An EPA Response on Confidentiality in Environmental Auditing

Michael H. Levin

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— The Editors

Mr. Levin is Chief of the Regulatory Reform Staff of the Environmental Protection Agency.

[13 ELR 10346]

I was pleased to see a copy of your Comment on environmental auditing disclosure issues. As you are aware, we have been actively involved in analyzing and encouraging private-sector environmental auditing for several years. It's nice to see informed analysis on these auditing issues.

Your "self-evaluation privilege" section [13 ELR 10306] was of particular interest. It suggests how well suited the privilege could be to the evaluative process involved in environmental auditing. As you indicated, the elements required for a company to assert the privilege include: (1) an internal review process akin to a self-evaluation, (2) a strong public interest in environmental auditing, and (3) a likelihood that environmentally beneficial auditing would be curtailed unless the disclosure issue were satisfactorily resolved.

We agree the disclosure/confidentiality issue should be resolved, and will be looking into whether environmental goals might benefit by an Agency policy statement on this issue. One interesting question not addressed in your Comment is whether an EPA policy commitment not to seek audit reports in routine enforcement actions would affect the ability of a company to claim the self-evaluative privilege in a citizen enforcement action.

Two statements in the Comment need clarification. First, you write that "several companies with the most experience" use their offices of corporate counsel to "maximize the chances of protecting particularly sensitive information" [13 ELR 10308]. This implies that most auditing programs emanate or should emanate from corporate legal departments. So far as we can tell, for sound organizational reasons most EA programs are operated out of corporate internal audit or environmental departments, though some do incorporate procedures which call particularly sensitive problems to the attention of counsel, thereby creating opportunity to sustain a privilege claim at a later date.

Second, we have seen no evidence that existing audits "seem generally to be directed to be less than candid in reporting and analyzing environmental problems until the lawyers establish the basis for claiming … privilege" [13 ELR 10307]. A lawyers' bias may be operating here.

EDITOR'S REPLY

Mr. Levin's letter asks whether an EPA policy statement on audits could strengthen a company's claim to the self-evaluative privilege in a citizen enforcement suit. This question requires further research, but a quick answer is that such a policy statement could only help. Granting the privilege is within the discretion of the district judge, so an EPA policy is no guarantee that the privilege will be recognized. However, the policy would weigh on the side of the scales favoring protection of the audit reports.

Mr. Levin's two suggestions for clarification are well taken. The statements from 13 ELR 10308, which he quotes and reads to imply that environmental audit programs should "emanate from corporate legal departments," were intended to make the contrary point that some companies give their lawyers only a limited role in the audit programs. The audit is part of the corporation's day-to-day management system and no effort is made to secure a privilege for regular audit reports. The role of the lawyers is to step in only when the audit uncovers a matter that calls for a legal opinion or is implicated in pending or probable litigation. The point the Comment attempts to make is that it is possible to run an audit program [13 ELR 10347] without heavy involvement of corporate counsel and to protect sensitive information that is entitled to privileged treatment if the auditors are trained to recognize situations where it is appropriate for the company to try to lay the foundation for attorney-client or work-product protection.

This observation leads directly to Mr. Levin's second point about the statement at 13 ELR 10307 that some companies direct their auditors to be "less than candid." This poorly worded sentence may indeed be open to misinterpretation. The point is not that companies direct auditors to misstate or withhold their findings. This would defeat the purpose of the audit program and companies like Occidental Petroleum (see 13 ELR 10308 n.48) direct their auditors to be completely candid in reporting information discovered in the audit, even if it could provide ammunition to an adversary of the company. Accurate audit reporting enables the company quickly to correct any problems discovered and to ensure that compliance procedures allow the company to avoid such problems in the future. Most firms with audit programs seem to have concluded that the benefits of being able to correct environmental problems in this manner far outweigh any harm that may come fromeventual disclosure of the existence of the problems. Their auditors report facts and necessary interpretation of those facts (e.g., "the monitor readings are all within the applicable state emission standard, but since the monitor has not been calibrated for 18 months, the data is inconclusive"). However, auditors may be instructed to draw the line at speculation about the implications of the necessary information.

Phillip D. Reed