Nothing But The Whole Truth

In the rapidly evolving culture of environmental regulation, the "good ol' days" often are mere months ago.

A publicly held company with environmental liabilities formerly could satisfy federal securities laws by casually noting in its annual report: "Our company was involved in a number of remedial actions to clean up hazardous wastes."

Today, however, corporate reports must be far more revealing. Last June, the Se-curities and Exchange Commission (SEC) changed the way it expects firms to relate their current and potential pollution liability risks. Under strict new ac-counting rules, a company must fully disclose unsettling information about its possible exposure.

The Commission "put us through the wringer about our lack of disclosure, so we're going to tell a lot more this year," said the chief financial officer of a major high-tech defense firm.

Ignoring the SEC's new requirements can cost a company a great deal in fines, penalties and aggravation. As a result, smart firms are keeping ahead of the game by carefully assembling the bad (or possibly bad) news. In turn, the shareholders and investors can expect to receive a slew of information and data on en-vironmental risks this year when companies issue their 1993 annual reports.

Enough bad news about possible hazardous waste cleanup costs can, and likely will, cause stock prices to tumble, financial analysts say. "It will be a painful process for many companies to make these disclosures, which in some instances amount to hundreds of millions of dollars," said one analyst. "Some disclosures may cause investors to sell their stock in some of the biggest and most admired companies in the chemical and manufacturing industries," he continued.

Under reporting and nonreporting of environmental liabilities is widespread, according to a recent Price Waterhouse survey. Approximately 60 percent of 523 responding companies admitted knowing about environmental exposures that were not being disclosed in financial reports.

Companies may be shocked when insurance coverage fails to cover liabilities. Insurers are fighting hard to a-void environmental cleanup responsibility altogether. And where a duty to defend and pay does exist, a number of insurers may find their financial resources quickly outstripped by the magnitude of the costs. Indeed, the insurance industry "is clearly underreserved if called upon to fund current [environmental] cleanup estimates," according to Best's Review, a publication of a rating service that gauges insurers' financial well-being.

The obligation to tell directly affects companies with a narrow view of what kind of environmental liabilities are "material." Under the old rules, companies could avoid talking about virtually all liabilities that amounted to less than 5 percent of profits or assets. These were not considered to be "material." The new SEC rule, however, will force some companies to disclose current and potential environmental liabilities below the 5 percent mark.

Moreover, companies will not be able to mask the truth about environmental liabilities by applying hoped-for insurance pay-outs to offset the magnitude of the problems. Nor will companies be permitted to downplay their potential exposure by using "present value" techniques to produce a seemingly manageable current price tag on a whopping fu-ture liability.

SEC Commissioner Richard Y. Roberts told a meeting of financial executives that the Commission in-tends to "draw and quarter" companies for any "inconsistencies and lack of disclosure" in SEC filings re-lated to environmental liability. If a company fails to report its liabilities properly, the SEC can suspend registration of the company's stock and can seek a court order forcing the firm to make required environmental disclosures and to pay up to $500,000 for each violation.

In a speech to a group of environmental lawyers in Washington, D.C., Roberts faulted companies that claim potential environmental liability is pushing them to the brink of bankruptcy but omit mentioning such circumstances in their annual reports. "Insurance companies are up on the Hill every week complaining about how Superfund is killing them," he said, "yet their disclosures don't show anywhere near that kind of potential liability."

Companies could face shareholders' suits for failing to make proper environmental disclosures, according to a spokesman for a major accounting firm. "Where an environmental charge of major proportions suddenly appears in an annual report, shareholders would be likely to bring a suit asserting that management knew about the potential liability for years," he said.

Superfund's joint and several liability scheme creates a special concern, according to the accountant. With each waste contributor being potentially liable for the entire cost of cleanup, he advised making "gross disclosure" of this lurking liability.