Legal Proceedings), and §229.303 (Management's
Discussion of Financial Condition and Results of Operations).
[End of table]
[End of section]
Appendix III: Summary of Disclosure Studies Included in Our Analysis:
Study: Austin, Duncan and Amanda Sauer, Changing Oil: Emerging
Environmental Risks and Shareholder Value in the Oil and Gas Industry,
World Resources Institute, 2002;
Objective and scope (time frame)[A]:
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;
Scope: 16 oil and gas companies (forward-looking);
Major limitations[B]:
* Small sample size within a single industry;
* Estimates in study depend heavily on the accuracy of various
assumptions;
* 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.
Study: Barth, Mary E; Maureen F. McNichols; and Peter G. Wilson,
"Factors Influencing Firms' Disclosure about Environmental
Liabilities," Review of Accounting Studies, Vol. 2 (1997): pp. 35-64;
Objective and scope (time frame)[A]:
Objective: To identify factors that influence companies' decisions to
disclose information about environmental liabilities;
Scope: 257 companies that have a high concentration of Superfund
exposure from four industries (1989 through 1993);
Major limitations[B]:
* 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;
* Study results not generalizable.
Study: Deis, Donald R; Santanu Mitra; and Mahmud Hossain, "10-K Report
and Market Pricing of Environmental Segment Information for Chemical
Firms," Accounting Enquiries, Vol. 11, No. 1, fall 2001/winter 2002,
pp. 1-42;
Objective and scope (time frame)[A]:
Objective: To assess the impact of environment-related disclosures in
companies' 10-K reports on the market pricing of chemical firms;
Scope: 30 public chemical companies (1994 through 1997);
Major limitations[B]:
* Small sample size; no discussion of extent to which selected
companies are representative of the single industry;
* Study results not generalizable.
Study: Freedman, Martin; Bikki Jaggi; and A.J. Stagliano, "Pollution
Disclosures by Electric Utilities: An Evaluation at the Start of the
First Phase of 1990 Clean Air Act," Sixth Annual Conference of the
Greening of Industry Network, (1997);
Objective and scope (time frame)[A]:
Objective: To examine the extent of disclosures related to emissions
controls required under the Clean Air Act Amendments of 1990;
Scope: 38 public companies that owned 88 coal-fired electric utilities
(1989, 1990, and 1995);
Major limitations[B]:
* Analyses may have been affected by differences in collection of
emissions data in 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.
Study: Freedman, Martin and A.J. Stagliano, "Disclosure of
Environmental Cleanup Costs: The Impact of the Superfund Act,"
Advances in Public Interest Accounting, Vol. 6, (1995): pp. 163-176;
Objective and scope (time frame)[A]:
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;
Scope: 193 companies that were potentially liable for Superfund
remediation costs (1987);
Major limitations[B]:
* Criteria for assessing adequacy of disclosure not consistent with
the requirements;
* 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.
Study: Freedman, Martin and A.J. Stagliano, "Superfund Disclosures in
Annual Accounting Reports: The Impact of AICPA Statement of Position
96-1," provided by authors;
Objective and scope (time frame)[A]:
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;
Scope: 137 companies identified as potentially responsible parties at
3 or more Superfund sites (1994 and 1997);
Major limitations[B]:
* 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;
* 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.
Study: Freedman, Martin and A.J. Stagliano, "Political Pressure and
Environmental Disclosure: The Case of EPA and the Superfund," Research
on Accounting Ethics, Vol. 4 (1998): pp. 211-224;
Objective and scope (time frame)[A]:
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;
Scope: 140 companies that were potentially liable for Superfund costs
(1987, 1989, and 1990);
Major limitations[B]:
* No justification for the particular weighting scheme used in study,
although finding of statistical significance is heavily dependent on
it;
* Study results not generalizable.
Study: Freedman, Martin and A.J. Stagliano, "Environmental Disclosure
by Companies Involved in Initial Public Offerings," Accounting,
Auditing and Accountability Journal, Vol. 15, No. 1 (2002): pp. 94-
105;
Objective and scope (time frame)[A]:
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;
Scope: 26 companies making initial public stock offerings that were
identified as potentially responsible parties under the Superfund
program (1984 through 1993);
Major limitations[B]:
* 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;
* 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.
Study: Gamble, George O; Kathy Hsu; Devaun Kite; and Robin R. Radtke,
"Environmental Disclosures in Annual Reports and 10Ks: An Examination,"
Accounting Horizons, Vol. 9, No. 3, (September 1995): pp. 34-54;
Objective and scope (time frame)[A]:
Objective: To determine the relative quality of disclosures over time
and whether such information is sufficient to satisfy stakeholders'
needs;
Scope: 234 companies from 12 industries combined into six industry
groups selected from Standard & Poor's Compustat Services (1986 through
1991);
Major limitations[B]:
* Criteria for assessing adequacy of disclosure not consistent with
the requirements;
* 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.
Study: Kreuze, Jerry G; Gale E. Newell; and Stephen J. Newell, "What
Companies Are Reporting (Environmental Disclosures)," Management
Accounting, Vol. 78, No. 1, (1996);
Objective and scope (time frame)[A]:
Objective: To examine the extent to which companies disclosed
environmental information in their annual reports to shareholders;
Scope: 645 Forbes 500 corporations (1991);
Major limitations[B]:
* Criteria for assessing adequacy of disclosure not consistent with
the requirements;
* 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.
Study: Repetto, Robert and Duncan Austin, Coming Clean: Corporate
Disclosure of Financially Significant Environmental Risks, World
Resources Institute, 2000;
Objective and scope (time frame)[A]:
Objective: To assess the adequacy of companies' disclosure of material
environmental exposures in accordance with SEC rules;
Scope: 13 public pulp and paper companies (1998 and 1999);
Major limitations[B]:
* Criteria for assessing adequacy of disclosure not consistent with
the requirements;
* Small sample size;
* 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.
Study: Repetto, Robert and Duncan Austin, Pure Profit: The Financial
Implications of Environmental Performance, World Resources Institute
(2000);
Objective and scope (time frame)[A]:
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;
Scope: 13 pulp and paper companies that will be significantly impacted
by near future environmental developments (forward-looking);
Major limitations[B]:
* Criteria for assessing adequacy of disclosure not consistent with
the requirements;
* Small sample size;
* 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.
Study: Schmidt, Richard J., "Disclosing Past Sins: Financial Reporting
of Environmental Remediation," The National Public Accountant, Vol.
42, Issue 5 (July 1997): pp. 41-45;
Objective and scope (time frame)[A]:
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;
Scope: 17 corporations representing 20 Superfund sites from EPA's 1995
National Priorities List (1991 and 1994);
Major limitations[B]:
* Criteria for assessing adequacy of disclosure not consistent with the
requirements;
* Small sample size;
* 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.
Study: Stagliano, A.J. and W. Darrell Walden, "Assessing the Quality
of Environmental Disclosure Themes," Second Asian Pacific
Interdisciplinary Research in Accounting Conference, Osaka City
University, Osaka, Japan, August 1998;
Objective and scope (time frame)[A]:
Objective: To examine the quantity and quality of environmental
disclosures in the financial and nonfinancial sections of corporate
annual reports;
Scope: 53 companies in four industries (1989);
Major limitations[B]:
* Criteria for assessing adequacy of disclosure not consistent with
the requirements;
* Small sample size;
* 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.
Study: Stanny, Elizabeth, "Effect of Regulation on Changes in
Disclosure of and Reserved Amounts for Environmental Liabilities," The
Journal of Financial Statement Analysis (summer 1998): pp. 34-49;
Objective and scope (time frame)[A]:
Objective: To examine the impact of SEC's Staff Accounting Bulletin
No. 92 on the disclosure of environmental remediation liabilities and
associated reserves;
Scope: 199 nonfinancial firms from the 1994 Standard & Poor's 500
index (1991, 1992, and 1993);
Major limitations[B]:
* Criteria for assessing adequacy of disclosure not consistent with
the requirements;
* 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.
Source: GAO.
[A] 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.
[B] This table combines studies with strong and very strong
limitations. The column on "major limitations" includes some but not
all of the major limitations we identified.
[End of table]
[End of section]
Appendix IV Experts Who Participated in GAO Survey:
Gavin Anderson: GovernanceMetrix International, Inc.;
Duncan Austin: World Resources Institute;
Constance E. Bagley: Harvard Business School;
Michelle Chan-Fishel: Friends of the Earth;
Jack Ciesielski: R.G. Associates, Inc.;
Holly Clack: PricewaterhouseCoopers LLP;
Doug Cogan: Investor Responsibility Research Center;
Mark A. Cohen: Vanderbilt University;
Andrew N. Davis: LeBeouf, Lamb, Greene, and MacRae, LLP;
Martin Freedman: Towson University;
Julie Gorte: Calvert Funds;
Suellen Keiner: National Academy of Public Administration
Donald Kirshbaum: Office of Connecticut State Treasurer;
Gayle S. Koch: The Brattle Group;
Jerry G. Kreuze: Western Michigan University;
Peter Lehner: Office of Attorney General, State of New York;
Tim Little: The Rose Foundation;
Steven D. Lydenberg: Domini Social Investments LLC;
Thomas M. McMahon: Sidley Austin Brown & Wood LLP;
Dennis M. Patten: Illinois State University;
Ken Radigan: AIG Environmental;
Robert Repetto: Stratus Consulting, Inc.;
Amy Ripepi: Financial Reporting Advisors LLC;
Greg Rogers: Guida, Slavich & Flores, P.C.;
Solomon Samson: Standard & Poor's;
Christopher Scudellari: Ernst & Young;
Elizabeth Stanny: Sonoma State University
William L. Thomas: Pillsbury Winthrop LLP;
Martin Whittaker: Innovest Strategic Value Advisors, Inc.;
Cynthia Williams: University of Illinois College of Law:;
[End of section]
Appendix V: Survey Questions and Results:
[See PDF for image]
[End of figure]
[End of section]
Appendix VI: Comments from the Securities and Exchange Commission:
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549:
DIVISION OF CORPORATION FINANCE:
July 2, 2004:
John B. Stephenson:
Environmental Issue Director, Natural Resources and Environment Team:
General Accounting Office:
441 G Street, NW:
Washington, DC 20548:
Dear Mr, Stephenson:
Thank you for the opportunity to review and comment on the General
Accounting Office's draft report regarding Environmental Disclosure.
The GAO recommends three actions for executive action, and I appreciate
your seeking our input on these recommendations as you finalize your
report.
First, the GAO has recommended that the SEC take steps to ensure that
information from staff examinations of corporate filings is
electronically sorted and tracked to facilitate its analysis across
filings. As you indicate, the Division of Corporation Finance has
recently implemented a procedure to do just that. Through the process
of collecting a summary of our work product in what we call a closing
memo, we have already begun to implement your recommendation. You are
correct in noting that we are currently documenting our final work
product on paper; however, our work on creating a searchable electronic
database of this information is nearly complete. We wholeheartedly
agree with your recommendation that we track the results of our
reviews, and, as you noted in your report, our efforts in this area
have been underway for some time.
The GAO also recommends that the SEC create a publicly available
searchable database of its comment letters and company responses to
those letters. For some time now, this topic has also been under
consideration, and, on June 24th, the SEC announced its plans to make
public staff filing related correspondence. Again, we wholeheartedly
agree with your recommendation and our efforts to implement it are
underway.
Finally, we note your recommendation that the SEC continue to work with
the EPA to explore opportunities to take better advantage of EPA data
in evaluating public company disclosure in filings made with us. As the
report indicates, there have been efforts in the past to work together,
and we will fully take this recommendation into account in our future
efforts.
As a final point, we reviewed the information in your report regarding
the views of stakeholders, and the SEC values the input of all
interested parties. We have not commented on this section of the
report, as we believe their views speak for themselves.
Thank you for the courtesy the GAO extended to the SEC during the
course of preparing its report, and thank you again for the opportunity
to provide comments to the GAO as it prepares its final draft of the
report.
Sincerely,
Alan L. Beller:
Director:
[End of section]
Appendix VII: GAO Contacts and Staff Acknowledgments:
GAO Contacts:
Ellen Crocker, (617) 788-0580 Les Mahagan, (617) 788-0517:
Staff Acknowledgments:
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.
(360299):
FOOTNOTES
[1] The securities laws authorize SEC to prescribe the methods to be
followed in the preparation of accounts and the form and content of
financial statements to be filed under those laws. To assist in meeting
these responsibilities, SEC has historically relied upon private sector
standard-setting bodies designated by the accounting profession to
develop accounting principles and standards. Since 1973, SEC has
officially recognized the Financial Accounting Standards Board as the
authoritative standard-setting organization.
[2] The AICPA continues to exist as the officially recognized standard-
setting body for independent financial audits of nonpublic companies.
[3] In 2002, we issued a report on the imbalance between SEC's workload
and resource levels. See U.S. General Accounting Office, SEC
Operations: Increased Workload Creates Challenges, GAO-02-302
(Washington, D.C.: Mar. 5, 2002).
[4] Social Investment Forum, 2003 Report on Socially Responsible
Investing Trends in the United States (Washington, D.C.: December
2003).
[5] If the best estimate in a range is accrued, then the potential for
additional liability need not be disclosed. However, under guidance
from the AICPA, companies must disclose the risks and uncertainties of
their estimates when it is at least reasonably possible that the
estimates will change in a way that is material to the financial
statements within the next year. See AICPA, Statement of Position 94-6:
Disclosure of Certain Significant Risks and Uncertainties, (New York,
N.Y.: 1994).
[6] See Basic, Inc., v. Levinson, 485 U.S. 224, 231 (1988) citing TSC
Industries v. Northway, Inc., 426 U.S. 438, 449 (1976).
[7] SEC regulations provide a "safe harbor" under which the agency will
generally not consider forward-looking statements to be fraudulent.
[8] SEC's guidance further states that if management determines that
the known trend, demand, commitment, event, or uncertainty is not
reasonably likely to occur, no disclosure is required. However, if
management cannot make such a determination, it must proceed on the
assumption that the trends or events will come to fruition; disclosure
is then required unless management determines that a material effect is
not reasonably likely. See 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, 22430 (1989).
[9] See AICPA, Statement of Position 96-1: Environmental Remediation
Liabilities, (New York, N.Y.: 1996).
[10] A supplemental environmental project is part of an enforcement
settlement related to the violation of an environmental law or
regulation. As part of the settlement, a violator voluntarily agrees to
undertake an environmentally beneficial project in exchange for a
reduction in the penalty; the project does not include activities a
violator must take to return to compliance with the law.
[11] Environmental assets could include, for example, emission
"credits" under an emission trading program in which companies that
keep their pollutant emissions below their allowed level may sell their
surplus allotments, known as emission reduction credits, to other
companies.
[12] Among the studies included in our initial selection were two EPA-
sponsored studies on the disclosure of environmental legal proceedings.
Although the studies have never been published, the results of one were
included in a paper presented at a conference and have been widely
cited in the literature. According to EPA officials, the agency stopped
short of publishing the studies because of concerns about the
methodology used and the validity of the results obtained. For example,
when EPA officials attempted to verify the results of one study, they
found many instances in which the companies had actually disclosed some
of the information that EPA's contractor had determined to be
unreported. EPA officials identified several reasons for the
discrepancies, including instances in which the companies had disclosed
legal proceedings prior to the time frame reviewed by the contractor,
inappropriate criteria for determining whether particular disclosures
were "correct," and the use of search terms that were not sufficient to
identify company disclosures. According to EPA officials, both studies
used similar methodologies. We also identified methodological
limitations and eliminated the EPA-sponsored studies from our analysis.
[13] Our 1993 report, Environmental Liability: Property and Casualty
Insurer Disclosure of Environmental Liabilities, GAO/RCED-93-108
(Washington, D.C.: June 2, 1993), did not fall within the time frame we
established for this review. If the report had been included, however,
certain limitations, such as a small sample size and narrow scope,
would have affected the extent to which conclusions could be drawn from
the study.
[14] Martin Freedman and A.J. Stagliano, "Political Pressure and
Environmental Disclosure: The Case of EPA and the Superfund," Research
on Accounting Ethics (Vol. 4, 1998).
[15] Martin Freedman, B. Jaggi, and A.J. Stagliano, "Pollution
Disclosures by Electric Utilities: An Evaluation at the Start of the
First Phase of the 1990 Clean Air Act," Advances in Environmental
Accounting & Management (2004).
[16] Specifically, the study focused on Staff Accounting Bulletin No.
92, Topic 5.Y: Accounting Disclosures Relating to Loss Contingencies.
See Elizabeth Stanny, "Effect of Regulation on Changes in Disclosures
of and Reserved Amounts for Environmental Liabilities," The Journal of
Financial Statement Analysis (summer, 1998).
[17] For example, the study cited the issuance of SEC's 1989 guidance,
SEC Interpretation: Management's Discussion and Analysis of Financial
Condition and Results of Operations; Certain Investment Company
Disclosures. See George O. Gamble, Kathy Hsu, Devaun Kite, and Robin R.
Radtke, "Environmental Disclosures in Annual Reports and 10Ks: An
Examination," Accounting Horizons, Vol. 9, No. 3, (September 1995).
[18] Three of these studies are among those that examined changes in
the amount of disclosure over time.
[19] Greenhouse gases include carbon dioxide (mainly from burning coal,
oil, and natural gas); methane and nitrous oxide (largely due to
agriculture and changes in land use); and hydrofluorocarbons,
perfluorocarbons, and sulfur hexafluoride (manufactured by industry).
These gases trap heat in the atmosphere and are believed to contribute
to climate change, including global warming.
[20] In December 1997, the United States participated in drafting the
Kyoto Protocol, an international agreement to specifically limit
greenhouse gas emissions. Although the U.S. government signed the
Protocol in 1998, the Clinton administration did not submit it to the
Senate for advice and consent, which are necessary for ratification. In
March 2001, President Bush announced that he opposed the Protocol.
[21] In some instances, the company filings use terms like
"significant," "substantial," or "far-reaching" to characterize the
potential impacts, without referring specifically to materiality.
[22] For our review, we focused on SEC's monitoring of companies'
annual 10-K reports. SEC also reviews quarterly filings, known as 10-
Qs, and various "transactional" filings related to newly issued
securities, efforts to raise additional capital, and mergers and
acquisitions. According to SEC officials, the reviewers examine most
filings related to initial public offerings and selectively review
other transactional filings as well as a sampling of the annual and
quarterly filings.
[23] Other actions resulting from a filing review can include
requesting an amendment of a past report or advising the company to
make a disclosure in a future report.
[24] Among the most common problems identified in the Fortune 500 study
were the need for better analysis of--and less boilerplate information
on--companies' financial condition and results of operations; expanded
discussion of companies' critical accounting policies, including, for
example, the most difficult and judgmental estimates and the areas most
sensitive to material change from external factors; clarification of
how companies recognize revenue; and more comprehensive disclosures
related to restructuring charges and pension plans.
[25] Appendix IV contains a list of the experts that participated in
our survey and appendix V includes our questionnaire and a summary of
the responses to the closed-ended questions.
[26] ASTM International is a standard-setting organization originally
known as the American Society for Testing and Materials. Expected value
analysis is a method of estimating the mean value of an unknown
quantity, which represents a probability-weighted average over the
range of all possible values.
[27] The Global Reporting Initiative develops and disseminates globally
applicable sustainability reporting guidelines for voluntary use by
organizations for reporting on the economic, environmental, and social
dimensions of their activities, products, and services. Examples of
environmental indicators include energy, material, and water use;
greenhouse gas and other emissions; effluents and waste generation; use
of hazardous materials; and recycling, pollution, waste reduction, and
other environmental programs.
[28] The Enforcement and Compliance History Online is a Web-based tool
that integrates information from data systems across EPA programs and
provides public access to monitoring, compliance, and enforcement
information for approximately 800,000 EPA-regulated facilities. The
Toxics Release Inventory is another publicly accessible database that
contains information on estimated releases of hundreds of chemicals,
which companies report annually to EPA and the states.
[29] The Carbon Disclosure Project is an organization of institutional
investors representing assets in excess of $10 trillion. Its mission is
to inform investors about the "significant risks and opportunities"
presented by climate change and company management about shareholder
concerns regarding the impact of such issues on company value. The
project has written to the 500 largest companies in the world by market
capitalization, asking for disclosure of investment-relevant
information concerning their greenhouse gas emissions.
[30] According to statistics compiled by the Investor Responsibility
Research Center, shareholders filed 66 petitions on environmental
issues in 2003 and had filed 57 as of mid-April 2004. Among other
things, the petitions have called for companies to report on their
greenhouse gas emissions, how climate change will affect their
operations, or their performance against environmental and other
indicators using the reporting guidelines established for the Global
Reporting Initiative.
[31] The Tennessee Valley Authority and two non-U.S. companies were
among the top 20 emitters in EPA's database, but we excluded them from
our analysis because they are not required to file 10-K reports. In
addition, according to an EPA official, EPA makes a number of
assumptions in allocating carbon dioxide emissions from facilities with
multiple owners and the relative ranking of the top emitters could be
affected as a result. Also, the measurement of carbon dioxide emissions
for smaller sources involves estimates, which could affect the amounts
by a small percentage. However, the official agreed that we had
included companies that were among the highest emitters of carbon
dioxide in our analysis.
[32] Effective April 2004, Reliant Resources changed its name to
Reliant Energy, Inc.
[33] We initially asked 31 individuals to participate. One person
declined.
[34] As noted earlier, our review of existing studies on environmental
disclosure included 27 studies. However, at the time we were developing
our questionnaire, we had identified only 25 of the studies.
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