July 16, 2004
Senate Calls on the SEC to Enforce Environmental Disclosure Regulations
by William Baue
A series of reports issued at a Senate symposium detail how insufficient disclosure of
environmental liabilities results from lack of SEC enforcement.
Yesterday, Senator Jon Corzine (D-NJ)
convened a symposium on Capitol Hill entitled
"Coming Clean: Corporate Disclosure of Environmental Issues in Financial Statements," specifically
referring to Securities and Exchange Commission (SEC) filings. Released at the event were several reports detailing
the problems of underdisclosure and recommending solutions.
Most prominent was the
report from the Government
Accountability Office (GAO), with its
self-descriptive title: Environmental Disclosure: SEC Should Explore Ways to Improve Tracking
and Transparency of Information. The GAO, known as the General Accounting Office until last
week, is the auditing and investigative arm of Congress.
The GAO report is based in part
on a survey of 30 experts, including the authors of two of the other reports issued at the event.
Friends of the Earth (FoE) released its
Third Survey of Climate Change Disclosure in SEC Filings of 113 companies in five
industries, authored by Michelle Chan-Fishel, who coordinates FoE's green investments program. She
also chairs the Corporate Sunshine Working Group (CSWG), an alliance of investors, environmental
organizations, unions, and public interest groups that helped organize the symposium. The report, which covers
2003 filings, finds the overall climate reporting rate to be "relatively low" at 39 percent, though
the electric utilities sector has an "impressive" reporting rate of over 90 percent.
Rose Foundation for Communities and the
Environment released a report
co-authored by its executive director Tim Little, a respondent in the GAO survey, and Sanford
Lewis, an environmental attorney. They entitle the report provocatively: Fooling Investors &
Fooling Themselves: How Aggressive Corporate Accounting & Asset Management Tactics Can Lead to
Environmental Accounting Fraud. The report identifies five strategies companies employ to hide
material environmental liabilities (SEC regulations mandate disclosure of material financial
issues, and the Supreme Court defines "material" as information "reasonable" investors need to make
For example, companies "hide the big issues in footnotes to make investors go
on a treasure hunt to piece together a complete picture of scattered cross-references," the report
states. The report provides a case study of Halliburton (ticker: HAL) to illustrate this tactic.
"Back in 1998, when Halliburton acquired Dresser Industries, it engaged in very little
disclosure of the relevant liabilities" related to asbestos, the report states.
search for "asbestos" on the company's May 15, 1998 S-4 filing on the
merger yields nothing, despite the fact that a similar search of Dresser's January 27, 1998 10-K filing
exposes the disclosure of 66,000 pending asbestos-related claims. In this filing, Dresser admits
that "a series of adverse rulings could materially impact operating results" but "management
believes that the pending asbestos claims will be resolved without material effect on the Company's
financial position . . . "
Wendy Hall, Halliburton's director of public relations,
explains that these liabilities were covered by indemnification agreements and insurance coverage,
absolving Halliburton of responsibility for them. It was not until 2001 that these indemnification
agreements and insurance coverage fell through, saddling Halliburton with these liabilities,
according to Ms. Hall. Halliburton recently established a $4.2 billion trust fund to handle
current and future asbestos claims by 400,000 claimants.
"Halliburton follows US GAAP [Generally Accepted
Accounting Principles]--our accounting and disclosures are proper for each period presented in our
SEC filings," Ms. Hall told SocialFunds.com. "In fact, Halliburton has extensive footnote, MD&A
[Management's Discussion and Analysis of Financial Condition and Results of Operations], and
risk factor disclosures regarding asbestos and silica matters, probably more in depth than any
"It appears the Rose Foundation didn't take the time to read all of our
disclosures," Ms. Hall said.
This statement seems to confirm the report's "treasure hunt"
point. Mssrs. Little and Lewis cite the 1970 Kohn v. American Metal Climax case that ruled against
"burying" facts in explanatory material.
"The Securities Exchange Act requires more than
disclosure, it requires adequate disclosure," the ruling states. "The more material the facts, the
more they should be brought to the attention of the public."
Ms. Hall insists that
Halliburton rightly interpreted the asbestos liabilities as immaterial at the time--"no one could
have anticipated the change in the asbestos liability environment from 1998 until 2002," she said.
"We're not saying Halliburton committed fraud, and we're not disagreeing that Halliburton
followed GAAP--we're saying that you can drive a truck through the gaps in GAAP," Mr. Little told
Ultimately, the burden falls on the SEC to enforce environmental
disclosure. However, the GAO's recommendations to the SEC, which include publicly disclosing
comment letters to companies on environmental disclosure and better coordination with the
Environmental Protection Agency (EPA), seem to
fall short of effecting such change.
"The mandate of the [material liabilities disclosure]
regulation is clear--it's hard to see how the SEC can avoid fulfilling it," said Steve Lydenberg,
chief investment officer of Domini Social
Investments, who spoke at the symposium and responded to the GAO survey. "I don't anticipate
major changes in corporate reporting before we see some action from the SEC."
"Corporations will need the guidance of SEC comments before they start getting more specific in
what they report on the environmental side," Mr. Lydenberg told SocialFunds.com.
Maine Treasurer Dale
McCormick, who also spoke at the symposium, agrees.
"The SEC has the authority--it doesn't
need to go to rulemaking, it just needs to issue clarification of what it expects the MD&A to
contain" on environmental liabilities, Treasurer McCormick told SocialFunds.com. If the SEC does
not address the problem of under-disclosure of environmental liabilities, "it will be another
instance where the federal government dropped the ball."
"We don't want the SEC to be
irrelevant," she concluded.