ENVIRONMENTAL LIABILITIES: ARE ESTIMATES DISCLOSED TO THE SEC RELIABLE?

An Ensight™ Study of Environmental Liability Estimates Disclosed to the Securities & Exchange Commission by 24 Companies in the Petroleum and Chemical Industries (November 2009). Download the Executive Summary.

Compliance Week says it makes "a pretty convincing argument for the need to come up with some new ideas on how to account for contingencies." Read more ...

Ashland
BP
Celanese
Chevron
ConocoPhillips
Dow Chemical
DuPont
El Paso
Exxon Mobil
FMC
W.R. Grace
Hess

Holly
Lyondell
Marathon Oil
Olin
PPG Industries
Rohm & Haas
Shell
Solutia
Sunoco
Tesoro
Tronox
Valero

This 180-page groundbreaking report describes the methodology and findings of a study of environmental liabilities of 24 companies in the petroleum and chemical industries as reported in annual reports filed with the Securities and Exchange Commission for the five–year period covering fiscal years 2004 – 2008. The study examined the reliability of accounting estimates, the relevance of estimated unquantified liabilities to overall financial condition, and the financial incentives and disincentives for companies to improve the quality of disclosure. Major findings include the following;

Accounting estimates were almost universally unreliable where reliability is defined as the degree to which estimates fully reflect eventual cash payments to resolve liability.
Estimates of unquantified liabilities showed significant variation, ranging from zero to over six times reported estimates.
Estimated unquantified liabilities were relevant to the overall financial condition of nearly two-thirds of the study group where the threshold for relevance is defined as estimated unquantified liabilities equal to or greater than five percent of stockholders’ equity.
Expenditures were highly consistent and predictable and more akin to ongoing operations and maintenance expense than to random and episodic payments to settle claims.
There is strong evidence of the influence of management discretion to generate accounting estimates that do not fully reflect available information according to a pre-determined formula.
One-third of the companies were found to have a financial incentive to improve the reliability of accounting estimates.

Call 866-599-0009 for more details or to get information about other companies and industries.

A Board's-Eye View of Environmental Liabilities

Financial analytical techniques are now being used to gauge the reliability and relevance of corporate disclosures of liabilities arising under the Comprehensive Environmental Response, Compensation, and Liability Act (CERCLA or Superfund), the Resource Conservation and Recovery Act (RCRA), and similar state laws. These techniques promise to improve market efficiency by introducing more timely and accurate information. They also hold the potential to empower boards to exercise stronger oversight and make more informed decisions on important environmental, social, and governance (ESG) issues. Read more...

The Truth about Reserves (as reported by CFO Magazine)

A new study of public financial data for 24 oil, gas, and chemical companies shows that despite spending millions each year on cleanup, most of these companies take charges every year to replenish their environmental reserves. The study was performed by Greg Rogers, an environmental attorney and president of consulting firm Advanced Environmental Dimensions. Of the 24 companies studied, 21 had a cash efficiency of less than 50 percent, meaning that they reduced their reserve by less than 50 cents for each dollar of cash spent on cleanup. Nine companies actually had negative performance — that is, for each dollar they spent on cleanup, their reserves actually grew, as indicated by a negative cash-efficiency metric. One company that fared well in the study was El Paso Corp. The oil company's legacy environmental liabilities are chiefly related to hydrocarbon releases that contaminated facility soil and groundwater. Since 2001, the company has reduced its reserve from more than $500 million and a portfolio of 900-plus sites to less than $200 million and fewer than 500 sites. In 2008, its reserve shrank by 69 cents, net of mergers and acquisitions, for each dollar spent on site cleanup. "That result [is evidence of] the level of diligence that goes into our estimating," says CFO Mark Leland. Each quarter the company performs a valuation analysis of every site and reflects the latest value of its liabilities in the company's 10-Q. El Paso doesn't bother creating a range of potential costs. It calculates what it believes its actual costs will be and discloses them, along with a "worst case" scenario as required by SOP 96-1. "Whether the liability goes up or goes down, we put it in the books without regard to the P&L impact," says Leland. Read more...

Lawsuit to Turn on Fair-Value Feud?: GAAP is moot in bankruptcy court, as fair-value estimates will help determine whether claims of insolvency are valid in a hotly contested case, by Marie Leone, CFO.com, September 2, 2009.

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