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FOR IMMEDIATE RELEASE: Thursday, July 15, 2004
Media
Contacts: Tim Little, Rose Foundation (510) 658-0702 or (510)
220-1885 (on-site cell phone)
Sanford
Lewis, Attorney (781) 894-0709; Michael Passoff, As You Sow
Foundation (415) 391-3212
New
Report Identifies Widespread Practices
that May Lead to Environmental Accounting Fraud
Strategies, Tactics and Companies Identified in Report
to the Congressional Symposium on the Investor Risk of Environmental
Liabilities: Expensive Global Warming, Asbestos & Toxic Liabilities
Highlighted
Washington,
DC: A new report, "Fooling Investors and Fooling Themselves"
identifies aggressive accounting and asset management tactics
that can lead to environmental accounting fraud. The report,
released by the Rose Foundation, will be made public today
at a Congressional Symposium, "Coming Clean: Corporate
Disclosure of Environmental Issues in Financial Statements,"
co-hosted by Senators Corzine, Lieberman and other Senators
and Members of Congress, Thursday, July 15, 2004, 2-4pm, Dirksen
Senate Office Building Room 430.
The
"Coming Clean" symposium will feature a report from
John Stephenson, Director of the Natural Resources and Environment
Division of the General Accounting Office about the SEC's
past enforcement of corporate disclosure of financially material
environmental liabilities. The report is anticipated to call
for changes in SEC environmental disclosure policies. Other
speakers will include SEC Commissioner Roel Campos, and a
number of institutional investors including Maine State Treasurer
Dale McCormick. A new report by Friends of the Earth about
corporate global warming liabilities will also be released.
"Fooling
Investors" (for full report)
shows how companies keep information about expensive environmental
liabilities like toxic pollution, product health hazards,
worker exposure, and global warming away from shareholder
scrutiny. Attorney and co-author Sanford Lewis said, "Some
of these tactics that keep shareholders in the dark about
financially material environmental liabilities have the earmarks
of securities fraud."
The
new report was hailed by major institutional investors. "This
report is fresh evidence that regulators and investors need
to implement the kind of environmental disclosure reforms
we have called for in Green Wave," said California Treasurer
Phil Angelides. "Investors need accurate, detailed environmental
liability information about their portfolio companies."
Lee
Wasserman, Director of the Rockefeller Family Fund said, "By
hiding expensive environmental liabilities, a company may
make it's short-term balance sheet look attractive, but investors
need to evaluate a company's long term outlook. Detailed information
about environmental liabilities is crucial to proper portfolio
analysis and investment decisions. This report shows that,
right now, a lot of companies are not providing the public
with that kind of information,"
"This
report 'names names'," said co-author and Rose Foundation
Executive Director Tim Little, "We show how companies
have withheld material environmental liability information
from shareholders." Among the specific companies and
examples identified are:
•
Halliburton, Dow and Kaiser Aluminum, for
failing to estimate or disclose billions of dollars of asbestos
liabilities and related worker health claims.
•
Honeywell, which declined to estimate the potential
costs of dredging extensive mercury contamination from a
lake in New York despite serving as a steering committee
member of an industry group that had developed cost analysis
at 22 other dredging sites that could have been used to
develop an estimate.
•
Monsanto, which scrubbed PCB and asbestos liabilities
from its balance sheet when it spun off a subsidiary which
then went bankrupt.
•
Tosco, which used a "no look" agreement
to prevent investigation of contamination at an oil refinery
for 10 years after the date of sale. This questionable agreement
is now the subject of a lawsuit by the ultimate buyer, Tesoro.
•
BP, ConocoPhillips, Chevron USA, Oxy USA, and Atlantic
Richfield, which cleared their balance sheets of millions
of dollars in shutdown and cleanup liabilities related to
aging oil wells by selling them to an undercapitalized company
that then went bankrupt.
As
Lewis explains, "some of the tactics that we have observed
are fully permissible under existing accounting rules, some
result from aggressively interpreting ambiguities in the law,
and still others appear unlawful under any reasonable interpretation
of existing laws and rules." The report explains five
overarching strategies companies use to hide environmental
bad news, collectively reflecting a "don't ask / donıt
tell" approach to environmental liabilities, including:
•
Delay the quantification of liabilities for years or decades.
•
Avoid meaningful qualitative disclosure when liabilities
cannot be quantified.
•
Hide the big issues in footnotes to send investors on a
treasure hunt for the truth.
•
Piecemeal the liability analysis to sweep liabilities under
the rug one by one.
•
Employ artificial time horizons to prevent disclosure of
known future liabilities.
"Fooling
Investors" shows how these strategies are implemented
through specific accounting and asset management tactics.
The report recognizes that company management may often be
motivated to try to preserve shareholder value by reassuring
investors of future profitability and avoiding disclosures
that could trigger potentially expensive compliance costs
or litigation. It also recognizes that some of the aggressive
tactics appear to be permitted under current rule interpretations.
However, regardless of managementıs motivation, the effect
is to avoid financially material disclosures by:
• Idling / Mothballing contaminated facilities to avoid
environmental assessments.
•
"No Look" agreements to keep suspected contamination
from being discovered.
•
Blaming non-disclosure on government regulators who are
reviewing clean up plans.
•
Hiding disclosures made to insurance companies from investors.
•
Passing the buck by selling-off an end of life asset (along
with its liabilities).
•
Avoiding disclosure of worker health claims from past exposures.
•
Denial of emerging hazards like global warming.
"Itıs
clear that the SEC needs to be more aggressive in policing
corporate environmental disclosures," said Little. "Fooling
Investors" ends with a set of recommendations for
action by the SEC, the Financial Standards Accounting Board
(FASB) and the Public Company Accounting Oversight Board (PCAOB).
Recommendations include:
•
SEC adoption of the Rose Foundation's petition to strengthen
environmental disclosure rules, endorsed by pension funds,
state treasurers, and foundations collectively representing
over $1 trillion (SEC # 4-463).
•
SEC creation of a Blue Ribbon Panel to review broad questions
related to social and environmental disclosure.
•
FASB analysis of inconsistencies and shortcomings in current
accounting guidance.
•
PCAOB guidance holding audit committees and auditors responsible
for ensuring adequate environmental disclosure.
•
Investor awareness of red flags such as "no look"
agreements, artificial time horizons, global warming risks
and lack of adequate environmental liability insurance.
About
the Report Authors:
Sanford
Lewis is an environmental attorney with 20 years experience
in environmental law and policy. He is the Principal of Strategic
Counsel on Corporate Accountability, and co-founder of the
Corporate Sunshine Working Group. Tim Little is the Executive
Director of the Rose Foundation, and serves on the Steering
Committee of the Foundation Partnership on Corporate Responsibility.
The
Rose Foundation thanks As You Sow Foundation, Citizens Funds,
Domini Social Investments, Dreyfus Premier Third Century Fund,
and the Foundation Partnership on Corporate Responsibility
for helping enable the publication of "Fooling Investors."
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For
a PDF version of the report
For a hard copy, send $15 to
the Rose Foundation
6008
College Ave, Suite 10
Oakland, CA 94618
FOR
MORE INFORMATION ON THE ROSE FOUNDATION'S Environmental
Fiduciary Project
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