After SarbanesOxley: Environmental Cost Estimations, Disclosures, and Controls

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After Sarbanes-OxleyEnvironmental Cost
Estimations, Disclosures, and Controls

• E. A. Skip Kazmarek
• American Gas Association
• Legal Forum
• July 18-19, 2005

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Basics of Environmental Disclosures

• FAS-5 Liability must be accrued if (1) the loss
  if probable and (2) the amount of the loss can
  be reasonably estimated
• FIN-14 Amount of loss can be reasonably
  estimated if (1) amount of loss can be predicted
  or (2) a range of possible losses can be
  estimated
• SAB-92 Must disclose facts and assumptions
  underlying the cost estimate.

3
Sarbanes-Oxley

• Section 404 Requires executive certification
  that
• Controls are designed such that all material
  information is made known
• Controls have been evaluated within 90 days
• All weaknesses in controls have been disclosed to
  internal/external auditors
• Outside auditor review

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Effect of Sarbanes-Oxley

• Increased emphasis on three components of
  environmental disclosures
• Quantifying environmental liabilities
• Improved disclosures, especially of underlying
  assumptions
• Controls to assure accuracy and reliability of
  calculations and disclosures

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Quantifying Environmental Liabilities
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Cost Estimating Methods

• See ASTM E-2137
• Expected value Weighted average cost
• Most likely value Used where both remedy and
  cost are known
• Range of values Upper and lower limits,
  without calculation of expectation
• Known minimum value Costs will be at least
  this amount, without stated upper end

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Cost Estimation Caveats

• Varies by stage of cleanup
• Critical assumptions are buried deep within the
  estimation methodology
• GIGO
• Estimates are frequently less precise than their
  numerical nature would suggest

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Cost Disclosures

• Critical accounting estimates
• Methodology and assumptions
• Effects of changes in assumptions or using
  upper/lower ends of range
• Discussions with audit committee regarding
  assumptions

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Basic Disclosure

• Sites or circumstances producing the liability
• Cost estimating process and assumptions
• Cost estimates and/or ranges
• Qualifying limitations

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Corporate Controls

• Design controls to spot and correct whatever can
  go wrong!
• Scope errors
• Estimation errors
• Stale information
• Technical insufficiency
• Management oversight

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Data Disclosure Requirements Cost Estimating
Methodologies
Initial Control Cost Estimate
Notebook w/Certification
Regulatory/Technical Comments
QA/QC Control
Backup w/Certification
Legal/Policy Comments
Management/Legal Control
Cover Memo Justification
Accounting/Financial Comments
Corporate Accounting/Audit Review
SOX 404 CERTIFICATION
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SOX Disclosures

• Can be
• Time consuming
• Expensive
• Complicated
• Distracting
• Get easier with time!