Sabotaging Kyoto by Privatizing Compliance
by Donald Sutherland

As the sun set on the Kyoto Climate Conference, the historic agreement to reduce greenhouse-gas emissions faded into multiple national interpretations.

In the US, corporations aiming to comply with the pact's goal to reduce greenhouse gases to seven percent below 1990 levels are expected to document their environmental performance with annual green reports. More than 200 firms already file annual environmental performance reports (EPRs).

The job of policing these corporate annual green reports falls primarily to the Big Four accounting firms - KPMG Peat Marwick/Ernst & Young, Price Waterhouse/Coopers & Lybrand, Arthur Andersen, and Deloitte & Touche. These powerful firms audit more than three-quarters of the publicly traded companies on the US stock market.

Third-party audits by an accounting firm are supposed to give shareholders a clear picture of a firm's environmental compliance with the Kyoto global warming pact. But such a supposition may be unfounded.

Over the last 20 years, the Securities Exchange Commission (SEC) has enforced its environmental filing requirements on only one occasion. And because the SEC's Division of Corporate Finance holds corporate internal environmental audits in confidence, this means that anything in reporting environmental performance - and that includes Kyoto emission reduction reports - is also considered confidential. Meanwhile, 26 states have passed laws to keep corporations' audit information closed to public inspection. Under these laws, even federally required Toxic Release Inventory information can be ruled off-limits to the public.

In a 1996 study of the 900 "publicly-traded potentially-responsible parties" on the EPA's National Priority List, Martin Freedman, professor at the School of Management at the State University in New York in Binghamton, found most companies made "little or no disclosure effort on environmental expense/liability reporting."

"It's no secret the [Big Four] financially carry AICPA [American Institute of Certified Public Accountants] and FASB [Federal Accounting Standards Board]" says Jay J. Church, executive director of the New Jersey State Board of Accountancy. "These organizations are being used to replace the SEC's auditing authority," he says.

The SEC admits it's heavily reliant on the AICPA and FASB to enforce environmental auditing, because of the limitations of the commission's budget and its small staff.

Environmentalists, however, are concerned that corporations may be tempted to obtain favorable environmental and/or financial reports if they hire auditors employed by the same companies they have hired as consultants.

In February 1997, Friends of the Earth (FOE), Sierra Club and Citizen Action wrote to the SEC, demanding an investigation of the entertainment giant Viacom Inc. for failing to report an alleged $300 million Superfund liability in their annual report. The SEC never responded.

Viacom was audited by Price Waterhouse LLP, which reported a clean financial report - minus the Superfund liability figures. Price Waterhouse also earns a sizable fee as a consultant to Viacom. Is there a conflict of interest? Price Waterhouse and the SEC have no comment.

David Costello, President and CEO of the National Association of State Boards of Accountancy, claims environmental and financial auditing is compromised throughout the accounting industry because of the expansion of consulting contracts.

"If you are doing an audit of a firm for a $300,000 fee and you have a consulting contract with the same firm for $1 million, it's hard to see how you can maintain being independent with that audit," Costello says.

The EPA has chosen to look the other way.

"The issues and controversies of environmental enforcement in the stock markets are never going to be brought up in this body," said Susan MacLaughlin, spokeswoman for the EPA's Environmental Accounting Project.

With the SEC and EPA allowing corporations to conceal their internal environmental audits, and the Big Four in charge of environmental auditing, US firms can potentially buy a favorable Kyoto emissions report simply by hiring one of the Big Four in a consulting contract.

"It's getting more and more overt," says Freedman, "and the corporations are writing the rules of [environmental] auditing."

What You Can Do: Tell your representatives that EPA environmental audits must be truly independent. For more information, contact FOE [1025 Vermont Avenue, NW, Third Floor, Washington, DC 20005-6303; (202) 783-7400. Fax: -0444] or the Investor Responsibility Research Center (202) 833-0700].

Related Stories:
Beyond the Kyoto Conference
How to Create a Solar Economy in Four Years

Donald Sutherland is a consultant on environmental management systems and a member of the EPA Environmental Accounting Project. © 1998 Donald Sutherland