Environmental Disclosure: SEC Should Explore Ways to Improve
Tracking and Transparency of Information (14-JUL-04, GAO-04-808).
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.
-------------------------Indexing Terms-------------------------
REPORTNUM: GAO-04-808
ACCNO: A10929
TITLE: Environmental Disclosure: SEC Should Explore Ways to
Improve Tracking and Transparency of Information
DATE: 07/14/2004
SUBJECT: Environmental monitoring
Financial disclosure
Financial records
Information disclosure
Investment companies
Investment planning
Liability (legal)
Monitoring
Reporting requirements
Requirements definition
Surveys
Stakeholder consultations
******************************************************************
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GAO-04-808
United States Government Accountability Office
GAO Report to Congressional Requesters
July 2004
ENVIRONMENTAL DISCLOSURE
SEC Should Explore Ways to Improve Tracking and Transparency of Information
a
GAO-04-808
Highlights of GAO-04-808, a report to congressional requesters
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.
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 [email protected].
July 2004
ENVIRONMENTAL DISCLOSURE
SEC Should Explore Ways to Improve Tracking and Transparency of Information
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.
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
1 3 6
9
16
23
29 36 36 37
Appendixes
Appendix I:
Appendix II:
Appendix III: Appendix IV: Appendix V: Appendix VI: Appendix VII:
Scope and Methodology
Principal Requirements and Guidance Applicable to the Disclosure of Environmental Information in SEC Filings
Summary of Disclosure Studies Included in Our Analysis
Experts Who Participated in GAO Survey
Survey Questions and Results
Comments from the Securities and Exchange Commission
GAO Contacts and Staff Acknowledgments
GAO Contacts Staff Acknowledgments
39
44
46
51
52
72
74 74 74
Tables Table 1: Disclosures Related to Potential Impacts of Current or
Proposed Requirements to Reduce Greenhouse Gas
Emissions 22
Table 2: SEC's Reviews of Companies' Annual 10K Filings, Fiscal
Years 1999 through 2003 25
Contents
Abbreviations
AICPA American Institute of Certified Public Accountants EPA
Environmental Protection Agency GAO Government Accountability Office
SEC Securities and Exchange Commission
This is a work of the U.S. government and is not subject to copyright protection in the United States. It may be reproduced and distributed in its entirety without further permission from GAO. However, because this work may contain copyrighted images or other material, permission from the copyright holder may be necessary if you wish to reproduce this material separately.
A
United States Government Accountability Office
Washington, D.C. 20548
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 companyowned 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 SarbanesOxley 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 Webbased 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 enforcementrelated data to
SEC's Division of Corporation Finance on a quarterly basis, but SEC
questioned the usefulness of the data because they were facilityspecific
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 costestimation 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 highprofile 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 10K, and
three quarterly reports, known as 10Qs.
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 SK. According to SEC, three sections of regulation SK are most
likely to elicit environmental disclosures, either because of specific
environmentrelated requirements or common practice:
o Under SK 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;
o Under SK item 103, companies must describe certain administrative or
judicial legal proceedings arising from federal, state, or local
environmental provisions; and
o Under SK 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.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
SarbanesOxley 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.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
1The 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
standardsetting 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
standardsetting organization.
2The AICPA continues to exist as the officially recognized standardsetting
body for independent financial audits of nonpublic companies.
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 SarbanesOxley 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 realtime 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.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
4
management.
3In 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, GAO02302 (Washington, D.C.: Mar. 5,
2002).
4Social Investment Forum, 2003 Report on Socially Responsible Investing
Trends in the United States (Washington, D.C.: December 2003).
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.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."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 standardsetting 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 SK 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
5If 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).
6See Basic, Inc., v. Levinson, 485 U.S. 224, 231 (1988) citing TSC
Industries v. Northway, Inc., 426 U.S. 438, 449 (1976).
uncertainty.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."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.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 SK item 103. Although SEC's regulations and guidance
7SEC regulations provide a "safe harbor" under which the agency will
generally not consider forwardlooking statements to be fraudulent.
8SEC'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).
9See AICPA, Statement of Position 96-1: Environmental Remediation
Liabilities, (New York, N.Y.: 1996).
generally do not establish numeric thresholds for determining materiality,
item 103 contains two exceptions related to environmentrelated 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 "forwardlooking 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 forwardlooking 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:
o 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.10
o 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.
o Companies are not required to disclose information about their
environmental assets or environmental performance.11 A growing body of
socially responsible investors believes that such information could be
material to many investors or indicative of effective corporate
management.
o 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.
10A 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.
11Environmental 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.
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:
o 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.
o 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.
o 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.
o Environmental regulations and market forces-not SEC disclosure
requirements-drive companies to comply with environmental laws and assess
their environmental performance.
o 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 strongtosevere 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 10K 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.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.)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
12Among the studies included in our initial selection were two
EPAsponsored 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 EPAsponsored studies from
our analysis.
13Our 1993 report, Environmental Liability: Property and Casualty Insurer
Disclosure of Environmental Liabilities, GAO/RCED93108 (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.
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.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 coalfired 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.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.16 In
the other case, a 1995 study of environmental disclosures by 234 companies
found that the amount of information reported in 10Ks and the companies'
14Martin Freedman and A.J. Stagliano, "Political Pressure and
Environmental Disclosure: The Case of EPA and the Superfund," Research on
Accounting Ethics (Vol. 4, 1998).
15Martin 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).
16Specifically, 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).
annual reports to shareholders increased following the issuance of
guidance from SEC and the Financial Accounting Standards Board.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.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.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
17For 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).
18Three of these studies are among those that examined changes in the
amount of disclosure over time.
19Greenhouse 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.
Protocol or legislation.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.21 Table 1 summarizes the types of information the electric
utility companies disclosed about the impact of potential controls over
greenhouse gas emissions.
20In 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.
21In some instances, the company filings use terms like "significant,"
"substantial," or "farreaching" to characterize the potential impacts,
without referring specifically to materiality.
Table 1: Disclosures Related to Potential Impacts of Current or Proposed Requirements to Reduce Greenhouse Gas Emissions
Number of utility companies
reporting potential impact Description of potential impact
Impacts related to Kyoto Protocol
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.
U.S. and international
operations: Compliance costs could be material and/or there could be farreaching and significant impacts on operations.
International operations
only: Significant compliance costs may affect operations.
U.S. operations
only: Specific impacts on operations could not be identified because of uncertainties.
None.
Impacts related to current administration policy on voluntary reductions
The company stated it was unable to determine the potential impact.
Compliance costs could be significant or material, and/or possible impacts on operations.
None.
Impacts related to other current or proposed federal, state, or international requirements
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.
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.
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.
General statement
only: The company may incur liabilities because of its emission of gases that may contribute to global warming.
Federal requirements
only: The company stated it was unable to determine the potential future impacts on its financial condition and operations.
1 Federal, state, and international
requirements: The company stated it was unable to determine the potential future impacts on its financial condition and operations.
4 None.
Source: GAO analysis.
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,
o 7 disclosed such information only in the SK item 101, "Description of
Business" section of the company's 10K or 10Q reports;
o 2 disclosed information only in SK items 301 and 302, "Selected
Financial Data" and "Supplementary Financial Information" sections of the
company's 10K or 10Q reports;
o 2 disclosed information only in SK item 303, "Management's Discussion
and Analysis of Financial Condition and Results of Operations" section of
the company's 10K or 10Q reports; and
o 8 disclosed information in multiple sections of the 10K, 10Q, 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, environmentrelated 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 onsite 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 10K filings to determine which reports warrant
further scrutiny and at what level.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.
22For our review, we focused on SEC's monitoring of companies' annual 10K
reports. SEC also reviews quarterly filings, known as 10Qs, 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.
Table 2: SEC's Reviews of Companies' Annual 10-K Filings, Fiscal Years 1999 through 2003
1999 2000a 2001 2002 2003
Annual filings 13,460 14,280 14,060 13,550 12,830
Annual filings reviewed by SEC 2,345 1,160 2,305 2,695 2,170
Percentage of filings reviewed 17.4 8.1 16.4 19.9 16.9
Source: GAO analysis of SEC data.
aSEC'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.
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.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 timecritical 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 10K or 10Q 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
23Other 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.
while they track enforcement cases by broad program area, such as
brokerdealer 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 followup.
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 10K
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.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.
24Among 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.
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 mid1980s, and in February 1990, SEC and
EPA reached an agreement under which EPA would provide enforcementrelated
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 facilityspecific, 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.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 standardsetting 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
25Appendix 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 closedended questions.
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.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
26ASTM International is a standardsetting 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 probabilityweighted average over the range of all possible
values.
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 "forwardlooking"
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.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 dollarfordollar
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
27The 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.
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 SarbanesOxley
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
highprofile 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 10K filings and the amount of
resources available to conduct such reviews has increased significantly as
a result of the SarbanesOxley 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 realtime 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.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.
28The Enforcement and Compliance History Online is a Webbased tool that
integrates information from data systems across EPA programs and provides
public access to monitoring, compliance, and enforcement information for
approximately 800,000 EPAregulated 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.
Some Experts Said Certain Nonregulatory Approaches Could Increase and
Improve Environmental Disclosure
Onethird 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.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.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
29The 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 investmentrelevant information
concerning their greenhouse gas emissions.
30According to statistics compiled by the Investor Responsibility Research
Center, shareholders filed 66 petitions on environmental issues in 2003
and had filed 57 as of midApril 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.
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 To improve the tracking and transparency of
information on environmental Executive Action 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:
o 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.
o 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 http://www.gao.gov.
Please call me at (202) 5123841 if you or your staff have any questions.
Major contributors to this report are listed in appendix VII.
John B. Stephenson Director, Natural Resources and Environment
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
Appendix I Scope and Methodology
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.1 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
1The Tennessee Valley Authority and two nonU.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 10K 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.
Appendix I Scope and Methodology
Company; TXU Corporation; and Xcel Energy, Inc.2 For each company, we
reviewed the most recent available annual and quarterly filings, namely,
the fiscal year 2003 forms 10K and 10Q 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 ForwardLooking 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
2Effective April 2004, Reliant Resources changed its name to Reliant
Energy, Inc.
Appendix I Scope and Methodology
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 Webbased 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.3
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;4 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
3We initially asked 31 individuals to participate. One person declined.
4As 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.
Appendix I Scope and Methodology
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 email
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 openended 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.
Appendix II
Principal Requirements and Guidance Applicable to the Disclosure of
Environmental Information in SEC Filings
Issue date Documenta
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
Financial Accounting Standards Board, Statement of Financial Accounting
Standards No. 5: Accounting for Contingencies. Norwalk, CT: 1975.
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.
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, c
codified at 17 C.F.R. Part 229.
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.
Financial Accounting Standards Board, Emerging Issues Task Force 90-8:
Capitalization of Costs to Treat Environmental
Contamination. Norwalk, CT: 1990.
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.
Financial Accounting Standards Board, Emerging Issues Task Force 93-5:
Accounting for Environmental Liabilities. Norwalk, CT: 1993.
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.
American Institute of Certified Public Accountants, Statement of Position
94-6: Disclosure of Certain Significant Risks and
Uncertainties. New York, NY: 1994.
American Institute of Certified Public Accountants, Statement of Position
96-1: Environmental Remediation Liabilities. New York, NY: 1996.
Securities and Exchange Commission, Staff Accounting Bulletin No. 99:
Materiality, 64 Fed. Reg. 45150.
Financial Accounting Standards Board, Statement of Financial Accounting
Standards No. 143: Accounting for Asset Retirement
Obligations. Norwalk, CT: 2001.
Financial Accounting Standards Board, Statement of Financial Accounting
Standards No. 144: Accounting for the Impairment or Disposal of Long-Lived
Assets. Norwalk, CT: 2001.
2001 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.
2002 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.
2003 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.
2003 Securities and Exchange Commission, Staff Accounting Bulletin No.
103: Update of Codification of Staff Accounting Bulletins, 68
Fed. Reg. 26840.
Source: GAO.
Appendix II Principal Requirements and Guidance Applicable to the Disclosure of Environmental Information in SEC Filings
aSome of these documents have been amended since they were first issued.
bSEC adopted Regulation SX in 1940 and issued a comprehensive revision in 1972. Provisions of Regulation SX relevant to environmental disclosure include 17 C.F.R. S:210.301(a), which requires annual submission of consolidated audited balance sheets; S:210.302(a), which requires annual submission of consolidated statements of income and cash flow; and S:210.401(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.
cIn 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 SK. 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. 335704; 3412414]) and environmentrelated legal proceedings (Proposed Amendments to Item 5 of Regulation SK Regarding the Disclosure of Certain Environmental Proceedings [Release Nos. 336315; 3417762]). The provisions of Regulation SK most directly relevant to environmental disclosure include 17 C.F.R. S:229.101 (Description of Business), S:229.103 (Legal Proceedings), and S:229.303 (Management's Discussion of Financial Condition and Results of Operations).
Appendix III
Summary of Disclosure Studies Included in Our Analysis
Study Objective and scope (time frame)a Major limitationsb
Austin, Duncan and Objective: To assess the potential impact of various Small sample size within a single industry.
Amanda Sauer, Changing scenarios for (1) controls over greenhouse gas
Oil: Emerging
emissions and (2) pressures to restrict access to oil Estimates in study depend heavily on the accuracy
Environmental Risks and
and gas reserves on shareholder value. of various assumptions.
Shareholder Value in the
Oil and Gas
Industry, Scope: 16 oil and gas companies (forwardlooking). The authors attempted to incorporate input from
World Resources Institute, various experts into the assignment of probabilities
2002. 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.
Barth, Mary E.; Maureen Objective: To identify factors that influence companies' No information on how the matching to produce
F. McNichols; and Peter G. decisions to disclose information about environmental potentially responsible party sites was done or the
Wilson, "Factors liabilities. accuracy of the matching process related to the use
Influencing Firms' of industry data files.
Disclosure about Scope: 257 companies that have a high concentration
Environmental Liabilities," of Superfund exposure from four industries (1989 Study results not generalizable.
Review of Accounting through 1993).
Studies, Vol. 2 (1997): pp.
3564.
Deis, Donald R.; Santanu Objective: To assess the impact of environmentSmall sample size; no discussion of extent to which
Mitra; and Mahmud related disclosures in companies' 10K reports on the selected companies are representative of the single
Hossain, "10K Report market pricing of chemical firms. industry.
and Market Pricing of
Environmental Segment Scope: 30 public chemical companies (1994 through Study results not generalizable.
Information for Chemical 1997).
Firms," Accounting
Enquiries, Vol. 11, No. 1,
fall 2001/winter 2002, pp.
142.
Freedman, Martin; Bikki Objective: To examine the extent of disclosures related Analyses may have been affected by differences in
Jaggi; and A.J. Stagliano, to emissions controls required under the Clean Air Act collection of emissions data in 1990 and 1995.
"Pollution Disclosures by Amendments of 1990.
Electric Utilities: An Small size of subgroups used in modeling affected
Evaluation at the Start of Scope: 38 public companies that owned 88 coalfired ability to draw meaningful conclusions and design of
the First Phase of 1990 electric utilities (1989, 1990, and 1995). subgroups relied on authors' judgments.
Clean Air Act," Sixth
Annual Conference of the Conclusions go beyond what is supported by the
Greening of Industry analysis.
Network, (1997).
Appendix III
Summary of Disclosure Studies Included in
Our Analysis
(Continued From Previous Page)
Study Objective and scope (time frame)a Major limitationsb
Freedman, Martin and Objective: To examine the extent to which companies Criteria for assessing adequacy of disclosure not
A.J. Stagliano, "Disclosure identified as potentially responsible parties disclosed consistent with the requirements.
of Environmental Cleanup information related to potential remediation liabilities in
Costs: The Impact of the their 1987 Form 10Ks. No information on how companies were identified
Superfund Act," Advances
for inclusion in the study or the extent to which the
in Public Interest
Scope: 193 companies that were potentially liable for companies are representative of others.
Accounting, Vol. 6, (1995): Superfund remediation costs (1987).
pp. 163176. No description of the content analysis or steps
taken to ensure interrater reliability.
Freedman, Martin and Objective: To determine whether the issuance of
A.J. Stagliano, "Superfund additional guidance (American Institute of Certified
Disclosures in Annual Public Accountants Statement of Position No. 961) led
Accounting Reports: The to improved disclosure of Superfund liabilities in
Impact of AICPA companies' annual filings with SEC.
Statement of Position 96
1," provided by authors. Scope: 137 companies identified as potentially
responsible parties at 3 or more Superfund sites (1994 and 1997).
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.
Freedman, Martin and Objective: To determine whether companies' No justification for the particular weighting scheme
A.J. Stagliano, "Political disclosures about potential Superfund liabilities used in study, although finding of statistical
Pressure and changed as a result of EPA efforts to prompt increased significance is heavily dependent on it.
Environmental Disclosure: enforcement of disclosure requirements by SEC.
The Case of EPA and the Study results not generalizable.
Superfund," Research on
Scope: 140 companies that were potentially liable for
Accounting Ethics, Vol. 4 Superfund costs (1987, 1989, and 1990).
(1998): pp. 211224.
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. 94105.
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).
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 interrater reliability of content coding.
Appendix III
Summary of Disclosure Studies Included in
Our Analysis
(Continued From Previous Page)
Study Objective and scope (time frame)a Major limitationsb
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: 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).
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 interrater reliability of content coding.
Study results not generalizable.
Conclusions go beyond what is supported by the analysis.
Kreuze, Jerry G.; Gale E. Objective: To examine the extent to which companies Criteria for assessing adequacy of disclosure not
Newell; and Stephen J. disclosed environmental information in their annual consistent with the requirements.
Newell, "What Companies reports to shareholders.
Are Reporting No information on how the sample was chosen or
(Environmental Scope: 645 Forbes 500 corporations (1991). the universe from which companies were selected.
Disclosures),"
Management Accounting, Limited time period covered by analysis.
Vol. 78, No. 1, (1996).
Study results not generalizable.
Conclusions go beyond what is supported by the analysis.
Repetto, Robert and Duncan Austin, Coming Clean: Corporate Disclosure of
Financially Significant Environmental
Risks, World Resources Institute, 2000.
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).
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.
Appendix III
Summary of Disclosure Studies Included in
Our Analysis
(Continued From Previous Page)
Study Objective and scope (time frame)a Major limitationsb
Repetto, Robert and Duncan Austin, Pure Profit: The Financial Implications
of Environmental Performance, World Resources Institute (2000).
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 (forwardlooking).
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.
Schmidt, Richard J., "Disclosing Past Sins: Financial Reporting of Environmental Remediation," The
National Public Accountant, Vol. 42, Issue 5 (July 1997): pp. 4145.
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).
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.
Stagliano, A.J. and W. Objective: To examine the quantity and quality of Criteria for assessing adequacy of disclosure not
Darrell Walden, environmental disclosures in the financial and consistent with the requirements.
"Assessing the Quality of nonfinancial sections of corporate annual reports.
Environmental Disclosure Small sample size.
Themes," Second Asian Scope: 53 companies in four industries (1989).
Pacific Interdisciplinary No specific information on sample selection (e.g.,
Research in Accounting no elaboration on "leaders in their respective
Conference, Osaka City industries").
University, Osaka, Japan,
August 1998. Possible sample selection bias cannot be
determined.
Study results not generalizable.
Stanny, Elizabeth, "Effect Objective: To examine the impact of SEC's Staff Criteria for assessing adequacy of disclosure not
of Regulation on Changes Accounting Bulletin No. 92 on the disclosure of consistent with the requirements.
in Disclosure of and environmental remediation liabilities and associated
Reserved Amounts for reserves. Low number of cases used in some aspects of the
Environmental Liabilities," modeling raise questions of external validity and
The Journal of Financial
Scope: 199 nonfinancial firms from the 1994 Standard potentially false negative results in tests of
Statement Analysis
& Poor's 500 index (1991, 1992, and 1993). significance.
(summer 1998): pp. 34
49. No discussion of efforts to address possible issues of autocorrelation in the multiple regression models due to pooling of multiple years.
Appendix III
Summary of Disclosure Studies Included in
Our Analysis
Source: GAO.
aThe 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.
bThis 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.
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
ChanFishel 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
Appendix V
Survey Questions and Results
The Webbased questionnaire included six sections. The first five sections
began with an issue statement and background material for the questions
followed by a series of closedended (radio button) questions and then, one
or more openended (text box) questions. The last section also used a
combination of closedended and openended questions, included general
questions about the impact of inadequate disclosure, and asked for
suggestions on ways to resolve concerns about disclosure.
Section I. Addressing Uncertainty Regarding the Likelihood and Amount of Existing
and Potential Liabilities Related to Environmental Contamination
Issue Statement: Companies may not be providing enough information about
environmental liabilities in their financial statements because of
uncertainties about (1) whether they have a liability that must be
disclosed and (2) if so, how to estimate the amount of the liability.
Without more specific standards and guidance, some companies conclude that
they have nothing to disclose, cannot calculate an estimate, or default to
a minimum amount rather than develop a best estimate.
Background: Under generally accepted accounting principles, companies must
report environmental and other types of liabilities in their financial
statements if such liabilities are "reasonably likely" to occur and the
amounts are "reasonably estimable." (In addition to liabilities, losses
may take the form of permanent reductions in asset value.) SEC, the
Financial Accounting Standards Board, and the American Institute of
Certified Public Accountants have all issued standards and guidance to
assist companies (and their independent auditors) in making determinations
about when and what amount to disclose.
The standards and guidance on when to disclose a liability consider a
range of probabilities that the liability will occur-from "likely" to
"remote"-and provide some benchmarks by which companies can judge the
likelihood of a liability resulting from environmental contamination (for
example, notification by the Environmental Protection Agency that they
have been identified as a responsible party at a hazardous waste site).
The standards and guidance on what amount to disclose specify the cost
elements that should be included in an estimate and require companies to
use the best information currently available. In addition, the guidance
helps companies determine an appropriate amount to disclose if they
estimate that the liability will fall within a particular dollar range.
Appendix V
Survey Questions and Results
Concern #1: The guidance on assessing the likelihood of an environmental liability and determining when it must be disclosed is not sufficiently clear. 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.
Q1. Do you share this concern?
Response categories Number of respondents Percent of respondents
Definitely no 4 13.33
Probably no 2 6.67
Uncertain 0 0.0
Probably yes 8 26.67
Definitely yes 16 53.33
No basis to judge 0 0.0
No answer 0 0.0
Q2. Does the lack of clear guidance for assessing the likelihood of an environmental liability contribute to inadequate disclosure of environmental information?
Response categories Number of respondents Percent of respondents
Definitely no 3 10.00
Probably no 1 3.33
Uncertain 0 0.0
Probably yes 10 33.33
Definitely yes 15 50.00
No basis to judge 1 3.33
No answer 0 0.0
Appendix V
Survey Questions and Results
Concern #2: The standards and guidance applicable to estimating the amount of environmental liabilities are not specific enough to help companies deal with the uncertainties inherent in deriving the estimates. Such uncertainties include the extent to which cleanup costs might be shared with other responsible parties or offset by insurance recoveries, the extent of contamination and required cleanup, the state of the art of available cleanup technology, and the stringency of environmental cleanup standards.
Q3. Do you share this concern?
Response categories Number of respondents Percent of respondents
Definitely no 3 10.00
Probably no 3 10.00
Uncertain 2 6.67
Probably yes 6 20.00
Definitely yes 16 53.33
No basis to judge 0 0.0
No answer 0 0.0
Q4. Does the lack of specific standards and guidance for estimating the amount of environmental liabilities contribute to inadequate disclosure of environmental information?
Response categories Number of respondents Percent of respondents
Definitely no 1 3.33
Probably no 6 20.00
Uncertain 1 3.33
Probably yes 9 30.00
Definitely yes 13 43.33
No basis to judge 0 0.0
No answer 0 0.0
Q5. Please provide any additional comments you have, or further elaboration on your responses for Section I, "Addressing Uncertainty Regarding the Likelihood and Amount of Existing and Potential Liabilities Related to Environmental Contamination," in the space below.
Response categories Number of respondents Percent of respondents
Did not write any comments 3 10.00
Wrote comments 27 90.00
Appendix V
Survey Questions and Results
Section II: Determining Whether Environmental Information is Material
Issue Statement: Companies may not be providing environmental information
in their SEC filings that would be considered material by "reasonable
investors."
Background: Applicable regulations and guidance generally define
materiality in terms of information that is important to investors'
investment decisions or necessary for the fair presentation of the
financial statements in accordance with generally accepted accounting
principles. For example, SEC's regulations define material information as
"matters about which an average prudent investor ought reasonably to be
informed." As another example, guidance issued by the Financial Accounting
Standards Board states that the omission or misstatement of an item in a
financial report is material if, in the 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 been
changed or influenced by the inclusion or correction of the item.
SEC's regulations and guidance generally do not establish numeric
thresholds for determining materiality. However, SEC Regulation SK, item
103 "Legal Proceedings" contains two exceptions: (1) losses resulting from
any administrative or judicial proceeding involving federal, state, or
local environmental laws, if the amount of the losses exceeds 10 percent
of the company's current assets and (2) monetary sanctions greater than
$100,000, if a governmental authority is a party to the proceeding.
Concern #3: The regulations and guidance issued by SEC and other standardsetting bodies are not specific enough to ensure adequate disclosure of material information, environmental or otherwise. For example, the regulations and guidance lack any metrics that could serve as minimum thresholds for materiality and do not sufficiently emphasize intangible, nonquantifiable factors in materiality determinations (for example, the impact of environmental contamination on a company's reputation).
Q6. Do you share this concern?
Response categories Number of respondents Percent of respondents
Definitely no 2 6.67
Probably no 4 13.33
Uncertain 0 0.0
Probably yes 6 20.00
Definitely yes 18 60.00
No basis to judge 0 0.0
No answer 0 0.0
Appendix V
Survey Questions and Results
Q7. Does the lack of specific regulations and guidance for determining materiality contribute to inadequate disclosure of environmental information?
Response categories Number of respondents Percent of respondents
Definitely no 2 6.67
Probably no 4 13.33
Uncertain 0 0.0
Probably yes 6 20.00
Definitely yes 18 60.00
No basis to judge 0 0.0
No answer 0 0.0
Page 56 GAO-04-808 Environmental Disclosure
Concern #4: SEC's regulations do not require companies to aggregate the estimated costs of potential environmental liabilities (for example, multiple hazardous waste sites) when assessing materiality. Q8. Do you share this concern? Response categories Number of respondents Percent of respondents Definitely no 2 6.67 Probably no 3 10.00 Uncertain 2 6.67 Probably yes 4 13.33 Definitely yes 19 63.33 No basis to judge 0 0.0 No answer 0 0.0 Q9. Does the lack of a requirement to aggregate the estimated costs of potential environmental liabilities contribute to inadequate disclosure of environmental information Percent of respondents? Response categories Number of respondents Percent of respondents Definitely no 1 3.33 Probably no 3 10.00 Uncertain 1 3.33 Probably yes 8 26.67 Definitely yes 17 56.67 No basis to judge 0 0.0 No answer 0 0.0
Appendix V
Survey Questions and Results
Concern #5: The $100,000 threshold for monetary sanctions may be outdated. For example, the threshold has not been adjusted since it was established in 1981.
Q10. Do you share this concern?
Response categories Number of respondents Percent of respondents
Definitely no 6 20.00
Probably no 8 26.67
Uncertain 3 10.00
Probably yes 7 23.33
Definitely yes 5 16.67
No basis to judge 1 3.33
No answer 0 0.0
Q11. Does the outdated monetary threshold contribute to inadequate disclosure of environmental information?
Response categories Number of respondents Percent of respondents
Definitely no 9 30.00
Probably no 13 43.33
Uncertain 4 13.33
Probably yes 2 6.67
Definitely yes 1 3.33
No basis to judge 1 3.33
No answer 0 0.0
Appendix V
Survey Questions and Results
Concern #6: The $100,000 threshold for monetary sanctions may be too restrictive. For example, certain costs related to the sanctions, such as the costs associated with (1) environmental remediation and (2) supplemental environmental projects conducted in lieu of paying sanctions, are not counted in determining whether the threshold has been met.
Q12. Do you share this concern?
Response categories Number of respondents Percent of respondents
Definitely no 3 10.00
Probably no 6 20.00
Uncertain 1 3.33
Probably yes 8 26.67
Definitely yes 12 40.00
No basis to judge 0 0.0
No answer 0 0.0
Q13. Does the too restrictive definition of monetary sanction contribute to inadequate disclosure of environmental information?
Response categories Number of respondents Percent of respondents
Definitely no 4 13.33
Probably no 4 13.33
Uncertain 4 13.33
Probably yes 8 26.67
Definitely yes 10 33.33
No basis to judge 0 0.0
No answer 0 0.0
Q14. Please provide any additional comments you have, or further elaboration on your responses for Section II, "Determining Whether Environmental Information is Material," in the space below.
Response categories Number of respondents Percent of respondents
Did not write any comments 5 16.67
Wrote comments 25 83.33
Appendix V
Survey Questions and Results
Section III: Disclosing Future Environmental Risks
Issue Statement: Companies may not be providing enough information on
potentially significant environmental problems or regulatory initiatives
that could pose a future financial risk.
Background: SEC's regulations and guidance categorize companies'
disclosure of information regarding their future condition, including
environmental risks, in two different ways. SEC Regulation SK, item 303,
"Management Discussion and Analysis" requires companies to discuss in
their filings with SEC any known material trends, events, and
uncertainties that would cause the companies' liquidity, capital
resources, and results of operations, as reported, to not be indicative of
future operating results or financial condition. On the other hand, SEC's
instructions for this requirement encourage, but do not require, companies
to discuss forwardlooking information in their filings. According to SEC,
reporting forwardlooking information involves anticipating a future trend
or event, or anticipating a less predictable impact of a known event,
trend or uncertainty.
Concern #7: SEC's regulations and guidance do not clearly distinguish between "known information that might impact future operating results" and "forwardlooking information."
Q15. Do you share this concern?
Response categories Number of respondents Percent of respondents
Definitely no 1 3.33
Probably no 6 20.00
Uncertain 5 16.67
Probably yes 10 33.33
Definitely yes 8 26.67
No basis to judge 0 0.0
No answer 0 0.0
Q16. Does the lack of a clear distinction between "known information that might impact future operating results" and "forwardlooking information" contribute to inadequate disclosure of environmental information?
Response categories Number of respondents Percent of respondents
Definitely no 1 3.33
Probably no 6 20.00
Uncertain 6 20.00
Probably yes 13 43.33
Definitely yes 4 13.33
No basis to judge 0 0.0
No answer 0 0.0
Appendix V
Survey Questions and Results
Concern #8: SEC's regulations and guidance do not specify how far into the future companies should look in identifying and discussing "known" or "forwardlooking" information (including information on environmental risks) and the potential impacts of such information.
Q17. Do you share this concern?
Response categories Number of respondents Percent of respondents
Definitely no 2 6.67
Probably no 2 6.67
Uncertain 3 10.00
Probably yes 12 40.00
Definitely yes 11 36.67
No basis to judge 0 0.0
No answer 0 0.0
Q18. Does the lack of specific regulations and guidance on the timeframes for "known" and "forwardlooking" information lead to inadequate disclosure of environmental information?
Response categories Number of respondents Percent of respondents
Definitely no 2 6.67
Probably no 2 6.67
Uncertain 3 10.00
Probably yes 13 43.33
Definitely yes 10 33.33
No basis to judge 0 0.0
No answer 0 0.0
Q19. Please provide any additional comments you have, or further elaboration on your responses for Section III, "Disclosing Future Environmental Risks," in the space below.
Response categories Number of respondents Percent of respondents
Did not write any comments 7 23.33
Wrote comments 23 76.67
Appendix V
Survey Questions and Results
Section IV: Ensuring Disclosure of Important Environmental Information
Issue Statement: Existing standards and guidance from SEC, the Financial
Accounting Standards Board, and the American Institute of Certified Public
Accountants do not require companies to disclose certain types of
information that some investors believe is important for making investment
decisions.
Background: According to SEC, the existing disclosure requirements focus
on providing a reasonable investor with sufficient information to assess
the financial condition of a company. Regarding environmental information,
the standards and guidance issued by SEC and other authorities require
companies to disclose in their filings (1) material environmental
liabilities and other losses, (2) the impact of certain material trends,
events, and uncertainties-including those related to environmental
risks-on the companies' capital expenditures and results of operations,
and (3) certain legal proceedings involving environmental matters.
Organizations that promote socially conscious investments argue that SEC
should expand its requirements for corporate disclosure of environmental
information because these organizations believe such information could be
material to many investors and serves as a proxy for effective corporate
governance. In response to litigation during the 1970s, SEC concluded that
it is authorized and required by the National Environmental Policy Act to
consider the promotion of environmental protection as a factor in
exercising its rulemaking authority. At that time, however, SEC argued
that relevant statutes and legislative history suggested that its
disclosure authority be used to require the dissemination of "economically
significant" information. SEC also noted the lack of reliable evidence
regarding the extent of investor interest in expanded environmental
disclosure.
Concern #9: Companies are not required to disclose information about their environmental assets (for example, emission trading credits) and environmental performance. A growing body of "socially conscious" investors want such information because they believe many investors may find this information material or because it indicates the effectiveness of corporate management.
Q20. Do you share this concern?
Response categories Number of respondents Percent of respondents
Definitely no 3 10.00
Probably no 4 13.33
Uncertain 4 13.33
Probably yes 3 10.00
Definitely yes 16 53.33
No basis to judge 0 0.0
No answer 0 0.0
Appendix V
Survey Questions and Results
Page 62 GAO-04-808 Environmental Disclosure
Q21. How important is it for investors to have information on companies' environmental assets and environmental performance when making investment decisions? Response categories Number of respondents Percent of respondents Not important 0 0.0 Slightly important 3 10.00 Moderately important 8 26.67 Greatly important 5 16.67 Extremely important 10 33.33 No basis to judge 3 10.00 No answer 1 3.33 Concern #10: Companies are not required to disclose quantitative information on the total number of their environmental remediation sites, related claims, or the associated costs. Q22. Do you share this concern? Response categories Number of respondents Percent of respondents Definitely no 3 10.00 Probably no 2 6.67 Uncertain 1 3.33 Probably yes 6 20.00 Definitely yes 18 60.00 No basis to judge 0 0.0 No answer 0 0.0 Q23. How important is it for investors to have quantitative information about the total number of environmental remediation sites, related claims, or the associated costs when making investment decisions? Response categories Number of respondents Percent of respondents Not important 0 0.0 Slightly important 2 6.67 Moderately important 9 30.00 Greatly important 7 23.33 Extremely important 10 33.33 No basis to judge 2 6.67 No answer 0 0.0
Appendix V
Survey Questions and Results
Q24. Please provide any additional comments you have, or further elaboration on your responses for Section IV, "Ensuring Disclosure of Important Environmental Information," in the space below.
Response categories Number of respondents Percent of respondents
Did not write any comments 7 23.33
Wrote comments 23 76.67
Appendix V
Survey Questions and Results
Section V: Monitoring and Enforcing Environmental Disclosure
Issue Statement: Companies' management, their internal accountants and
independent auditors, and reviewers at SEC may not be adequately
fulfilling their responsibilities for ensuring that companies properly
disclose material information, including environmental information.
Background: In terms of environmental disclosure, companies' managers are
responsible for establishing effective internal controls to gather and
report information about environmental liabilities and other losses.
Companies' internal accountants are responsible for recording and
reporting transactions, including those related to environmental
liabilities, using generally accepted accounting principles promulgated by
the Financial Accounting Standards Board. Independent auditors attest to
whether a company has properly accounted for environmental liabilities,
actual or contingent, and other losses related to environmental
contamination, in accordance with auditing standards and guidance from the
American Institute of Certified Public Accountants and SEC's regulations
and guidance. To ensure that investors are protected, SEC staff review
company filings to determine if they comply with SEC's disclosure
requirements and take action if necessary. In fulfilling its monitoring
and enforcement role, SEC has a variety of options available, ranging from
making inquiries to issuing comment letters to taking legal action.
Concern #11: Companies' internal controls are not adequate to ensure that environmental liabilities and other losses are brought to management's attention and reported in companies' financial statements as appropriate.
Q25. Do you share this concern?
Response categories Number of respondents Percent of respondents
Definitely no 1 3.33
Probably no 6 20.00
Uncertain 2 6.67
Probably yes 7 23.33
Definitely yes 9 30.00
No basis to judge 4 13.33
No answer 1 3.33
Appendix V
Survey Questions and Results
Q26. Do weak internal controls within companies contribute to inadequate disclosure of environmental information?
Response categories Number of respondents Percent of respondents
Definitely no 1 3.33
Probably no 4 13.33
Uncertain 2 6.67
Probably yes 7 23.33
Definitely yes 12 40.00
No basis to judge 3 10.00
No answer 1 3.33
Page 65 GAO-04-808 Environmental Disclosure
Concern #12: Companies' internal accountants may not be making an adequate effort to identify and appropriately report all environmental liabilities and other losses in the companies' financial statements. Q27. Do you share this concern? Response categories Number of respondents Percent of respondents Definitely no 0 0.0 Probably no 4 13.33 Uncertain 2 6.67 Probably yes 10 33.33 Definitely yes 9 30.00 No basis to judge 4 13.33 No answer 1 3.33 Q28. Does insufficient effort on the part of internal accountants contribute to inadequate disclosure of environmental information? Response categories Number of respondents Percent of respondents Definitely no 0 0.0 Probably no 4 13.33 Uncertain 1 3.33 Probably yes 10 33.33 Definitely yes 9 30.00 No basis to judge 4 13.33 No answer 2 6.67
Appendix V
Survey Questions and Results
Concern #13: Independent auditors may not be exercising "due professional care" in their efforts to verify the accuracy and completeness of information on environmental liabilities and other losses that companies report in their financial statements.
Q29. Do you share this concern?
Response categories Number of respondents Percent of respondents
Definitely no 1 3.33
Probably no 3 10.00
Uncertain 5 16.67
Probably yes 8 26.67
Definitely yes 9 30.00
No basis to judge 4 13.33
No answer 0 0.0
Q30. Does the lack of "due professional care" by independent auditors contribute to inadequate disclosure of environmental information?
Response categories Number of respondents Percent of respondents
Definitely no 0 0.0
Probably no 4 13.33
Uncertain 3 10.00
Probably yes 12 40.00
Definitely yes 7 23.33
No basis to judge 3 10.00
No answer 1 3.33
Appendix V
Survey Questions and Results
Concern #14: SEC's monitoring and enforcement activities related to environmental disclosure are limited. For example, SEC infrequently conducts full reviews of companies' periodic filings and, in particular, rarely focuses on environmental disclosure. Enforcement actions related to environmental disclosure are also rare.
Q31. Do you share this concern?
Response categories Number of respondents Percent of respondents
Definitely no 0 0.0
Probably no 2 6.67
Uncertain 1 3.33
Probably yes 3 10.00
Definitely yes 23 76.67
No basis to judge 1 3.33
No answer 0 0.0
Q32. Do SEC's limited monitoring and enforcement activities contribute to inadequate disclosure of environmental information?
Response categories Number of respondents Percent of respondents
Definitely no 0 0.0
Probably no 1 3.33
Uncertain 2 6.67
Probably yes 6 20.00
Definitely yes 20 66.67
No basis to judge 1 3.33
No answer 0 0.0
Appendix V
Survey Questions and Results
Concern #15: SEC is not effectively using EPA's enforcement data or otherwise coordinating with EPA.
Q33. Do you share this concern?
Response categories Number of respondents Percent of respondents
Definitely no 0 0.0
Probably no 0 0.0
Uncertain 1 3.33
Probably yes 11 36.67
Definitely yes 12 40.00
No basis to judge 6 20.00
No answer 0 0.0
Q34. Does the ineffective coordination with EPA contribute to inadequate disclosure of environmental information?
Response categories Number of respondents Percent of respondents
Definitely no 0 0.0
Probably no 0 0.0
Uncertain 1 3.33
Probably yes 12 40.00
Definitely yes 11 36.67
No basis to judge 6 20.00
No answer 0 0.0
Q35. Please provide any additional comments you have, or further elaboration on your responses for Section V, "Monitoring and Enforcing Environmental Disclosure," in the space below.
Response categories Number of respondents Percent of respondents
Did not write any comments 5 16.67
Wrote comments 25 83.33
Appendix V
Survey Questions and Results
Section VI: Additional Concerns, Impact, and Recommendations
This questionnaire has identified a number of concerns that may contribute
to inadequate disclosure of environmental liabilities or other losses.
This section asks you to describe any additional concerns you may have. In
addition, it asks about the impact of inadequate environmental disclosure
on investors and how you would address inadequate disclosure.
Q36. Please describe any other significant concerns that contribute to inadequate disclosure of environmental liabilities or losses.
Response categories Number of respondents Percent of respondents
Did not write any comments 9 30.00
Wrote comments 21 70.00
Q37. To what extent, if at all, does inadequate disclosure of environmental information hinder investors' ability to assess the overall financial condition of a company?
Response categories Number of respondents Percent of respondents
Does not hinder 0 0.0
Slightly hinders 2 6.67
Moderately hinders 17 56.67
Greatly hinders 8 26.67
No basis to judge 0 0.0
No answer 3 10.00
Q38. To what extent, if at all, does inadequate disclosure of environmental information hinder investors' ability to assess the overall future risks that a company faces?
Response categories Number of respondents Percent of respondents
Does not hinder 0 0.0
Slightly hinders 1 3.33
Moderately hinders 13 43.33
Greatly hinders 13 43.33
No basis to judge 0 0.0
No answer 3 10.00
Appendix V
Survey Questions and Results
Q39. To what extent, if at all, does inadequate disclosure of environmental information hinder investors' ability to assess other aspects of a company's overall performance (for example, corporate governance) that determine whether the company is a good investment?
Response categories Number of respondents Percent of respondents
Does not hinder 0 0.0
Slightly hinders 4 13.33
Moderately hinders 14 46.67
Greatly hinders 10 33.33
No basis to judge 0 0.0
No answer 2 6.67
Q40. To what extent, if at all, does inadequate disclosure of environmental information hinder investors' ability to compare the overall performance of companies within an industry?
Response categories Number of respondents Percent of respondents
Does not hinder 0 0.0
Slightly hinders 1 3.33
Moderately hinders 14 46.67
Greatly hinders 12 40.00
No basis to judge 0 0.0
No answer 3 10.00
Q41. If you are aware of any specific examples in which the ability of investors to make investment decisions was impaired as a result of the issues and concerns identified in this questionnaire, please describe them here. It would be helpful to us if, in your response, you could link each example to a specific issue or concern.
Response categories Number of respondents Percent of respondents
Did not write any comments 12 40.00
Wrote comments 18 60.00
Appendix V
Survey Questions and Results
Q42. How could problems related to inadequate disclosure be addressed? In your answer, consider what entities would be the most effective or appropriate vehicle for addressing the problems, including: 1) SEC; 2) other governmental entities, such as other federal agencies and the Congress; and 3) nongovernmental entities, such as the Financial Accounting Standards Board or shareholder or public interest groups. It would be helpful to us if, in your response, you could link each example to a specific issue or concern.
Response categories Number of respondents Percent of respondents
Did not write any comments 6 20.00
Wrote comments 24 80.00
Q43. Please provide any additional comments you have, or further elaboration on your responses for Section VI, "Additional Concerns, Impact, and Recommendations," in the space below.
Response categories Number of respondents Percent of respondents
Did not write any comments 17 56.67
Wrote comments 13 43.33
Appendix VI
Comments from the Securities and Exchange Commission
Appendix VI Comments from the Securities and Exchange Co issmm ion
Appendix VII
GAO Contacts and Staff Acknowledgments
GAO Contacts Ellen Crocker, (617) 7880580 Les Mahagan, (617) 7880517
Staff In addition to the individuals named above, Kate Bittinger, Mark
Braza, Stephen Cleary, Evan Gilman, Kevin Jackson, Rich Johnson, Tom
Melito,
Acknowledgments Lynn Musser, Cynthia Norris, and Judy Pagano made key
contributions to this report.
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