Sarbanes-Oxley: Environmental Implications

Do you know about the environmental implications of the Sarbanes-Oxley Act? Although SOX legislation has focused primarily on financial issues, the environmental implications are very important. Below are items that business continuity professionals should know about SOX:

1. Regulation S-K, Item 101 (17 CFR 229.101) – Description of Business – Requires that registrants reveal any material effects that compliance or non-compliance with federal, state and local environmental regulations are likely to have on earnings, competitive position and capital expenditures.

2. Regulation S-K, Item 103 (17 CFR 229.103) – Legal Proceedings – Requires disclosure of any environmental administrative or judicial proceeding if the proceeding is
material, involves a claim for more than 10% of current assets, or involves potential monetary sanctions in excess of $100,000.

3. Regulation S-K, Item 303 (17 CFR 229.303) – Management’s Discussion and Analysis – Companies must disclose known trends, events or uncertainties that may have a material effect on their financial condition. These guidelines include environmental trends such as the cost of compliance with anticipated new regulations.

What this means is that executives, managers and employees must be more prepared to enter the often messy world of environmental issues. Specifically, SOX increases the responsibilities of management to implement control procedures within the company. Senior management will be held accountable to ensure: 1) that procedures are in place to transmit environmental information to the appropriate corporate officer within a timely manner so that informed disclosure decisions can be made, 2) that environmental disclosures comply with requirements, and 3) that environmental liabilities are reflected in the financial statements. SOX does not actually change the disclosure requirements, but requires management to certify that the correct controls and procedures are in place to accurately disclose material changes in the company’s financial condition.

Companies are now required to have a company protocol in place for identifying, tracking, quantifying, and assessing environmental issues. The required actions to comply with SOX will include reviewing pending or threatened litigation, current regulatory obligations, emerging trends and potentially new environmental regulations. Senior managers will need to be involved in the evaluation of information required to assess costs and liabilities. It is of the utmost importance that these managers possess the tools and support to understand the significance of the information they are provided. These elements can only be satisfied through the cooperation and regular communication of senior managers and staff, outside environmental consultants and legal counsel.

Recognizing that increased disclosure would improve compliance, the Environmental Protection Agency (EPA) has joined the Securities and Exchange Commission (SEC) by intensifying its efforts to ensure that companies are in compliance with environmental disclosure rules. The EPA even features a section on their web site, which presents compliance history on companies for the public to view. This makes it easy to compare environmental disclosures made in the past with current SEC filings.

Executives of a privately held company who believe that the Sarbanes-Oxley regulations do not impact them are mistaken. Any private firm that one day hopes to become public needs to assess their ability to meet SOX requirements. Furthermore, a perception of social responsibility is becoming a requirement to do business with many customers, investors and partners.

The Sarbanes-Oxley Act is a financial regulation with environmental implications. Senior management must realize the importance of ensuring that a system is in place in which information is collected and then distributed to the correct individuals within the company to make disclosure decisions. Those that are able to use the requirements to increase knowledge of their own company will be taking a reporting requirement and using it to their advantage.

This article was written by Thomas Anderson and Jason Schnellenberger (Copyright 2005 Witter Publishing Corporation. Reprinted with permission)