National Conference of State Legislatures Study Finds That State Environmental Audit Laws Have No Impact on Company Self-Auditing and Disclosure of Violations

Nancy K. Stoner and Wendy J. Miller

Editors' Summary: State audit privilege and immunity laws and audit policies have been championed as a way to encourage facilities to audit, or increase the auditing of, their compliance with environmental laws. A recent study by the National Conference of State Legislatures examined the success of these laws and policies by surveying how they have affected facilities' auditing practices. In this Dialogue, the Director of EPA's Office of Planning and Policy Analysis and an attorney advisor in that Office analyze this study and its implications. The Dialogue begins with an overview of state audit privilege and immunity laws and audit policies. It then describes the study's design and results and discusses some examples of EPA's own experience in encouraging environmental auditing. The Dialogue concludes by evaluating the study in light of EPA's position on these laws.

Ms. Stoner is the Director of the U.S. Environmental Protection Agency's (EPA's) Office of Planning and Policy Analysis within the Office of Enforcement and Compliance Assurance. Ms. Stoner served as an attorney in the Policy, Legislation, and Special Litigation Section of the Environment and Natural Resources Division of the U.S. Department of Justice from 1987 until the fall of 1996, when she joined EPA. Ms. Stoner attended the University of Virginia, where she obtained a B.A. in 1982, and Yale Law School, where she obtained a J.D. in 1986. Ms. Miller is an attorney advisor in EPA's Office of Planning and Policy Analysis within the Office of Enforcement and Compliance Assurance. She received a J.D. from the University of Maryland School of Law in 1983 and an LL.M. in environmental law from the George Washington University in 1997. She has worked in various EPA offices since 1989. The views expressed in this Dialogue are solely those of the authors and do not necessarily reflect those of EPA.

[29 ELR 10265]

A new National Conference of State Legislatures (NCSL)¹ study dispels the premises underlying state environmental audit privilege and immunity laws.² The NCSL's study concludes that state audit privilege and immunity laws do not encourage facilities to begin auditing, to increase the number of audits they perform, or to disclose more violations to regulators. The study also finds that inspector presence is a strong motivator for environmental auditing. This Dialogue examines the NCSL study and its implications for the U.S. Environmental Protection Agency's (EPA's) position on state audit privilege and immunity laws.

Background

At the time the NCSL study was conducted, more than 20 states had enacted some type of environmental audit privilege and immunity law,³ and 11 states had adopted environmental audit policies.⁴ Audit privilege laws typically shield environmental information related to an audit from disclosure to the public or regulatory agencies and prohibit use of the information in an administrative or judicial proceeding, including an enforcement proceeding. Audit immunity laws generally provide immunity from fines or penalties for violations [29 ELR 10266] detected during an audit and disclosed to a regulatory agency. For 10 years, EPA has opposed passage of state audit privilege and immunity laws because of their effect on public access to environmental information and on states' ability to protect human health and the environment by enforcing environmental laws.⁵

EPA looks favorably on other types of environmental self-auditing incentives. In 1995, the Agency issued a policy, Incentives for Self-Policing: Discovery, Disclosure, Correction and Prevention of Violations, to encourage companies to conduct voluntary self-auditing.⁶ The policy is designed to encourage greater compliance with laws and regulations that protect human health and the environment. Under EPA's policy, where violations are found through voluntary environmental audits or a compliance management system and are promptly disclosed and expeditiously corrected, EPA will not seek gravity-based penalties (i.e, the penalty amount over and above the company's economic gain from noncompliance) and generally will not recommend criminal prosecution against the regulated entity. To protect human health and the environment, the policy does not apply to disclosures involving individual criminal conduct, repeat violations, and violations presenting serious harm or imminent and substantial endangerment. The Agency also specifically retains the discretion to recover significant economic benefit gained from noncompliance from companies conducting self-auditing. In addition, the policy restates EPA's long-held policy and practice of refraining from routine requests for environmental audit reports. Since the audit policy was implemented in 1996, regulated entities have disclosed environmental violations at more than 1,800 facilities.

Notwithstanding this policy and other incentives favored by EPA, proponents of audit privilege and immunity laws believe that the laws that they advocate are still needed. They suggest that such laws will encourage companies that do not currently audit to begin to do so; will encourage more auditing by companies that already audit; and, for immunity laws, will encourage disclosure and more prompt correction of environmental violations. All three of these rationales have been found wanting in the new NCSL study.

NCSL Study Design and Results

In 1997, the NCSL requested and received grant assistance from EPA to perform a study of state environmental audit privilege and immunity laws and policies.⁷ The NCSL surveyed environmental compliance officials at 988 manufacturing facilities in more than 30 states to determine the factors that influence the rate and quality of environmental auditing.⁸ The states where the surveyed facilities were located fell into three categories — states with audit privilege and immunity laws, states with audit policies, and states with neither an audit law nor an audit policy.⁹

The study found that neither an audit privilege and immunity law nor an audit policy appears to influence the level of audit activity by facilities. More than 75 percent of the 988 facilities surveyed are performing audits.¹⁰ The NCSL found no statistically significant difference in auditing rates based on whether the state in which the facility operates has an environmental audit law, an environmental audit policy, or no law or policy. In fact, more facilities responded that they are doing audits in states with no audit law or with a policy than in states with an audit privilege and immunity law, but the difference in auditing rates among the categories of states is not statistically significant.

The study also looked at whether there has been any increase in auditing among the surveyed facilities over the [29 ELR 10267] past four years (when environmental audit laws began to be enacted). The number of facilities beginning to conduct audits increased by a few percentage points over that time period as did the number of audits conducted by all facilities surveyed.¹¹ Again, however, the NCSL found no statistically significant difference in the increase in auditing rates over the four-year period for facilities based on whether they were located in a state with an audit law, an audit policy, or neither. The majority of company officials surveyed confirmed that the state audit law had no impact on their company's audit program.¹²

Study results show that the existence of an audit privilege and immunity law does not appear to influence the disclosure of violations by facilities. The majority of facilities surveyed had not disclosed violations that had been discovered during an audit — and the fact that the facility was located in a state with an audit privilege and immunity law or a policy does not appear to make a difference.¹³

The NCSL did identify other motivators for environmental auditing. An overwhelming number of facilities (90 percent) identified measuring compliance with environmental laws and regulations and finding and correcting violations before inspectors do as very important reasons that they conduct audits.¹⁴ These findings are consistent with those of Price-Waterhouse's 1995 Voluntary Environmental Audit Survey of U.S. Business, in which 96 percent of the companies surveyed identified finding and correcting problems before they were discovered by an inspection as a motivation for conducting audits.¹⁵ Thus, while audit laws do not appear to impact auditing, enforcement presence does.

EPA's experience in several pilot enforcement and compliance assurance programs suggests that enforcement presence is important not only in encouraging auditing, but also in increasing the disclosure and correction of violations by regulated entities. One such example is the mini-mills enforcement initiative led by EPA Region 5. Mini-mills, generally defined as electric arc furnaces with associated rolling mills, are the fastest growing segment of steel production in the United States. Given the rapid growth of this industry, and the fact that their operations are subject to multiple environmental requirements, EPA Region 5 identified mini-mills as a priority sector for enforcement and compliance assurance activities. In 1996, EPA Region 5 sent letters to 22 steel mini-mills in the Midwest, which provided compliance assistance materials, invited the companies to take advantage of the opportunity to audit and correct violations in exchange for reduced penalties under EPA's audit policy, and informed the companies that EPA would conduct inspections of mini-mills in 1997. EPA also provided the companies with auditing materials and held a workshop to discuss the applicability of specific environmental laws to steelmaking operations. Of the 22 companies contacted, 12 companies elected to disclose violations. Most of these violations were corrected by June 1998. The companies will pay no penalties to EPA for the disclosed violations. EPA will pursue enforcement activities to the extent appropriate against nondisclosing entities.

Another example is the EPA Region 7 rock crushing operations initiative. Rock crushing operations are subject to new source performance standards under the Clean Air Act that limit emissions of particulate matter.¹⁶ EPA Region 7 found that most rock crushing operations in Missouri had not performed necessary tests to ensure that their emissions were in compliance with the Act. Many of these facilities were small, closely held companies without environmental compliance staffs. EPA Region 7, with the Missouri Limestone Producers Association, announced that for a limited three-month period, any company in violation of the requirements could voluntarily come forward under the program, comply with the testing and reporting regulations, and pay a stipulated penalty substantially lower than would normally be assessed for such violations. Forty-five companies participated in the program, reporting violations at 70 plants across the state of Missouri, and paying an average penalty of approximately $ 20,000. All of the companies participating in the program have completed the necessary testing and reporting requirements. EPA Region 7 and the Missouri Department of Natural Resources worked together to determine whether companies that failed to come forward under the program were subject to the requirements. For those companies that did not come forward, EPA Region 7 pursued traditional enforcement actions, having recently settled the last of those actions in 1997 for a penalty of approximately $ 400,000.

The NCSL study also found that the most important reason that facilities do not audit is that they are having few problems complying with environmental requirements. The second most important reason cited was a concern that a state or federal regulatory agency may obtain the audit report and use the information in an enforcement action or [29 ELR 10268] civil or criminal suit.¹⁷ While the regulated community may be concerned that audit reports will be used against them, there are in fact few instances in which EPA has used audits in enforcement actions.¹⁸ Thus, this concern appears to be based more on perception than reality. In addition, as noted above, actual auditing rates do not appear to vary based on whether an audit privilege and immunity law is in place.

EPA's Response to the NCSL Study

EPA is considering the results of this study, along with a broad range of other sources of empirical information, in its current evaluation of the effectiveness of its own audit policy.¹⁹ EPA finds two aspects of the NCSL study relevant to that evaluation. First, because the study finds that enactment of an audit privilege and immunity law does not increase auditing rates, EPA believes that its well established position of opposing enactment of federal or state audit privilege and immunity laws remains appropriate. Second, because the use of audits in enforcement remains a concern of some members of the regulated community (although not one that impacts auditing rates), EPA will consider whether it is possible to provide additional assurances concerning the use of audit reports in determining whether to assess penalties for violations disclosed under its audit policy.

Thus, the NCSL study demonstrates that the advocated benefits of environmental audit privilege and immunity laws simply do not exist. Among the high percentage of the surveyed facilities that are conducting environmental auditing, the existence of an audit privilege and immunity law has no impact on the level of audit activity. The study's empirical results support EPA's long-standing view that the incentives provided by a well marketed penalty mitigation policy, along with a strong environmental enforcement program, are the keys to achieving better environmental compliance and protection.

1. Created in 1975, the NCSL provides a variety of educational services to state lawmakers and legislative staffers.

2. LARRY MORANDI, NATIONAL CONFERENCE OF STATE LEGISLATURES, STATE ENVIRONMENTAL AUDIT LAWS AND POLICIES: AN EVALUATION (1998) [hereinafter NCSL]. Larry Morandi is the Director of the NCSL's Environment, Energy, and Transportation Program. Summary information on the NCSL report is available on the NCSL website. NCSL Environment, Energy, and Transportation Program. Environmental Audits (last modified Dec. 1998) http://www.ncsl.org/programs/esnr/audits.htm.

3. The states of Texas and Michigan, for example, enacted environmental audit privilege and immunity laws in 1994 and 1996, respectively. MICH. STAT. ANN. § 13A-14801-148010 (Law. Co-op. 1998); TEX. REV. CIV. STAT. ANN. art. 4447cc (West 1998). In 1997, the Texas and Michigan audit laws were amended to meet specific requirements for enforcement authority and public availability of information associated with authorized federal environmental programs administered by the states. For a summary of state audit privilege and immunity laws as of 1997, see, e.g., John A. Lee & Bertram C. Frey, Environmental Audit Immunity Laws: A State-by-State Comparison, 28 Env't Rep. (BNA) 331 (June 13, 1997); John-Mark Stensvaag, The Fine Print of State Environmental Audit Privileges, 16 UCLA J. ENVTL. L. & POL'Y 69 (1997-1998).

4. The states of California and Florida, for example, adopted environmental audit policies in 1996. CAL/EPA Policy on Incentives for Self-Evaluation, Memorandum from Gerald G. Johnston, Assistant Secretary for Law Enforcement and Counsel, California Environmental Protection Agency (July 8, 1996); Department of Environmental Protection, State of Florida, Program Directive DEP 922 (Apr. 1, 1996), which is available on the state of Florida website at http://www.dep.state.fl.us/ogc/documents/enfmanual/appendix/dep922.pdf. In late 1998, the California Environmental Protection Agency issued a revised audit policy. Unified CAL/EPA Policy on Incentives for Self-Evaluation, Memorandum from Gerald G. Johnston, Deputy Secretary for Law Enforcement and Counsel, California Environmental Protection Agency (Dec. 15, 1998), which is available on the CAL/EPA website at http://www.calepa.ca.gov/programs/unienforce/ensec6.htm.

5. EPA has stated its opposition to federal and state audit privilege and immunity laws in a variety of fora. For example, the U.S. Senate Committee on Environment and Public Works held a hearing on October 30, 1997, regarding the activities of the federal government concerning voluntary environmental audits. Steven A. Herman, Assistant Administrator for Enforcement and Compliance Assurance, presented written and oral testimony on behalf of EPA, and a variety of other individuals offered their views. Review of Activities by the Federal Government Concerning Individuals or Organizations Voluntarily Submitting to Environmental Audits: Hearing Before the Senate Comm. on Environment and Public Works, 105th Cong. (1998) [hereinafter Voluntary Environmental Audit Hearing].

A number of law review articles describe the pros and cons of federal and state audit privileges and immunities. See, e.g., Heather L. Cook & Robert R. Hearn, Putting Together the Pieces: A Comprehensive Examination of the Legal and Policy Issues of Environmental Auditing, 7 TUL. ENVTL. L.J. 545 (1994); Craig N. Johnston, An Essay on Environmental Audit Privileges: The Right Problem, the Wrong Solution, 25 ENVTL. L. 335 (1995); James T. O'Reilly, Environmental Audit Privileges: The Need for Legislative Recognition, 19 SETON HALL LEGIS. J. 119 (1994); Linda A. Spahr, Environmental Self-Audit Privilege: The Straw That Breaks the Back of Criminal Prosecutions, 7 FORDHAM ENVTL. L.J. 635 (1996); Philip Weinberg, "If It Ain't Broke …"; We Don't Need Another Privileges and Immunities Clause for Environmental Audits, 22 J. CORP. L. 643 (1997). For a recent summary of audit privilege and immunity commentary, see Stensvaag, supra note 3, at 72-76.

6. 60 Fed. Reg. 66706 (Dec. 22, 1995).

7. While EPA funded the study, the Agency did not design the survey questions, administer the survey, or prepare any portion of the report. The NCSL, with the assistance of Abt Associates, Inc., of Massachusetts, prepared the survey. Experienced Abt Associates interviewers administered the survey to facility environmental managers over a two-month period following the well established protocols of a national survey group. The 988 respondents reflected an overall facility response rate of 41 percent. NCSL, supra note 2, at 33-39.

8. The NCSL directed the survey to facilities that were certain to have environmental regulatory obligations — manufacturing facilities that report to EPA's Toxics Release Inventory (TRI) and hold one or more major air, water, or hazardous waste permits. Id. at 34-35. In the second part of the study, the NCSL surveyed environmental agencies and offices of attorneys general in 28 states that have audit privilege and immunity laws, audit policies, or neither audit laws nor policies to measure the amount and type of audit activity in those states. The NCSL found that states are generally unaware of auditing rates; therefore, they are unable to determine whether their laws or policies have impacted those rates. Id. at 23-25.

9. The facilities were located in the following states (the categories reflect state-law enactment status as of the date of the survey): (1) states with audit privilege and immunity legislation (Colorado, Idaho, Kansas, Kentucky, Michigan, Minnesota, New Hampshire, South Carolina, Texas, Virginia, and Wyoming); (2) states with audit policies (California, Connecticut, Florida, North Carolina, Oklahoma, Pennsylvania, Tennessee, Vermont, and Washington); and (3) states with no legislation or policy (Alabama, Arizona, Georgia, Iowa, Louisiana, Maine, Massachusetts, Missouri, Nebraska, New Jersey, New Mexico, New York, North Dakota, West Virginia, and Wisconsin). Id. at 34. Only states that had audit laws or policies in place for at least two years were included in the survey because the NCSL reasoned that a two-year period provided companies with time to learn about and make changes in response to the law or policy.

10. The study showed that 78 percent of facilities are conducting audits in states that have an audit law, 82 percent of facilities are conducting audits in states that have an audit policy, and 80 percent of facilities are conducting audits in states that have no audit law or policy. Id. at 18. More than 75 percent of facilities in all states had performed three or more audits in the past four years. Id.

11. The NCSL found that 74 percent of facilities were conducting audits four years ago in states that have an audit law, 76 percent of facilities were conducting audits four years ago in states that have an audit policy, and 73 percent of facilities were conducting audits four years ago in states that have no audit law or policy. Id.

12. The NCSL asked those facilities that knew whether their state had an audit law or policy whether that law or policy had a major, minor, or no impact at all on the evolution of the company's audit program during the past four years. For facilities in states with an audit law, 62 percent thought the law had no impact, and 27 percent thought it had a minor impact; for facilities in a state with an audit policy, 44 percent thought that it had no impact, and 39 percent thought that it had a minor impact. Id. at 20.

13. The survey asked facilities that are currently conducting audits whether they had ever disclosed a violation detected during an audit to a regulatory agency. The NCSL found that 28 percent of facilities had disclosed a violation in states that have an audit law, 29 percent in states that have an audit policy, and 29 percent in states that have no audit law or policy. Id. at 19.

14. The NCSL asked facilities to rank the reasons that they audit as very important, somewhat important, or not at all important. In addition to identifying measuring compliance and finding and correcting violations as very important reasons for auditing, 80 percent of facilities also considered providing assurance that pollution control systems are functioning properly as a very important reason for auditing; furthermore, 70 percent of facilities indicated that improving the facility's overall environmental program and lowering financial risks and operating costs were very important reasons for auditing. One-third of facilities identified reduced or more lenient inspections or enforcement as a very important reason for conducting audits. Id. at 20-21.

15. PRICE WATERHOUSE LLP, THE VOLUNTARY ENVIRONMENTAL AUDIT SURVEY OF U.S. BUSINESS 6 (1995). The survey report reflected findings from 369 participants in a national survey of auditing practices among U.S. companies of varying sizes (primarily companies with 100 employees or more and with sales of at least $ 10 million) and within 14 industrial sectors.

16. 42 U.S.C. § 7411. ELR STAT. CAA § 111.

17. The NCSL asked facilities that do not audit to rank reasons as very important, somewhat important, or not at all important in their decision not to audit. NCSL, supra note 2, at 21. Thirty-nine percent of facilities in states with audit laws, 48 percent of facilities in states with audit policies, and 54 percent of facilities in states with no audit law or policy cited having few or no problems complying with environmental requirements as a very important reason for not auditing. In response to a question asking how important is a concern that regulatory agencies may obtain audit reports and use the information in an enforcement action or lawsuit, 47 percent of facilities in states with audit laws, 36 percent of facilities in states with audit policies, and 57 percent of facilities in states with no audit law or policy ranked this reason as very important. Id. at 22.

18. Voluntary Environmental Audit Hearing, supra note 5, at 52.

19. In 1998, EPA began a study of the effectiveness of its audit policy. The Agency plans to complete the study by the summer of 1999. As part of the study, EPA asked its Regions in June 1998 to comment on the policy, sent out a user's survey in October 1998 to those companies who have made self-disclosures under the policy, and has been seeking comments from the general public about the effectiveness of the policy and suggestions for changes to it. Through a Federal Register notice planned for publication this spring, EPA will announce the findings of its evaluation efforts to date and will solicit public comment on revisions to the policy.