environmental auditing: approaches of the u.s. and canadian professions

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Environmental Auditing: Approaches of the U.S. and Canadian Professions Linda B. Specht Nola Buhr The gr’obal focus on environmental issues has resulted in numerous initiatives by professional accounting associations worldwide. The CICA in Canada and the AICPA in the United States illustrate disparate approaches in defining the emerging role of the accounting profession in the area of environmental auditing. Although there are dffering legal and political influences at work in the United States and Canada that have impacted (and will continue to impact) the accounting profession’s involvement in environmental matters, economic globalization and public demands for information are likely to draw accountants into the area. INTRODUCTION During the past decade, there has been a global focus on environmental issues. Numerous initiatives, including that of the World Commission on Environment and Development (1987), have called for a union of economy and ecology. Various forms of local legislation and regulation have been enacted in order to facilitate pollution prevention and cleanup. As a result, there has been an increased demand for information and services regarding environmental performance. A number of these services have been described as “environmental audits,” which may or may not include services rendered by members of the accounting/ auditing profession. The need for, and propriety of, involvement by members of the profession in environmental matters is being debated by professional accounting associations worldwide. For example, in 1992, the Environment Research Journal of International Accounting Auditing & Taxation, 3(2): 115-l 33 ISSN: 1061-9518 Copyright @ 1994 by JAI Press, Inc. All rights of reproduction in any form reserved. Linda B. Specht, CPA, J.D. l Trinity University, Department of Business Administration, 715 Stadium Drive, San Antonio, TX 78212-7200. Nola Buhr, Ph.D., CA@ School of Management, Binghamton University, State University of New York, Binghamton, NY 13902-6000.

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Environmental Auditing: Approaches of the U.S. and Canadian Professions

Linda B. Specht Nola Buhr

The gr’obal focus on environmental issues has resulted in numerous initiatives by professional accounting associations worldwide. The CICA in Canada and the AICPA in the United States illustrate disparate approaches in defining the emerging role of the accounting profession in the area of environmental auditing. Although there are dffering legal and political influences at work in the United States and Canada that have impacted (and will continue to impact) the accounting profession’s involvement in environmental matters, economic globalization and public demands for information are likely to draw accountants into the area.

INTRODUCTION

During the past decade, there has been a global focus on environmental issues. Numerous initiatives, including that of the World Commission on Environment and Development (1987), have called for a union of economy and ecology. Various forms of local legislation and regulation have been enacted in order to facilitate pollution prevention and cleanup. As a result, there has been an increased demand for information and services regarding environmental performance. A number of these services have been described as “environmental audits,” which may or may not include services rendered by members of the accounting/ auditing profession.

The need for, and propriety of, involvement by members of the profession in environmental matters is being debated by professional accounting associations worldwide. For example, in 1992, the Environment Research

Journal of International Accounting Auditing & Taxation, 3(2): 115-l 33 ISSN: 1061-9518 Copyright @ 1994 by JAI Press, Inc. All rights of reproduction in any form reserved.

Linda B. Specht, CPA, J.D. l Trinity University, Department of Business Administration, 715 Stadium Drive, San Antonio, TX 78212-7200. Nola Buhr, Ph.D., CA@ School of Management, Binghamton University, State University of New York, Binghamton, NY 13902-6000.

116 INTERNATIONAL ACCOUNTING AUDITING & TAXATION, 3(2) 1994

Group of The Institute of Chartered Accountants in England and Wales published a study titled Business, Accountancy and the Environment: A Policy and Research Agenda. During the same year, a study group of the Canadian

Institute of Chartered Accountants (CICA) released a research report titled

Environmental Auditing and the Role of the Accounting Profession. The following year, the American Institute of Certified Public Accountants

(AICPA) sponsored an Environmental Issues Roundtable to assess the need for both authoritative and nonauthoritative accounting and auditing guidance

relating to environmental matters. The degree of involvement of accountants/ auditors and of professional accounting associations in environmental matters varies greatly from one country to another.

For purposes of illustration, this article describes the emerging role of

the accounting profession with respect to environmental audits and other environmentally related services in Canada and the United States and the

disparate initiatives taken by the CICA and the AICPA. The first section outlines the environmental audit as it has been practiced in the United States

and compares it to the various definitions of environmental auditing as envisioned by the International Chamber of Commerce and presented in the

CICA Research Report. The second section briefly discusses the current role of the accounting profession in the area of environmental auditing in both

the United States and Canada and concludes with a summary of the CICA’s recommendations for action and the findings of the AICPA Roundtable. The

subsequent section examines the legal and political factors in Canada and the United States that may influence the profession’s involvement in

environmental matters. The last two sections offer some perspectives on economic influences and public demands which may affect the accounting

profession’s developing role in the environmental area, and conclusions and implications.

THEENVIRONMENTALAUDIT

The term “environmental audit” has been used to describe a variety of professional services relating to environmental matters, ranging from site assessments to studies of environmental control systems. The use of a single term, “environmental auditing,” to label such a proliferation of services results in confusion. Many of these services do not provide audit assurance, as that term is understood in the context of financial statement audits. The sections

that follow describe the international, U.S., and Canadian definitions to illustrate some of this confusion and to demonstrate the need for professional accounting associations to work together to develop a common interpretation of these activities and of the profession’s role in performing these services.

Environmental Auditing Approaches 117

An International Definition of Environmental Auditing

Probably the most widely accepted definition of environmental auditing is that proposed by the International Chamber of Commerce (ICC) in 1989:

A management tool comprising a systematic, documented, periodic and objective evaluation of how well environmental organisation, management and equipment are performing with the aim of helping to safeguard the environment by:

(i) facilitating management control of environmental practices; (ii) assessing compliance with company policies, which would include meeting

regulatory requirements (ICC, 1989, p. 6).

Under the ICC definition, on-site activities are not conducted for the sole purpose of determining that the site is free of contamination. Rather, the activities at the site are conducted for the following purposes:

(1) identifying and understanding management’s environmental control system for the particular facility;

(2) evaluating the effectiveness of the system; (3) gathering audit evidence (e.g., reviewing a sample of effluent monitoring data, training

records, or purchase department records); (4) evaluating audit findings; and

(5) discussing audit findings with, and providing an interim written report to, facility management prior to the preparation of a final report (ICC, 1989, pp. 11-12).

Post-audit activities then include:

(1) the issuance of a final audit report; and (2) th’e preparation and implementation of an action plan (ICC, 1989, pp. 12-13).

The traditional U.S. approach to environmental auditing has been site-specific and is not at all the same concept as that proposed by the ICC.

The Environmental Audit in the United States

Although much has been written about the environmental audit in the United States (Greeno, Hedstrom, and DiBerto, 1985; U.S. Congress, 1989 [H.R. 27871; Jones, 1988; O’Malley and Shuman, 1989; Scagnelli and Malloy, 1987), there is no clear definition or standard of what that audit should include. In 1989, Rep. Weldon proposed legislation that sought to define the environmental audit as follows:

the term “Phase 1 Environmental Audit” means an investigation of the real property, conducted by environmental professionals, to determine or discover the obviousness of the

118 INTERNATIONAL ACCOUNTING AUDITING & TAXATION, 3(2) 1994

presence or likely presence of a release or threatened release of hazardous substances on the real property (H.R. 2787).

The components of this Phase I Environmental Audit would have included a review of each of the following sources of information regarding previous ownership and use of the real property:

(1) recorded chain of title documents (e.g., deeds, easements, leases, restrictions, and covenants for a fifty year period);

(2) aerial photographs which may reflect prior use of the property (reasonably obtainable

through governmental agencies); (3) determination of the existence of recorded environmental cleanup liens (e.g., federal,

state or local); (4) reasonably obtainable government records of hazardous sites and facilities, or of

activities or incidents likely to cause a release or threatened release of hazardous substances on the property; and

(5) a visual inspection of the real property site (including all improvements and adjacent

properties) (H.R. 2787).

The proposed legislation was never passed and Rep. Weldon has since introduced a similar measure titled “The Innocent Landowner Defense Amendment of 1993” (H.R. 570) (U.S. Congress, House, 1993b). At this time, the proposed legislation is still in committee. Generally speaking, however, a phase 1 audit has included the types of inquiries enumerated above (Jones, 1988; O’Malley and Shuman, 1989). A phase 2 audit, which is used when a phase 1 audit indicates possible contamination, includes physical testing of the soil and water (Baker, 1990). The final phase of an environmental audit typically includes a risk assessment or quantification of the estimated costs of cleanup (Scagnelli and Malloy, 1987).

The environmental audit, as typically performed in the United States, is a transactional event that is contracted for by the parties to a loan agreement, a lease, a merger, a real estate sales contract, or other business transaction as part of an overall strategy to avoid environmental liabilities or to contractually allocate those liabilities among the parties (Baker, 1990; Baker and Shea, 1990; Crager, 1988; Forte, 1987; Jones, 1988; Pilko, 1988).

A variety of services that have been referred to as environmental audits, including both the U.S. and the ICC concepts, have been described in a report issued by a study group of the Canadian Institute of Chartered Accountants (1992).

Environmental Auditing as Defined in the CICA Research Report

The Research Report identified four general types of services that are related to environmental matters and are often referred to as environmental audits:

Environmental Auditing Approaches 119

l Environmental consulting services; l Site assessments; 0 Operational compliance assessments; and 0 Environmental management system assessments.

The Study Group assessed the four types of services in light of its definition of “auditing” :

Auditing is a systematic process of objectively obtaining and evaluating evidence regarding a verifiable assertion about activities and events to ascertain the degree of correspondence between the assertion and established criteria and then communication of the results (of the process) to interested users (CICA, 1992).

Environmental consulting services are essentially management advisory services. They cover a wide range of objectives, such as to reduce consumption and cost of energy, improve process technology, reduce waste outputs, and determine .product life cycle (cradle-to-grave) environmental impacts and costs. Users of such services would be limited to internal parties such as management and the board of directors. Because environmental consulting services are largely problem-solving, performance-improving exercises rather than the collection of evidence to measure correspondence with some criteria, there is little resemblance between environmental consulting services and an audit.

The Study Group description of site assessments corresponds to the “environmental audit” as it has been conducted in the United States and as it has been used in Canada to satisfy the requirements of lenders and buyers or insurance and regulatory bodies (although management might initiate a site assessment). A site assessment is used to determine if a specific site contains contaminants which will require clean-up and to determine the cost of such a clean-up. These services are “usually detailed, technical statements of findings” (CICA, 1992). Site assessments were not found to be audits within the accounting profession’s meaning of the term.

Operational compliance assessments, the third type of environmental service, are used to determine if operating plants and facilities are in compliance with applicable environmental laws and regulations. Compliance may be sought on a current point-in-time basis or over a period of time. The users of an operational compliance assessment may be internal or external to the company. Although there may be no systems in place to provide the necessary evidence to make verifiable assertions, where such systems do exist, operational compliance assessments could be considered audits.

The Research Report description of environmental management system assessments corresponds closely to the ICC definition of environmental auditing. Environmental management systems assessments are the most comprehensive of the four types of environmental services, as they are directed

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toward providing management with “independent assurance that environmental management systems and procedures can be relied upon for their stated purpose (for example, to ensure compliance with corporate environmental policy, achieving environmental goals, etc.)” (CICA, 1992). Such assessments are intended to trigger continuous improvement as well as to identify risk areas. The Study Group concludes that under certain conditions (with specified criteria and verifiable assertions) these assessments could be conducted as audits.

Thus, the CICA Research Report has taken a comprehensive view of environmentally related services, which includes environmental management system assessments that correspond to the ICC definition of environmental auditing and site assessments that correspond to the U.S. definition of the same term. Such disparity in interpretation hampers the development of much-needed environmentally related services and creates confusion among the various stakeholders as to the nature of the service that has been contracted for and provided. Despite the existence of an expectations gap, there is some general agreement with respect to the nature and role of financial statement audits, as reflected by the International Standards on Auditing (AICPA, 1992). There is no counterpart in the area of environmental auditing.

Adding to the confusion about the nature of environmentally related services are the disparate roles assumed by the various professional accounting associations in defining, performing, and using these services. The following section examines the role of the CICA and the AICPA in the development of standards for environmental audits and the role of chartered accountants and certified public accountants in the performance of environmentally related services.

THE ROLE OF THE ACCOUNTING PROFESSION

In the United States, at all levels of inquiry, the site assessments that have been referred to as environmental audits have normally been conducted by an independent environmental investigator under the supervision of an experienced environmental attorney, in order to protect privileged information (Baker and Shea, 1990). Although an entity’s accountant may have been involved in matters of environmental risk management on behalf of one or more of the entities involved (Bader, 1985), it has been unlikely that the independent CPAs who perform the financial statement audit for these entities would have been aware of the events taking place. Only recently, in fact, would the CPA have been advised to include environmental matters in the client’s letter of inquiry to counsel, in order to obtain the attorney’s representations regarding these matters (Specht, 1992).

Hence, in the United States, not only is the accounting profession typically not involved in environmental auditing, but the CPA is only now becoming

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aware of the need to make audit inquiries regarding potential contingent liabilities relating to environmental matters. Any direct involvement by the accounting profession in environmental matters has come about, not through the actions or recommendations of the AICPA, the FASB, or other authoritative bodies, but rather through the emerging practice initiatives of the Big Six firms. Similarly, in Canada, the majority of environmentally related services have been performed by chemical engineers and other technical specialists. Lawyers are also engaged to supervise such services, often with a view to obtaining solicitor-client privilege in anticipation of possible litigation; however, the litigation threat has not been as significant in Canada as in the United States.

Although, generally speaking, the accounting profession’s involvement with environmentally related services in Canada has been limited, one public accounting firm has joined with an engineering firm in forming a limited liability company to offer such services. The alliance is intended to take advantage of the synergy between the two professions, with the company’s services to include environmental audits (however they may be defined).

In recognition of the potential contribution that might be made by the accounting profession, often in the context of such a “team effort,” the CICA Study Group’s Research Report made several recommendations regarding the profession’s role with respect to environmental matters.

Research Report Recommendations

The Study Group examined the four types of environmental services that were identified in the Research Report and provided commentary and recommendations regarding each of the following: environmental consulting services, site assessments, operational compliance assessments, and environmental management system assessments.

Environmental consulting services were considered to be similar in nature to other types of business advisory services. The Study Group concluded that the chartered accountant (CA) with the requisite expertise may be able to provide certain of these services, or may otherwise participate in the delivery of these services.

With regard to site assessments, the Study Group concluded that CAs have little or no contribution to make in this area, due to their lack of technical expertise in legal and scientific areas. Furthermore, the Study Group found that these services would not call for the assurance-providing process and expertise of CAs.

In the area of operational compliance assessments, the Study Group found that CAs have little to contribute at this time due to their limited expertise in scientific and legal areas and due to the current embryonic state of environmental record-keeping and management systems. However, the Study

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Group did foresee a possible role in the future for the CA in providing assurance- based reports in this area, with considerable use of the work of specialists and with the CA’s development of expertise in the areas of law and science.

By contrast, the Study Group emphasized that accountants have a major role in providing environmental management system assessments, either through the contribution of auditing skills to a team effort, or through their direction of these assessments (after the acquisition of the necessary additional skills). According to the Research Report, the CA should have an important role in the development and/ or delivery of environmental management system assessments and in providing the following types of assurance:

0 Assurance about specific items of information, and l Assurance about corporate environmental reports.

It is anticipated that both forms of assurance would be provided to external users, thus utilizing a CA’s traditional attestation skills, Although specialists might be needed, depending on the scope and technical nature of the matter, the Study Group concluded that the independent assurance offered by the CA might be important to both lenders and regulators. Likewise, the Study Group concluded that there will be a growing demand for reports to external users regarding corporate environmental performance. The Study Group anticipated that this, in turn, would create a demand for uniform standards of reporting, with the accounting profession having much to offer in the area of standard- setting and the delivery of attestation services.

The Study Group’s recommendations were set forth under four general headings:

I. Shaping Expectations-Accountability, Information and Audit: Needs, Models and Stakeholders;

II. CAs’ Professional Standards of Service and Guidelines; III. CAs’ Professional Competence and Credibility-Needs, Resources

and Specialists; and IV. Public Practice of Multi-disciplinary Services and Rules of

Professional Conduct.

In formulating its recommendations, the Study Group recognized two obstacles in the development of environmental auditing services: (1) the absence of standards against which to judge environmental performance, and (2) the absence of standards or guidance for providing environmental auditing services. In the financial arena, generally accepted accounting principles (GAAP) and generally accepted auditing standards (GAAS) provide the professional accountant with authoritative guidance. As the field of environmental auditing

Environmental Auditing Approaches 123

evolves it will be necessary to develop both GAAP- and GAAS-type standards in that field.

The Study Group anticipates that this standard-setting process should begin with the identification of the information and assurance needs of internal and external users (Recommendation #I), and that it should include a review of all existing Auditing and Related Services Recommendations and Guidelines (Recommendation #6) and the development of Handbook Standards for Assurance-based Service Engagements (Recommendation #5). In addition, the Study Group seeks to improve communications between the accounting profession and various stakeholders. Recommendation #4, for example, is intended to reduce the Expectations Gap by suggesting that the profession “manage stakeholder expectations so as to minimize any gaps by clarifying unrealistic expectations and promoting reasonable ones” (CICA, 1992). The recommendations also deal with training and support of members of the accounting profession who choose to work in the environmental area (Recommendations #7 through #lo). Although a detailed discussion of the numerous specific recommendations is beyond the scope of this article, the Study Group’s twelve recommendations are set forth in their entirety in the Appendix.

While the Study Group articulated a broad set of recommendations relating t’o a wide range of environmental standards and services, the AICPA, in contrast, convened an Environmental Issues Roundtable to consider a relatively narrow range of accounting and auditing issues relating to environmental matters.

The AICPA and the Environmental Issues Roundtable

In 1993, the AICPA held its Environmental Issues Roundtable to assess the need in the United States for both authoritative and nonauthoritative guidance relating to environmental matters. The specific objectives of the Roundtable were:

0 To examine practice problems applying GAAP and GAAS to environment-related financial statement assertions;

0 To identify environmental issues for which the need for authoritative accounting and auditing guidance should be evaluated; and

0 To provide a starting point for the development of nonauthoritative guidance on applying existing accounting and auditing standards to environmental matters (AICPA, 1993).

The Roundtable found a lack of agreement among auditors as to the profession’s role and the application of existing pronouncements, concluding that:

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[Gluidance is needed on recognizing environmental liabilities with a focus on an entity’s

obligation to clean up environmental problems created in the past;

Financial statement preparers and independent auditors should be more knowledgeable

about the significant federal laws on hazardous waste cleanup and the concepts of strict

liability and joint and several liability applicable to cleanup costs (AICPA, 1993).

Most significantly, participants of the Roundtable “expressed concern that

many CPAs are unaware that the nationally recognized problem of environmental cleanup costs affects them directly” (AICPA, 1993). Following the AICPA Roundtable, several task forces were formed to consider both accounting and auditing issues relating to environmental matters. All of the

Big Six firms are represented on the AICPA’s Accounting Standards Executive

Committee/Environmental Issues Task Force. In the meantime, they are moving ahead privately with new areas of practice that include:

l Environmental risk management and compliance support, 0 Environmental compliance audits,

l Litigation support,

l Due diligence for mergers and acquisitions, and l Financial accounting and disclosure relating to environmental matters.

At the time of this writing, the subject of environmental audits had not been addressed by the Task Force.

Other Initiatives

The CICA’s Study Group has urged the accounting profession to be an active participant in the forefront of standard-setting. This standard-setting

process is currently underway and, in Canada, includes such bodies as the Canadian Standards Association (CSA) and the International Institute for

Sustainable Development, which is located in Winnipeg, Manitoba. The CSA efforts at formulating consensus standards for environmental auditing are in furtherance of the International Organization for Standardization (ISO) project

to develop environmental management system standards. These efforts have proceeded with the participation of representatives from the CICA and support the Study Group’s position that the accounting profession has a role to play in providing assurance-based services regarding environmental management issues, albeit with the assistance of specialists where required. The envisioned role might be likened to the current role of CAs (and CPAs in the United States) with respect to insurance companies and pension funds, where the accountant provides assurance-based services while utilizing the expertise of actuarial specialists.

Environmental Auditing Approaches 125

In the United States, NSF International has taken on a similar role to that undertaken by the CSA, one of formulating a conceptual framework and voluntary guidelines for the performance of environmental audits. NSF International, like the CSA, is a nongovernmental, nonprofit organization that develops voluntary standards through a consensus process involving regulators, users, and others. Unlike the CSA initiative, however, which includes representatives of the CICA, the NSF’s Environmental Auditing Committee does not include representation from the AICPA.

Thus, not only does the United States differ in its definition of environmental auditing, but the AICPA also differs in its degree of interest and commitment to standard setting in the area of environmentally related services. Unfortunately, without the involvement of professional accounting associations, there will be a potential loss of expertise in standard-setting and reporting that auditors could otherwise bring to the area of environmental reporting.. It appears that there may be differing legal and political influences at work in the United States and Canada that have impacted and will continue to impact the extent of the profession’s involvement in environmental matters.

LEGAL AND POLITICAL INFLUENCES

Perhaps the most significant of the legal and political influences restricting the AICPA’s involvement in environmental matters is the litigation crisis in the United States.

The Litigation Crisis

CPAs in the United States have been experiencing tremendous litigation losses in conjunction with the attestation services they currently provide (Berton, 1992a, 1992b; Lochner, 1992; Weinbach, 1992). Out-of-court settlements resulting from allegations of negligence in conducting bank and savings-and- loan audits alone have ranged from a $65 million settlement by Arthur Andersen and Co. to a $400 million settlement by Ernst and Young (Solomon and Berton, 1993). While earlier estimates indicated that the accounting profession faced an additional $15 to $30 billion in liability claims (Arthur Andersen and Co. et al., 1992; Lochner, 1992), 1993 estimates place the liability claims against the Big Six firms at $30 billion (Solomon and Berton, 1993). The Financial Executives Institute (FEI) has reported that 9% of the total audit and accounting fees earned by the Big Six firms during 1991 was spent in settling or defending against law suits (FEI, 1992).

A recent survey found that a decreasing number of small CPA firms are doing audit work in the United States and that, among those still doing audit work, such work accounted for 31% of their litigation costs and only 6% of

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their annual revenues (Weinbach, 1992). Predictions are made that start-up companies, in particular, will soon find it difficult to find an auditor willing to accept the risks involved in performing an audit and that this fear of liability will increase the cost of audits and disrupt capital markets (Weinbach, 1992). That being the case, the social costs of an audit could exceed the social benefits derived from its performance (Chapman, 1992).

These dismal facts and forecasts have been directly attributed to the “joint and several” theory of legal liability (FEI, 1992; Weinbach, 1992). Under this theory, any one of the parties to a liability action may be held responsible for the total damages awarded in the suit, regardless of that party’s degree of responsibility (or negligence). Because the external auditor is often the only potential defendant who remains financially viable, plaintiffs in a suit alleging financial fraud often seek to recoup losses by pursuing the auditor’s “deep pocket” (whereby the “one least liable on a percentage basis could be most liable on a monetary basis if he or she is the only one with a pocket deep enough to satisfy the judgment”,) (Arthur Andersen and Co. et al., 1992; Lochner, 1992; Paskell- Mede, 1991). The FE1 is sufficiently concerned about the public perception of accounting firms as “deep pockets” that it has been instrumental in forming the Coalition to Eliminate Abusive Securities Suits. The FEI, in fact, regards the situation “so serious that it threatens the viability of individual firms and of the auditing profession as a whole” (FEI, 1992). Furthermore, the litigation crisis has already resulted in what has been described as “‘the tort tax’ . . . the increased cost of goods and services caused by runaway litigation” (Arthur Andersen and Co. et al., 1992). Former SEC Chairman Richard C. Breeden expects that this increased cost will tend to place U.S. businesses at a competitive disadvantage in the world market (Arthur Andersen and Co. et al., 1992). Given the extent of actual litigation and threats of litigation that the CPA currently faces in connection with financial statement audits, it would seem likely that the AICPA would be reluctant to venture into the area of environmental services, an area that does not have an established GAAP or GAAS.

Canadian firms are also subject to joint and several liability. However, Canadian accounting firms have been targeted as deep pockets to a lesser extent than U.S. firms. As recently as 1987, fears that Canada would follow in the highly litigious footsteps of the United States were dismissed as “largely unfounded, given the somewhat conservative legal climate [of Canada]” (Gunz, 1987). Although recent developments indicate an increase in litigation against Canadian auditors (Clifford, 1993; McKenna, 1993) these events occurred after the CICA Study Group was initiated and the commitment made to environmental matters.

National Political Agendas

Meanwhile, in the political arena, environmental matters have not reached a point of national consensus in the United States as they have in Canada.

Environmental Auditing Approaches 127

Although the U.S. Senate passed a bill in March 1993 (U.S. Congress, Senate, 1993) that would have renamed the Environmental Protection Agency, elevated it to cabinet agency status, and created a Bureau of Environmental Statistics, a similar bill (H.R. 109) was stalled in the U.S. House of Representatives at the time of this writing (U.S. Congress, House, 1993a). In 1990, the federal government of Canada established the “Green Plan”-a Canadian agenda that has no 1J.S. counterpart. The Green Plan “expresses the government’s commitment to work with Canadians to manage our resources prudently and to encourage sensitive environmental decision-making” (Canada, 1990).

Hence, the differences in the legal and political environments of Canada and the United States may very well have contributed to the differences in the pace at which the CICA and the AICPA have involved themselves in environmental matters. Despite these differences, however, there are two strong forces which are likely to draw the accounting profession willingly or unwillingly into this arena. These forces are globalization and public demands.

FORCES FOR CHANGE

Globalization

In an era of trade liberalization and environmental protection, questions abound regarding the impact of environmental regulations on trade partners (Gutfeld, 1992). The European Community has adopted a regulation, effective in 1995, that calls for companies doing business within Europe to comply with voluntary environmental management and audit guidelines. As a result, the ISO’s standards-setting process has been accelerated, and with it, the efforts of the CS A and NSF International.

With respect to the North American Free Trade Agreement (NAFTA), questions have been posed regarding the effect on the environment of differences between the relatively green environmental measures of the United States and Canada and those of their trade partner, Mexico (Gutfeld, 1992). Activists have called for the establishment of a trilateral environment commission that would monitor each nation’s “progress in adopting and enforcing laws to protect health, natural resources and the environment” (Gutfeld, 1992).

Accountants and auditors have an opportunity for proactive leadership in response to these global developments. The CSA and NSF International are currently developing national standards and are collaborating to establish North American standards for the performance of environmental audits. The CSA is also serving as the Secretariat to the ISO’s Technical Committee for Environmental Management, working towards formulating international standards. In the context of these initiatives, the accounting profession should move quickly to define its role in performing environmental audits and other environmentally related services.

128 INTERNATIONAL ACCOUNTING AUDITING & TAXATION, 3(2) 1994

Public Demands

Accounting, as a profession, “presumes an advanced and advancing body of knowledge and a commitment to service, hence, service to the public interest” (Briloff, 1986). Almost thirty years ago, Spacek (1969) expressed the view that the accounting profession “is a reader-serving process, not a figure-producing process”:

A profession begins with the public and its needs. Given the public needs, the profession develops backwards, first concerning itself with the requirements of the public (Spacek, 1969).

If accounting is going to serve the public interest, it must adapt to changing social and economic circumstances, which may include a preference among certain investors for investments in “green funds,” a growing demand for information regarding corporate accountability, and increasing corporate liability resulting from environmental regulation. In view of these trends, it is not unlikely that future investors will demand more information regarding corporate environmental performance and that they will also eventually seek independent assurance about the quality of this information.

Typically, investors desire information about an investee’s risks and opportunities (Thornton 1992). In today’s world, one of the risks facing many corporations is the risk of environmental liability resulting from the joint and several liability and strict liability provisions of environmental laws (CERCLA, 1988). Going beyond this present risk is the risk of future violations resulting from poor environmental controls. Given the enormous sums involved in environmental cleanup at present (Adams, 1993; Lorinc, 1992; McGraw, 1993) it is foreseeable that reporting on an entity’s environmental controls may become as important as reporting on its internal controls. Already, a number of corporations have begun to disclose selected environmental performance information to outside users (Aeppel, 1993; Mahood, 1993; Wall Street Journal, 1992). Only time will tell whether the investing public will demand external attestation services with respect to such information, but one thing is certain- the accounting profession must remain sensitive to the needs of investors and to the needs of the society that it purports to serve.

The term “environmental audit” has been used to describe a variety of environmentally related services, ranging from advisory services to compliance and system assessments. A Study Group of the CICA, in Canada, has issued a report that identified four different general types of services that have

Environmental Auditing Approaches 129

commonly and confusingly been referred to as “environmental audits.” The Study Group also articulated a broad set of recommendations relating to the role of the accounting profession in performing these environmentally related services. In the United States, by contrast, the AICPA convened an Environmental Issues Roundtable to consider a relatively narrow range of accounting and auditing issues relating to environmental matters.

Although the disparate approaches of the CICA and the AICPA may have been influenced by the differing legal and political environments in Canada and the United States, there seem to be two forces for change that are likely to draw members of the accounting profession in both countries into the area of environmental services-globalization and public demands. It is time for a profession that has been referred to as “watchdogs” for the public (Amhowitz, 1987) to act in the public interest on at least a hemispheric, if not a global scale. Otherwise, like the dinosaur who could not adapt to change, it might well find itself extinct . . . in fulfillment of the Big Six firms’ prophecy of doom (Arthur Andersen and Co. et al., 1992).

APPISNDIX

Recommendations from the CICA Research Report on Environmental Auditing and the Role of the Accounting Profession

I. Shaping Expectations-Accountability, Information and Audit: Needs, Models and Stakeholders

1. The CICA should participate in a multi-disciplinary, multi-stakeholder working forum in order to:

a) identify and define the information and assurance needs of internal and external users within the context of environmental accountability relationships and decision-making;

b) consider and agree on the types of reporting and examination processes and services, both investigatory and assurance-based, that will best satisfy the needs referred to above.

2. The CICA should contribute process and content expertise to those who are:

a) developing standards (criteria) for the design and assessment of environmental management systems and practices;

b) developing measures or indicators, systems and standards for reporting on an organization’s environmental performance and management effectiveness;

c) establishing standards for the conduct of and reporting on investigatory examination services as defined in this report;

130 INTERNATIONAL ACCOUNTING AUDITING & TAXATION, 3(Z) 1994

d) developing methodologies for and practitioner skills in the conduct

of services related to environmental management systems and

environmental examinations and assessments, including the

investigatory examination services defined in this report.

3. The CICA, with the involvement of and input from other professions,

disciplines, groups and organizations where appropriate in the process,

should apply its expertise and due process for standards-setting to establish

professional service standards and guidelines for the conduct of and

reporting on the environmentally-related assurance-based examination services proposed in this report.

4. The CA profession should take steps to communicate to the various

external stakeholder audiences its goals, strategies, roles and resources

relative to environmental accountability, reporting, auditing and the

profession’s services. In particular, the profession must manage stakeholder

expectations so as to minimize any gaps by clarifying unrealistic

expectations and promoting reasonable ones.

II. CAs’ Professional Standards of Service and Guidelines

5. The Auditing Standards Board of CICA should treat as a matter of top

priority the development and release of Handbook Standards for

Assurance-based Service Engagements.

6. The Auditing Standards Board of CICA should undertake a detailed review

of existing Auditing and Related Service Recommendations and Guidelines

and projects currently in progress. This review should recommend what

changes are needed or material needs to be added for the guidance of

members providing services of the types discussed in this report.

This review of Handbook material should be accompanied by a more

extensive review of members’ current practices and services of the types

discussed in this report to determine what in fact is currently being done

and why.

III. CAs’ Professional Competence and Credibility-Needs, Resources and

Specialists

7. The CA profession should develop and issue guidelines for its members

as to the required types and levels of knowledge and skill in the various

types of environmental service in which CAs have a role to play.

8. The CA profession should provide direction to its members on a curriculum

of suitable training and experience and a menu of professional development

programs and reference materials so as to enable members who so choose,

to acquire and sustain the levels of knowledge and skill they have

determined as necessary.

Environmental Audit& Approaches 131

9. The CA profession should review its Uniform Final Examination Syllabus to determine whether any changes are necessary or desirable in order to professionally educate students in such a way that they will (be) better able than now to provide services of the nature proposed in this report.

10. The CICA should establish and provide appropriate methods of support to members who choose to provide services in the environmental field, including such vehicles as a CA profession special interest group as a focal point, knowledge clearing house, learning forum and practitioner network.

IV. Public Practice of Multi-disciplinary Services and Rules of Professional Conduct

11. The CA profession should clarify the definitions of public accounting practice and related functions, at least with respect to the types of services discussed in this report, and amend its rules of professional conduct where necessary to reflect the definitions.

12. The CA profession should reconsider its rules of professional conduct with respect to acts by clients that appear to be illegal or contrary to the public interest, and make any changes that are desirable in balancing members’, clients’, and the public’s interests.

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