Third Party Auditing of Environmental Management Systems

1
Third Party Auditing of Environmental Management
Systems

• Challenges, Choices and Opportunities for
  Environmental Governance in the 21st Century
• ASPA Research Conference
• March 29, 2004
• Portland, Oregon

2
Challenges

• A summary of findings and conclusions concerning
  third party certification of environmental
  management systems under the ISO 14001 standard
  and its prospects for public policy

3
EMS as a tool for public policy

• Some envision third party audits of a firms EMS
  as a potential tool for public policy
• EMS auditors could reduce the need for EPA
  inspections and enforcement
• Until recently the SEC financial auditing system
  served as a potential model
• Use of EMS auditors envisioned by some as a way
  to help public sector redirect resources toward
  firms requiring more compliance assistance
  (higher priorities)

4
Prospects for EMS audits as a public policy tool
clouded

• Stakeholder confusion about ends and means
• Are EMS audits a form of private regulation,
  compliance substitute?
• EMSs are business-controlled, lacking in
  credibility
• Business sees EMS auditors as an environmental
  cop, unannounced inspector
• Some business views EMSs as a justification for
  public benefits
• Some view EMSs strictly by business, for
  business

5
Prospects clouded by confusion of EMS audits with
other forms of auditing

• Confusion of EMS auditing with financial audits,
  compliance audits and EPA voluntary programs that
  have auditing as a component
• If EMS audits are to become a tool for public
  policy, it is necessary to first eliminate these
  sources of confusion

6
Context for EMS challenges

• Why business developed EMSs
• What is an EMS? An EMS audit?
• How do EMS audits compare to
• Financial audits
• Compliance audits
• Public voluntary programs with auditing component
• Implications of oft-conflicting expectations
• What EMS proponents must do to make EMS auditing
  more viable

7
Why business developed environmental management
systems

• Globalization of raw materials extraction and
  manufacturing
• International variation among environmental laws
• International variation in capacity of
  organizations to enforce those laws
• Global activism to promote greater product
  stewardship

8
What is an environmental management system (EMS)?

• A formalized set of management procedures to
  improve environmental performance
• Iterative housekeeping and accounting measures
• Plan, check, do
• May or may not employ third party independent
  auditors to certify organization conforms with
  international ISO 14001 standard

9
What does the ISO 14001 standard require of firms?

• Develop an environmental policy and public
  environmental statement
• Devise set of management practices to achieve
  environmental goals, including
• Prevention of pollution
• Continual environmental improvement
• Identify all environmental impacts, regulated and
  unregulated
• Develop an EMS scope of which may be broad or
  narrow (cover all facilities and activities or
  simply a few)
• May or may not use independent EMS auditors to
  verify EMS conforms with the ISO 14001 standard

10
What do EMS auditors do?

• Check to ensure that an environmental management
  system is in place
• See that management and employees understand what
  the system requires
• Audit documents that show EMS is in place
  (manifests, permits, purchase orders

11
What dont EMS auditors do?

• Verify that a firm is in compliance with all
  applicable federal and state environmental laws
• Monitor emissions, effluents
• Measure against quantitative, verifiable
  benchmarks
• EMS audits are subjective, based on auditors
  background, training, experience and scope of a
  firms EMS

12
Potential models for EMS audits as a tool for
public policy

• Financial auditing
• Compliance auditing
• Voluntary EPA programs based in part on
  environmental audits

13
Financial auditing

• Until recently, served as a potential model for
  using ISO 14001 audits as a public policy tool
• Recent scandals involving a few high profile
  firms, individuals and accounting firms have cast
  the promise of this model into doubt
• Important similarities and differences between
  financial and EMS auditing that color EMS
  perceptions

14
How EMS audits compare to financial audits

• Financial audits of publicly traded businesses
  are mandatory
• Driven by a need to ensure transparency
• Soundness of information helps prevent market
  failure, protect public investors
• EMS audits, in contrast, are purely voluntary and
  private, internally-driven to improve a firms
  conformance with ISO

15
How EMS audits compare to financial auditing

• Like EMS auditing, does not compare performance
  of one firm to that of another
• Unlike financial accountants, EMS auditors are
  not required to adhere to externally-defined
  professional standards
• SEC requires financial auditors to be licensed
  and independent of the organization they audit

16
How EMS audits compare to financial auditing

• Like EMS auditing, SEC relies on private firms to
  monitor and assure quality
• Unlike EMS auditing, financial auditors rely in
  part on peer review
• Unlike financial system, EMS is a purely private
  system
• Whereas SEC registers financial auditing systems
  and oversees accounting practices, the purely
  private National Accreditation Program (NAP)
  oversees EMS auditors in the US

17
How EMS audits compare to financial auditing

• Difference in transparency between the two
  approaches
• Financial audit findings are disclosed in public
  reports, but not the results of EMS audits
• Shared concerns regarding auditor independence
• Financial auditing firms, like EMS auditing firms
  also have lucrative consulting arms creating
  potential conflicts of interest

18
How financial audits color perceptions of EMS
audits

• While it initially appeared as a promising model
  for public policy, financial auditing is a poor
  benchmark and scandals have had spillover
  effect on to EMS auditing under ISO 14001
• EMS audits viewed as even less transparent than
  financial audits
• EMS and financial audits both have potential for
  auditor conflicts of interest

19
Compliance auditing

• Evaluate whether regulated industry is in
  compliance with federal environmental laws and
  regulations
• Adopted voluntarily to identify and correct
  compliance problems before EPA inspectors
• Use accelerated during 1980s in response to
  Superfunds strict liabilities
• Industry concerns about accidental audit
  disclosure, adoption of state audit privilege laws

20
How EMS audits compare to compliance auditing

• EMS audits primarily are designed to ensure
  whether an organizations management system
  conforms to ISO, not federal laws
• ISO 14001 does not require an organization to
  maintain compliance with laws
• EMS auditors are neither trained nor expected to
  serve as compliance auditors

21
How EMS audits compare to compliance auditing

• Compliance auditors, in turn, do not evaluate
  EMSs
• EMS auditors to look to see that a management
  system in place to prevent recurring legal
  violations, compliance auditors dont
• Compliance audits are more straightforward, EMS
  audits subjective, either in compliance or not

22
How compliance audits color perceptions about EMS
auditing

• Environmental groups and regulators worry that
  EMS audit findings might shield regulated
  facilities from liability for potential
  wrongdoing
• Business, in turn, worries about inherent
  subjectivity of EMS audits and how third parties
  could potentially use audit data.

23
Voluntary EPA programs based on audits

• EPA voluntary self-disclosure and audit policy
• To encourage voluntary self-disclosure about
  compliance violations
• Environmental Leadership Program
• Fewer inspections in exchange for more compliance
  and EMS audits

24
Voluntary EPA programs based on audits

• Star Track
• Recognition and regulatory flexibility in
  exchange for implementing EMSs, self-reporting,
  and improved reporting
• Performance Track
• Couples the use of EMSs with performance
  reporting goals and incentives (e.g., reduced
  discretionary inspections)

25
Moving toward using EMS audits as tool of a
public policy

• Star Track
• Idea was to move toward SEC quasi public/private
  approach
• Required compliance and EMS audit
• Replaced EPA inspectors with private compliance
  auditors
• Published reports on environmental performance
  including data from EMS audit

26
How EMS audits compare to EPA audit initiatives

• Although Star Track and P-Track have EMSs as a
  component, they are not explicitly related to the
  ISO 14001 standard and auditing under ISO 14001

27
How EPA programs color perceptions about EMS
audits

• Idea that enforcement, inspections could be
  privatized a la Star Track viewed with great
  suspicion among EPAs enforcement officers
• Although neither ELP nor Star Track relied on EMS
  auditing under ISO 14001 to achieve
  privatization, use of EMS auditing as a potential
  policy tool cast ISO 14001 audits into further
  doubt

28
Proceed with caution

• Public environmental initiatives that provide
  administrative or regulatory benefits in exchange
  for EMS adoption must be cautious in concluding
  that policy goals will be achieved through
  voluntary, third party EMS auditing alone.

29
Choices and Opportunities

• Steps required to strengthen EMS audits and
  provide them with a necessary foundation as a
  tool for public policy

30
Challenges, Choices Opportunities

• Recommendations to improve EMS audits

31
Distinguish EMS audits from other types of
auditing

• Imperative that auditing of EMSs under ISO is
  distinguished from other types of environmental
  auditing and auditing in general
• SEC requires public reporting of financial
  performance, ISO 14001 does not
• SEC harnesses peer review to monitor auditors,
  ISO 14001 does not
• Financial auditing firms liable for bad audits,
  ISO auditing firms are not

32
Manage expectations

• EMS auditors under ISO 14001 and their clients
  must play a greater role in managing public
  expectations
• US National Accreditation Program is conducting
  outreach for state regulators
• EMS auditors should promote greater uniformity in
  auditing procedures, adopting effective peer
  review and communicating high professional
  auditing standards more clearly in public policy
  discussions.

33
Consider ways in which to improve transparency

• EMS audits are confidential, yet goal of such
  audits is to assure EMS conforms with ISO 14001
  standard
• Confusion rendered by this choice contrasts
  sharply with openness of financial reporting
• US bodies that develop ISO 14001 standards should
  consider how public reporting can be more
  explicitly addressed

34
Consider peer review

• ISO 14001 auditors should consider adopting SEC
  peer review system to make professional
  interpretation more uniform
• Yet even SECs additional safeguards have been
  proven inadequate to ensure transparency and
  auditor independence
• These conditions must be met well before ISO
  14001 contemplated as a public policy tool

35
Ensure greater auditor independence

• ISO 14001 in US restricts EMS auditors from
  providing consulting and auditing services to the
  same client
• However, if EPA and state agencies seek to
  harness ISO 14001 auditing to achieve public
  goals, policy makers must adopt stronger measures
  to ensure auditor independence.

36
Show how EMS audits benefit the public

• For the most part, firms still view ISO 14001
  audits as by business, for business
• State and federal regulators should inform public
  and other parties about how EMS auditing can
  promote bottom line and public health
• Commission research, publish reports, issue
  statements of public policy

37
Moving forward

• Actors and organizations outside ISO 14001
  auditing system need to better understand how
  system works
• Their expectations are too high and too low
• Too high because expectation is that EMS audits
  enforce compliance
• Too low because underestimate EMSs potential to
  drive continuous improvements in environmental
  performance

38
Moving forward

• Disabusing stakeholders of these misperceptions
  affords challenges, choices, and opportunities
  that proponents of EMS audits ignore at their
  peril.