Trends in Environmental Auditing

Frank J. Priznar

Editor's Summary: Environmental auditing has proliferated in use and matured in complexity as a tool for detecting and preventing potential environmental problems. As a result, environmental auditing has taken many forms and has produced controversy. Key factors in this controversy include the current environmental regulatory climate, the need for certainty in understanding the potential environmental liabilities involved in decisionmaking, and the lack of uniformity in environmental audits. The following two Articles consider recent trends in environmental auditing and the role of the environmental consultant's opinion letter. Each author's Article provides a succinct analysis of the evolving trends and tools available to modern decisionmakers that are shaping environmental auditing today.

Mr. Priznar has been a consultant to industry and government on environmental compliance issues for over 10 years. He is the Executive Director of the Institute for Environmental Auditing, P.O. Box 23686, Washington, D.C. 20026-3686. Mr. Priznar resides in Gaithersburg, Maryland.

[20 ELR 10179]

Environmental auditing is controversial. Some of the controversy seems marginal: for example, recent articles endlessly debate whether environmental auditing should be called auditing, inspecting, assessing, surveying, or evaluating.¹ But other controversial topics are more central to the debate, and most environmental auditors now observe that the same issues and trends perpetually define the debate.

Environmental auditing is maturing along these central trends. They are

Automation

Moralization

Professionalization

Globalization

Diversification

Selection

This Article offers observations on these important trends in environmental auditing, their driving factors, possible outcomes, and some recommendations for dealing with them.

For clarity, the Environmental Protection Agency's (EPA's) definition of "environmental auditing" will be used as a benchmark for this Article. EPA's definition of environmental auditing is elegantly simple and widely accepted. "Environmental auditing is a systematic, documented, periodic and objective review by regulated entities of facility operations and practices related to meeting environmental requirements."² This definition is broad enough to include inspections, assessments, surveys, and evaluations.³ Regardless of the significant differences among these activities, the trends presented still apply.

Automation

The demand for efficiency, control, and quality has forced a dramatic shift toward automated information systems in auditing. Automation is crucial to enhanced productivity and quality improvement because there are too many federal, state, and local regulations to track and understand, vastly different facilities to evaluate, too many audits to conduct, and not enough good and experienced auditors.

There are many automated tools now available to assist auditors. While new hardware and software programs appear in a steady stream, the best automated auditing aid should have three fundamental features: an easily searched regulatory citation text system; a word processing capability permitting quick report development; and a database developed to track and sort findings to facilitate ad hoc reporting needs.

An automated full-text regulation retrieval system makes it more convenient to search for applicable regulations in a given situation. Specifically, searching for key words [20 ELR 10180] (e.g., training, PCBs) finds relevant citations more efficiently and completely than a manual search.

In terms of developing audit reports, word processing automation again is beneficial as a time-saver. Many series or specialty audit reports are boilerplate, with spaces to insert variables such as site-specific information and findings. With the format and outline already established, the auditor needs to key in only technical data. This promotes standardization, completeness, and efficiency.

Too often, great volumes of audit data are compiled without planning for analysis and use. One organization, for example, completed dozens of facility audits before deciding to prepare a summary report. That decision resulted in a painful and time-consuming process of revisiting all the reports and reinterpreting, classifying, and categorizing thousands of findings. All of this could have been avoided with sensible planning. Because it is not always possible to know how audit data will be used, a flexible database management system is critically important. It can provide the versatility needed to quickly produce a variety of ad hoc reports, benefiting just about any type of organization.

Many auditors travel from one facility to another. The best audit reports are developed as soon as possible. If a report is not prepared during an audit, shortly thereafter, or at least before the next one begins, there will always be some critical memory loss and sense of urgency in recording findings. To prevent this, many auditors now take laptop computers and portable printers on site. This way, they can leave a draft report on disk with the client or send a disk to the office to have a hardcopy draft report reviewed and waiting for them upon their return.

Automated auditing produces at least three predictable results:

Improved computer skills among auditors;

Continued development of auditing automation tools; and

Increased utilization of audit data.

Of these three, the increased use of audit data is the most important, since it will have the largest impact on corporations and government agencies. Environmental auditing has been likened to a management information system⁴ because it provides management with specific information on how an organization is performing with respect to environmental compliance requirements. When linked with other corporate information systems, environmental audit data will reach its full potential by assuring compliance and aiding financial planning, new product lines and expansions, and generally risk management.

One large company, for example, modified its internal information systems so that audit findings can be integrated with other related corporate databases. These include environmental compliance tracking systems and systems traditionally used to manage business, such as operating budgets, facility improvement plans, personnel performance monitoring and planning, health and safety program monitoring, and production activity scheduling. Integrated databases make it easier for managers to understand and react to audit findings because they can be causally linked to a wider range of activities or staff. Additionally, integrated databases improve compliance management by helping managers understand relationships among a wider range of variables, giving them more options for mitigating problems. This will eventually result in more effective compliance management.

Moralization

The ethical and moral questions surrounding disclosure of audit findings are a growing concern among auditors and their employers. Is it sufficient to inform only the auditor's direct supervisor or client when an auditor discovers practices or records at a facility that indicate serious, willful noncompliance, especially practices that seem likely to result in harm to human health? Put another way, should the auditor, upon learning of or even strongly suspecting a situation with significant threat to human health or the environment, directly inform regulatory authorities? There is no one right answer to this question. However, a recent presentation⁵ and a workshop⁶ on this subject have helped clarify the issue, pointing out that the legal and ethical implications of the disclosure issue may not necessarily dictate the same course of action. Guidelines to resolve this potential conflict should be promulgated in corporate policy, in professional codes of ethics, and in environmental regulations themselves. This "ethics" contention will continue to occur absent a move toward more corporate awareness and the professionalization of environmental auditing.

Legal techniques, such as creating an attorney-client privilege or attorney work product, can be used to help ensure the confidentiality of audit information,⁷ but there is uncertainty whether absolute protection exists. For example, EPA may request audit reports on a case-by-case basis.⁸ While these legal techniques may provide some control, they all depend on a commitment by the participants to maintain an information control strategy. The issue typically becomes the willingness to participate in the face of internal ethical pressures.

Obviously much depends on the auditor's personal beliefs, values, and responsibilities and relationship to the employer, but there are some legal obligations and requirements that can alter the auditor's decision on how to proceed when confronted with an ethical concern. It is clear, for example, that if an auditor discovers a chemical spill exceeding the reportable quantity, he or she must ensure that response authorities are contacted within 24 hours. While the regulatory requirements should relieve any ethical question, it is surprising how employees' fears of being transfered or terminated for disclosure impact their choosing the correct course of action.

Auditors must also make decisions about unascertainable issues that involve uncertainty as to the nature and extent of a problem due to a lack of sufficient technology or legal data. This area is murky and creates most of the [20 ELR 10181] concern and debate among auditors. Many good auditors are driven by a feeling that they are doing something important and "right." Moreover, to maintain their enthusiasm and tenacity, they must see results from their efforts. Making the same finding time after time is one of the most discouraging things that an auditor encounters. If considered serious enough, it can become very difficult for some auditors not to make an anonymous phone call to a regulatory agency. The potential for these uncontrolled information releases may drive large firms to conduct audits using their own teams of employees rather than consultants.

There are other options available to management to help reduce the risk of uncontrolled information releases. These may seem fundamental, nonresponsive, or unhelpful, but they still present alternatives that are used by some firms. One option is not to have audits conducted. This may seem ridiculous, since managers must understand their facility's condition in order to make good business decisions. Nevertheless, the axiom "Don't ask the question if you don't want to hear the answer" holds especially true in this case. Some managers feel they cannot afford to learn of additional demands to which they cannot respond. Another alternative is to treat auditors and their information very seriously. The number of times a frustrated or disillusioned employee caused problems for a current or previous employer is incalculable. If this disgruntled employee is, or was, an auditor, the potential for problems through uncontrolled information release is enormous. Finally, auditors should agree to a tight reporting hierarchy before they begin an assignment. This way, everyone involved will know who gets the information and when. This is in a sense a screening process. Auditors who cannot agree to a corporate reporting sequence and hierarchy pose a risk to the facility by possibly releasing information.

Several outcomes are likely as a result of these ethical issues in environmental auditing. When corporate management and counsel take measures designed to maximize a legal shield around audit findings, increasing care will be given to choosing the staff involved as well as the process for controlling information. Corporate proactivity in environmental program management will be triggered by managers who have been exposed to or have experienced these ethical problems and understand the corporation's compliance policies, supervisory responsibilities, and liabilities. Finally, ethics will promote professionalization.

Professionalization

Environmental auditing's status as a profession is controversial. The field is still so new and there are so many variablesthat many knowledgeable people do not believe environmental auditing is really a profession. Nevertheless, the future of environmental auditing seems clear — it must ultimately be standardized and supported by a formal professionalization program.

The professionalizing of environmental auditing is driven by several forces, including ethics, professional development, peer recognition, regulatory initiatives, and information transfer. However, aside from a few articles,⁹ there is surprisingly little written about this movement. A number of organizations have studied environmental auditor professionalization. The first formal organization for auditing, the Institute for Environmental Auditing, has hosted a series of meetings on the subject. Another organization, the Environmental Auditing Roundtable, has a committee studying auditor credentials. A third group, the Environmental Forum, is strongly interested in the issue but has not pursued professionalization as a key agenda item. These groups have made some progress, but there is no clear resolution for the issues impeding professionalization, such as deciding who is qualified, what standards should be developed, and who or what organization can sanction auditors.

Many environmental auditors feel the need for professionalization. This is evidenced by their eager willingness to pay for registration or participate in certifying organizations. These efforts, while giving recognition to auditing professionals with some qualifications, add little real value to the individual professionally. Thousands of individuals annually pay dues to be affiliated with one or more of the new certifying or registering organizations, despite the fact that as yet there is no meaningful registration or certification program for environmental auditors. One potential exception is the voluntary environmental assessor registration program sponsored by the California Environmental Affairs Agency,¹⁰ which was created by the Environmental Quality Assessment Act of 1986.¹¹ It is still too soon to tell how effective that program will be. Key issues need to be resolved, such as its real value to auditors, acceptance by practitioners, and reciprocity with other potential state programs.

Until an accepted professionalization program is in place, there is uncertain value to current environmental auditing affiliations. Certainly if one participates in an auditor organization it indicates a willingness or interest in improving or maintaining skills, but at this time affiliation does not necessarily imply quality.

The need for professionalization is clear. Regardless of differences in name, end use, and scope, the practices included in environmental auditing have fundamental similarities. The areas of common ground could be the basis for initiating professional standards. To be meaningful, a regulating body should eventually endorse the standards. Without this endorsement, the standards will always be suspect.

The probable outcome is that there will ultimately be an environmental auditor profession. There will be professional standards andpossibly a government-sanctioned regulatory structure. It is only a matter of time until someone or an organization takes the lead and does a credible job of pulling interested parties together.¹² It is critical, however, that auditors avoid the development of a negative image caused by unqualified practitioners conducting faulty audits and costing clients huge sums of money. Professionalization will reduce this risk.

[20 ELR 10182]

Globalization

Few, if any, countries are as advanced as the United States in environmental auditing. This creates problems for some and opportunities for many. Interest in environmental auditing as a management tool at an international level has existed for some time. With broad support, the International Chamber of Commerce (ICC) prepared and published a position paper on environmental auditing last June.¹³ In doing this, the ICC asserted a leadership position that will probably shape the direction of international environmental auditing. The policy statement is consistent with the expectations and practices of most auditors in the United States.

Many large U.S.-based corporations have overseas operations subject to foreign regulations and customs that are not necessarily similar to those followed in the United States. In many cases, a U.S.-based company must decide if it will adhere only to local requirements or if it will apply more stringent U.S. requirements. Since many of these facilities are located overseas because of economic criteria, including a more relaxed set of environmental standards, there is often a conflict of interests.¹⁴ In these situations, auditors must decide which standards to apply in these overseas audits — U.S. standards or less stringent local requirements.

There are strong and differing opinions on this fundamental question that present conflicts between environmental ethics and economics. Do corporations want to know that their operations overseas do not meet the same standards worldwide? It is hard to rationalize choosing between environmental ethics and economics, especially with standards affecting human health. Fortunately, many U.S.-based corporations are acting responsibly in this regard. There are, however, numerous problems in implementing U.S. standards overseas, such as:

* Differences in culture

* Communication problems

* Differences in regulations or a lack of them

* Differences in enforcement

* Difficulty in finding trained staff

* Politically sensitive situations or instability

* Corporate relationships (e.g., partial ownership) with local governments

There also can be significant problems with foreign-based corporations that have acquired or opened facilities in the United States. When these transactions occur, the owners must be made aware of the importance of environmental laws. They could learn too late that they own a hazardous waste site or a facility with huge fines levied against it for poor environmental practices. In these cases, the cost of doing business can jump dramatically.

A good example of where environmental auditing can help occurred recently. A large European-based conglomerate prepared for months to purchase a specialty chemical manufacturer in the United States. Initially, the conglomerate suspected no environmental regulatory difficulties, since the feedstocks and products were widely accepted and loosely regulated. Just days before the deal was to be made, the conglomerate decided to audit for environmental concerns. Checking with EPA revealed proposed regulations that would affect the target firm's profitability and operating plan. In particular, there was a good chance that the target's products would be environmentally unacceptable in nearly all current applications. The deal was called off.

The internationalization of corporations holds benefits for consultants. Although many corporations have qualified staff to conduct environmental audits, they are rarely distributed evenly among overseas facilities. Local consultants may be preferred because of such advantages as understanding local language, customs, and regulations, and their ability to be fully functioning and available on short notice.

Environmental auditing will likely be one of the pioneering tools used to stimulate standardization in worldwide environmental management and practices. Globalization of environmental auditing will also promote good corporate citizenship and accountability. There will be explosive growth in environmental auditing opportunities worldwide.

Diversification

Diversification is broadening the scope of environmental auditing and narrowing the focus of specialty audits. By broadening in scope, environmental auditing is evolving into a tool that can be used for total risk management. Two examples illustrate this point. First, many organizations are including health and safety concerns in environmental audits. Environmental auditors, practicing for many years, almost all agree that they felt their work was incomplete when a full audit centered only on the traditional environmental concerns, such as air pollution, water pollution, and waste management. Consequently, it is not unreasonable for what is known as a health and safety survey to be included in an environmental audit.

Second, even though the body of environmental laws and regulations is large, there are numerous practices and situations apparent to an experienced auditor that present environmental risks that are not regulated. In fact, regulatory compliance is no guarantee against liability. Thus, an audit that includes an identification of risks beyond compliance is a reasonable extension of the audit's scope.

Environmental auditing can also be narrow in scope. For example, specialty audits have been recognized for some time and include waste minimization audits, third-party liability audits, audits for real estate transactions, and management effectiveness audits. As subsets of full audits, these specialty audits focus on understanding only a portion of what ordinarily constitutes a full program audit. Some of these specialty audits have become so customized for a specific objective or client type that unique terms and conditions for performing the work are spreading nationally. For example, in auditing property transfers it is now important to understand that there are commonly three audit phases offered.¹⁵ (Phase II and Phase III audits are in most cases not really audits, but the nomenclature is gaining acceptance.)

[20 ELR 10183]

Federal environmental laws, such as the Resource Conservation and Recovery Act (RCRA)¹⁶ and the Emergency Preparedness and Community Right-to-Know Act (EPCRA)¹⁷ have spurred audit diversification, or specialty audits. Even more specifically, New Jersey's Environmental Cleanup and Responsibility Act requires "that any place of business where hazardous materials were stored or handled in any way be given a clean bill of health by the state before a transfer of ownership or change of operation takes place."¹⁸ The result of this statute has been an increase in the number of consulting environmental auditors. These auditors then complete property evaluations for their clients who in turn must submit them to the state.

While these audits have become extremely specialized, the need for diversified audits continues to grow. Some of the factors in favor of diversification include the need for risk and liability management, insurance information requirements, and budgetary planning. These factors create special audit objectives and auditing techniques, but can easily be incorporated into a general environmental audit.

The flexibility of the traditional environmental audit allows auditors to focus or expand their product for a special need or client. These specialty audits have arisen primarily because of regulatory requirements and will continue to evolve to fit unique market or program niches.

Selection

The main criteria for auditor selection, in the absence of accepted standards and a code of ethics, is an auditor's specialized experience and cost. Some consulting firms have focused on the most active auditing market segments, such as real estate transactions. The result is an "assembly-line" audit that only covers the most rudimentary and obvious problems, such as compliance status. Lack of knowledge often causes buyers to use price as the primary, if not sole, factor in selecting an auditor even though the lowest cost is not necessarily the best value. "Caveat emptor," usually mentioned in reference to the purchase of real property, applies to environmental services as well.

Most external auditors come from a consulting firm, which raises a market practice that buyers need to be aware of. This is the old "foot in the door" routine. Some consulting firms offer audits at low cost to establish a client relationship. If their auditor learns of more serious problems while performing the audit, the consulting firm may position itself to gain more lucrative follow-up work. Not all consulting firms do this, but many do and admit it freely to their colleagues as a successful marketing technique. There is nothing wrong with offering add-on services to clients who are in need, but in searching for lucrative problems to solve, consultants can lose sight of their primary mission to do a thorough audit.

There is a simple, sensible method for classifying and subsequently choosing external auditors. It relies on matching needs with knowledge and skill levels. There are important differences among auditors' knowledge and skill levels and this has a substantial impact on audits. First, evaluate and understand auditing needs. Is a focused or limited audit sufficient? The better the need is understood, the better will be the decision to choose the external auditor. As an example, a large international consulting firm is probably best qualified to audit the effectiveness of worldwide environmental program operations for an international firm or government organization. Alternately, to effectively audit the compliance status of commercial real estate in New Jersey, the best firm could be the one closest to the property with a good track record in that particular type of audit. These differences are dramatic but they make an important point. Each company and each auditor has its own style and strengths. These should be matched with a client's needs and specific facilities to ensure the audit is meaningful.

Sources of information on capabilities of environmental auditors are scarce. California is publishing its list of registered assessors with their areas of expertise. This will give potential clients a helpful starting place. Alternatively, three auditing organizations — the Institute for Environmental Auditing, the Environmental Auditing Roundtable, and the Environmental Forum — may be good sources for names of member firms or individuals.

The increasing demand for audits means that there will be substantial growth in the number and diversity of external environmental auditors. In the short term there will be more work than there are qualified auditors, but with professionalization, it will be easier to evaluate auditor quality and make informed decisions.

Conclusion

Environmental auditing has moved from being just a good management tool toward an acknowledged profession. While environmental auditing is not yet fully evolved, it has followed a predictable path of trends that indicate what auditing can become. First, as an information-based process, environmental auditing is both enhanced and being shaped by automated tools. Next, ethical issues will dictate tighter control of information, influence auditor selection, and shape auditing practices. In addition, environmental auditing will inevitably become professionalized. Currently, diversification is making auditing both broader and more focused. Environmental auditing through globalization could pioneer the effective introduction and enforcement of worldwide environmental standards. External auditor selection will continue to increase in importance because of ethics, diversification, and specialization. As these trends evolve, auditing will play an increasingly important role as a flexible and responsive analytical tool for environmental management and compliance.

1. See, e.g., Deuel & D'Aloia, Defining Our Vocabulary, ENVTL. AUDITOR 33-38 (1989).

2. Environmental Auditing Policy Statement, 51 Fed. Reg. 25004 (July 9, 1986), ELR ADMIN. MATERIALS 35001.

3. This Article is about what has come to be known as auditing. There are other articles in which terms such as "inspections," "surveys," or "assessments" are more appropriate. See, e.g., Ouellette & Maestri, The Process and Cost of Environmental Audits, HAZMAT WORLD, Oct. 1989, at 52.

4. J. PALMISANO, Environmental Auditing as a Management Information System, in THE MCGRAW-HILL ENVIRONMENTAL AUDITING HANDBOOK (L. Harrison ed. 1984).

5. K. Blumenfeld, Dilemmas of Disclosure: Ethical Issues in Environmental Auditing (presented at the Conference on Business, Ethics, and the Environment, Bently College, Boston, Mass., Oct. 26, 1989).

6. Ethics Workshop, Air and Waste Management Association Convention, Anaheim, Cal. (June 29, 1989).

7. J. CRIST, REPORTING, RECORD KEEPING, AND DISCLOSURE REQUIREMENTS FOR AN ENVIRONMENTAL AUDIT (Executive Enterprises, N.Y., 1989).

8. Supra note 2, at 25007.

9. E.g., Palmisano, Environmental Auditing: Past, Present, and Future, ENVTL. AUDITOR 7-20 (1989).

10. Oliver, Registering Environmental Assessors in California, USA, ENVTL. AUDITOR 21-24 (1989).

11. CAL. HEALTH AND SAFETY CODE § 1, § 25570 (West 1987).

12. The American Society for Testing Materials recently formed a subcommittee (D-34) on Environmental Assessment of Commercial Real Estate Transactions. Part of its scope will be to provide recommendations to entities with authority to set minimum standards to license professionals who perform environmental assessments.

13. ICC Position Paper on Environmental Auditing, June 1988, International Chamber of Commerce, Paris, France.

14. P. Cash, Auditing International Facilities (notes from presentation, Environmental Auditing Roundtable, Alexandria, Va., June 12, 1989).

15. Schubring, Environmental Site Assessments for Commercial Real Estate Transactions, ENVTL. AUDITOR 59-68 (1989).

16. 42 U.S.C. §§ 6901-6992k, ELR STAT. RCRA 001-050.

17. 42 U.S.C. §§ 11001-11050, ELR STAT. EPCRA 002-012.

18. 1983 N.J. Laws 330 (codified at N.J. STAT. ANN. § 13:1k-6 et seq.); see Olson, ECRA: New Jersey's Cleanup Statute, 17 ELR 10395 (1987); Miller, New Jersey's Improved ECRA Implementation: The State Answers Its Critics, 18 ELR 10084 (1988).