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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.

The 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 decisions.)

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.

A word 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 "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 other registrant."

"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

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 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.


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