Sarbanes-Oxley Featured

9:48am EDT July 16, 2004
Has your company invested in or sold a brownfield property or a potentially contaminated property?

Are there any existing or pending lawsuits against your company involving environmental issues? Will your company likely be affected by an evolving trend in environmental law? An answer of "yes" or "maybe" to either question may place any corporate executive officer at risk of incurring the harsh penalties provided by the Sarbanes-Oxley Act for insufficient or inaccurate environmental disclosure.

The interconnection between corporate disclosure and environmental liability is nothing new. Since the SEC Act of 1934, publicly held companies have had to disclose information affecting their financial status, including environmental liabilities.

Now, however, CEOs and CFOs face stiff penalties and/or imprisonment for failing to provide accurate and complete SEC filings in accordance with Sarbanes-Oxley. Now more than ever, companies should seek business and environmental counsel in order to ensure compliance and avoid penalties.

 

What must a company disclose?

In determining what to disclose in a company's quarterly and annual SEC filings, any existing or potential environmental liabilities come into play. For example, a company must disclose, among other things, any "material effects" of complying with environmental laws, any existing or pending judicial proceedings involving environmental laws or regulations, or any known trends in environmental law which may affect the company.

These provisions require executives to assess whether an environmental liability or trend will materially impact a company. Making accurate assessments of materiality necessitates seeking advice from professionals who constantly track new legislation and rule amendments that could impact their clients.

 

High stakes for failure to comply

Under Sarbanes-Oxley, CEOs and CFOs must sign a certification stating that the company's SEC filings "[d]o not contain any untrue statement of a material fact or omit to state a material fact necessary." Moreover, CEOs and CFOs must take responsibility for "establishing and maintaining disclosure controls and procedures."

CEOs or CFOs who fail to abide by Sarbanes-Oxley's requirements face penalties of up to a $1 million fine and/or imprisonment for up to 10 years (up to $5 million and/or up to 20 years in prison for willful certification of any statement not complying with Sarbanes-Oxley). With such severe penalties for noncompliance, accurately identifying environmental liabilities, pending environmental litigation or trends in environmental law that may materially impact a company should command the attention of any CEO or CFO.

 

How can CEOs and CFOs ensure compliance?

The primary means by which a principal executive or financial officer may ensure compliance and limit possible penalties is through the development of a process that consistently assesses potential environmental compliance, enforcement, remediation and other environmental liabilities. Any such system will undoubtedly require continuing dialogue with both environmental and business counsel.

By developing a system which includes environmental counsel as well as internal or external environmental consultants in preparing quarterly and annual SEC filings, a company will be better equipped to accurately identify which environmental liabilities must be disclosed. Such a system will provide the best protection for both investors and the CEOs and CFOs responsible for compliance. Kathleen Lucas is a partner and chair of the environmental law group. Her practice is concentrated in environmental law, administrative law and general representation before state and federal agencies. Reach her at klucas@boselaw.com or (317) 684-5232. Daniel McInerny is a partner in the Environmental Group. Reach him at dmcinerny@boselaw.com or (317) 684-5102. Alex Intermill, summer associate at Bose McKinney & Evans, also contributed to this article.