---

The U.S. Government Accountability Office ("GAO") recently issued a report encouraging the U.S. Securities Exchange Commission ("SEC") to improve the means by which it tracks environmental disclosures in corporate filings. This report, entitled ENVIRONMENTAL DISCLOSURE: SEC Should Explore Ways to Improve Tracking and Transparency of Information (GAO-04-808, July 2004), is further evidence that corporate disclosures of environmental information have come under increased scrutiny in the wake of recent scandals in the business world. The SEC does not appear to intend to implement substantial changes to current reporting requirements for environmental information. However, the SEC has stated that it will (1) evaluate means by which the SEC can take better advantage of U.S. Environmental Protection Agency ("EPA") data in evaluating the adequacy of environmental disclosures in corporate filings and (2) make additional information available to the public via SEC's web site. As a result, companies may want to review their internal processes regarding disclosure of environmental information to ensure that they are making proper disclosures.

Currently, three sections of the SEC's regulation S-K are most likely to elicit environmental disclosures:

• Under S-K item 101, companies must disclose the material effects of compliance with federal, state, and local environmental provisions on their capital expenditures, earnings, and competitive position;
• Under S-K item 103, companies must describe certain administrative or judicial legal proceedings arising from federal, state, or local environmental provisions; and
• Under S-K item 303, companies must discuss their liquidity, capital resources, and results of operations, including any environmental matters that could materially affect company operations or finances.

Although the Sarbanes-Oxley Act of 2002 does not contain provisions that specifically address environmental disclosure, some provisions could lead to improved reporting of environmental liabilities. These provisions include requirements for the SEC to review company filings more frequently; for companies to make real-time disclosures of material changes in their financial conditions; and for company officials to annually assess the effectiveness of internal controls and procedures for financial reporting and to certify that their SEC filings fairly present, in all material respects, the company's financial condition and results of operations.

The GAO was asked by the U.S. Congress to evaluate (1) key stakeholders' views on how well the SEC has defined the requirements for environmental disclosure, (2) the extent to which companies are disclosing environmental information in their SEC filings, (3) the adequacy of SEC's efforts to monitor and enforce compliance with the disclosure requirements, and (4) suggestions for increasing and improving environmental disclosure. The GAO acknowledges that little is known about the extent to which companies are disclosing environmental information in their SEC filings, as it is difficult to determine, without direct access to company records, what environmental information is potentially subject to disclosure and whether that information should be considered material - thus meeting the reporting threshold - given the companies' particular circumstances. To better track corporate disclosures, the GAO report recommends that the SEC and EPA work together to increase opportunities for the SEC to make use of EPA enforcement data that may be relevant to environmental disclosures.

In addition, the GAO notes that it is difficult to assess the adequacy of the SEC's efforts to monitor and enforce compliance with environmental disclosure requirements without more definitive information on the extent of environmental disclosure and the results of SEC's oversight process. Currently, the SEC's primary means of monitoring compliance with disclosure requirements is reviewing companies' filings and issuing comment letters to request additional information, amendments of prior filings, or specific disclosures in future filings.

In response to the GAO report, the SEC is creating a searchable electronic database that will facilitate analysis across multiple filings. The SEC will also make its comment letters, and company responses thereto, available to the public and accessible through the SEC's web site, beginning with the August 2004 filings. In addition, the SEC will continue to work with the EPA to explore opportunities to work with the EPA and utilize EPA data when evaluating the adequacy of environmental disclosures in corporate filings.

In light of the increased federal focus on the adequacy of corporate disclosures, companies may wish to re-evaluate their internal processes and procedures regarding disclosure of environmental information to ensure that they are making proper disclosures. If a company fails to provide the proper information to the SEC, it could result in delaying approval of filings that the company needs in order to raise capital. In egregious cases, the SEC can seek sanctions against companies for the misrepresentation or omission of important information about securities in civil or administrative proceedings. Finally, although it appears that the SEC does not plan on making any immediate changes to corporate reporting requirements, it is clear that the SEC is already implementing mechanisms that will increase the tracking and transparency of environmental disclosures, both within the federal government and to the public at large. As a result, companies can expect increased scrutiny of their disclosures of environmental information, not only from within the SEC, but also from public interest groups that track environmental issues.