THE ENVIRONMENTAL AUDIT AS A COMPLIANCE MANAGEMENT TOOL
Environmental Choices, Fall 1994
The environmental compliance audit has become more widespread in the last few years. Many environmental laws have criminal sanctions when you know you are violating the law, and sometimes when you don't. The U.S. Department of Justice says we will think about your efforts to comply with the law when we're thinking about prosecution of environmental crimes. When a member of the board of directors decides that he doesn't to want worry about going to jail and it's worth spending some time making certain his organization is complying with the environmental laws, it gets done. You can do audits for many reasons but fundamentally you do them to put dollar figures on certain environmental costs, exposures or liabilities. The superfund property audit is the most common audit. If the bank is taking real property as collateral, they want to know whether that collateral is worth what it appears to be worth or if is worth less or has a negative value because it is contaminated. In addition to superfund costs, there are other costs of regulatory compliance: complying with the clean air act rules, complying with the water pollution laws, complying with hazardous waste disposal laws. These issues are the focus of an environmental regulatory compliance audit.
There are any number of ways you can incur liability under environmental laws or common law lawsuits. Some are listed in Figure 1, and they include personal injury claims, private property damage, natural resource loss and damage and penalties for non-compliance with laws and regulations. Permit or application fees are becoming significant. Agencies are charging $10,000.00 for a water permit application fee which was unheard of five years ago. As the agency regulators' budgets have gotten tighter, which has been the trend the last five years, you're seeing permit fees go higher. In addition to permit fees, the cost of control of equipment that you must install to comply with the permits and the cost of operating the control equipment once you have it installed can have an impact on operating costs. Emissions fees can be six figures for some plants under the air program. There is comprehensive regulation of any aspect of running a business. The environmental compliance audit covers all regulatory programs and all environmental costs: air pollution, water pollution, waste disposal, use of toxic substances, PCB's, asbestos and storage tanks, right to know laws.
CLEAN AIR ACT COMPLIANCE
The environmental program that is going to have the biggest impact on industry over the next ten years is the air pollution control program. The government is finally issuing regulations implementing the Clean Air Act Amendments passed in 1990. In November 1995 everybody who has a covered air emissions source is supposed to have a permit to operate. Under the old clean air act, you had to be a chemical plant, a steel plant or a power plant to be covered. The potential scope of the new air permit program is much broader because there are a lot more sources of air emissions than there are of point sources of discharge to water. If you are a covered source, you can't emit anything to the air without a permit. Your permit is going to tell you how much of whatever you can emit. You are required to have a certain level of air emissions control technology. You are required to monitor compliance and submit monthly monitoring reports under oath. The monthly reports show your permit limit for discharge of whatever and what you actually emitted. Compliance reports are a legal admission, which means if you find out the data is wrong later, you're going to have a real hard time wiggling out of it. There is both federal and state regulatory and citizen suit enforcement action.
Does the facility have all necessary permits is the first issue in an air compliance audit. You need a permit if you are a major source. The definition of major source depends on where you are - the attainment designation of the area - and what pollutant you are being regulated for. In each geographical area you have to find the attainment status for the criteria pollutants. You are going to have to figure out what pollutants you are emitting and decide if you have the potential to emit more than the threshold amount for that pollutant. If you are a major source, you need a permit.
In addition to the criteria pollutants, (particulates, NOX, SO2, VOC, CO) there is an entirely new regulatory program for air toxics. Congress came up with a list of 190 chemicals. If you use -in the course of one year 10 tons of any one of these chemicals or 25 tons per year of any combination of chemicals on the list you're considered to be a major source of air toxic chemicals. For the purposes of doing an environmental audit, if you run an operation continuously through the year, you're looking at an emissions standard of two point three pounds per hour to get you to that ten tons per year. That's not a lot of paint thinner or solvent to put you in need of a permit to emit air toxics and maximum available control technology. Maximum available control technology sounds like an expensive requirement, but it's not really so severe in the scheme of air regulation. It's got to be available.
Right now these air emission sources are probably unregulated and the emissions can be uncontrolled. Companies that are just scraping by right now with no controls of their air emissions may have a real problem two years from now when they have to have a permit and they have to show that they meet whatever level of control technology is required. The expense of installing any kind of control may be enough to put some marginal businesses under. For purposes of doing a compliance audit, you need to review emissions inventories. Many companies have no idea if they're a major source or if they are subject to additional requirements. In most states you are required to prove you are not a major source. An emissions inventory is needed to determine if regulations apply, see if emissions fees are due, quantify the value of emissions reduction credits and specify what kind of control equipment is appropriate. If the facility is a major source, consult an expert in air pollution control technology to give you some idea of likely impact of the new Clean Air Act requirements.
REGULATION OF WATER POLLUTION
Under the clean water act program, you need a permit from the government to discharge any kind of water with any kind of pollutant in it. There are three major kinds of permits: First, NPDES permits for point source discharges to a stream; second, discharges to POTW's (publicly owned treatment works). And third, you need a permit for storm water discharges, under a program that is relatively new. (This program wiped out a number of forests, but hasn't really improved water quality much.) If you're discharging any water containing a pollutant, you need a permit of some kind. A permit can come from the federal government. A permit can come from the state government. A permit can come from the county or the municipality or regional authority that operates your treatment plant. When you're auditing a plant for water pollution compliance you obtain and review the permit and permit conditions. Permits run from 50 pages to 3 or 4 pages.
One of the laws of bureaucracy is environmental regulations and limits tend to get more strict. The government tightened down on water pollution through the 80's. The standard for discharge of industrial water pollution now is to protect aquatic ecology, which means you're not concerned about pollutants which could injure humans. Humans are actually fairly tolerant of pollution. But algae, fish, snails and other aquatic organisms are not so tolerant of pollutants. Since the Federal Water Pollution Control Act was amended in 1987, the way we establish discharge limits is to find the most sensitive aquatic organisms and calculate a permit limit that will allow them to live. You end up with industrial waste water discharge standards that are thousands of times more strict than what is permissible in human drinking water and you're also pushing the limits of what analytical chemists can measure. The law is written to say your discharges will be safe for the aquatic environment. It doesn't matter if you can't measure it. It doesn't matter if you can't treat it to that standard. There are ways around this, of course, but it's a very strict regulatory program.
There is a tremendous backlog of unprocessed permit applications in most states. Water pollution permits are issued for up to five years, and if you get your renewal application in on time, 180 days before the permit expires, you are treated as having a new permit until the new one is processed. I have audited steel and chemical plants that are operating under permits that were issued in 1981. When you find somebody in that situation, look at their exposure very carefully, because the standards have gotten a lot tighter since 1981. Whenever they get their new permit, they're going to go from discharge limits of parts per million to limits in parts to billion very quickly. Treating to these "water quality based limits" is expensive. A lot of plants are operating with permits that do not reflect current standards and it can cost a lot of money to install controls to meet current standards.
If you look at discharge monitoring reports to see if the discharge meets permit limits you will see a huge mountain of paper, depending on how many outflows and parameters the plant is regulated for. The regulators know better than to deal with that much paper, so you will find that any regulatory agency has a computer summary of the discharge monitoring reports. Get a hold of the summaries that the state inspectors use - it will show permit limits and what was actually discharged. Correspondence with the agency should be reviewed. When the facility has an expired permit, be certain you see all of the correspondence that says that they have done what they have to do to keep their permit status current. Permit applications are a very detailed source of information on the plant and it is helpful to look at permit applications early in the audit. Permit applications give you summary information on the process, a flow schematic on water use and a summary of what water treatment process they use. You can then go to EPA guidance books and find out what the current state-of-the-art in treatment is for those facilities. Orders, consent agreements, notices of violations and inspection reports are other things to look at. If the plant's water pollution inspector has identified shortcomings in the plant, it's a quick way of identifying areas you should look at closely.
HAZARDOUS WASTE COMPLIANCE
The hazardous waste disposal regulations are so complicated that the government enforcement personnel frequently do not understand them. To begin, if you generate any kind of wastes, you must evaluate your waste to figure out whether or not it is hazardous. There are two ways a waste can be hazardous. First, it can have characteristics of a hazardous waste or second, it can be a listed waste. If you mix anything with a listed waste we pretend it turns into that waste. Let's assume you are auditing a typical manufacturing plant for compliance with hazardous waste laws. First, for every waste stream, they should have made a determination on whether the wastes are characteristic or they're not characteristic. To classify wastes, you use process knowledge and test results. You test for waste characteristics and you look at the list of waste streams in the code federal regulations to determine if the waste comes from a process, or is a chemical, defined to be a listed waste.
Once you have characterized all your waste streams, you have other duties as a generator of hazardous waste. You are required to choose an appropriate disposal site. If you look at the certification on the hazardous waste disposal manifest it doesn't say not only that you have picked a proper place to send your waste, it says you have picked the best place in the country to send your waste. You are also required to certify that you have a program in place to minimize the amount of hazardous waste you are generating. You are required to have manifests and record keeping. This is the "cradle to grave" tracking of waste. When you ship a waste, you sign a shipping paper called a waste manifest. The transporter will sign for it and check volumes and quantities of wastes. He is supposed to take it to the disposal site. You should get an acknowledgement from the disposal site saying that they have in fact received your waste within a few days. There are additional requirements for training employees and contingency plans for dealing with hazardous waste accidents.
TOXIC SUBSTANCE LAWS
The toxic substance control act is where you find the asbestos in public buildings regulations. The toxic substance control act also regulates use of PCB's and inspection of PCB equipment. If you know you have PCB containing equipment you are required to do periodic inspections and have annual reports showing that you have inspected your PCB equipment. The PCB rules restrict disposal of PCB equipment and PCB contaminated spill media and also tell you how you clean up spills of PCB's. If you are auditing a facility who uses chemicals, you should know that the Toxic Substance Control Act requires every chemical manufactured in this country, or imported into this country to have an EPA identification number and comply with the pre-manufacture notice rules.
In my experience only about one plant in three that is covered by the Emergency Planning and Community Right to Know Act actually complies with these requirements. The facilities covered by the federal law are shown in Figure 2. Many local governments have similar laws. There are two major duties under the federal "Right to Know" law. You are required to let your local emergency response agency know where you keep hazardous or flammable chemicals so that if there is a fire at your plant, they know how to respond to the emergency. The "chemical inventory reports" are required to be filed annually on March 31st. Along with the chemical inventory reports you file summaries or collections of your material safety data sheets for all the chemicals you have on site.
If you release reportable quantities of hazardous substances, you have to call the government and tell them. There are both emergency release notification requirements and annual reports. The "Form R" reports are due July 1st every year, for chemicals used at that plant. For each chemical on the government's list you tell EPA how much you had and what you did with it, how much went off in your waste water, or how much went off in your garbage. I audited a printing operation in Vermont recently. The company told me they knew they had to file Form R reports for the last five years for about six chemicals and had never gotten around to doing it. The penalties for not filing the reports are up to $25,000.00 per day per chemical. The theoretical penalty exposure because these people had not filed their reports was more than $6,000,000.00. The plant was being sold for about $5,000,000.00. I have negotiated settlements with EPA in similar cases in the low six figures. I advised my client their most likely exposure was two or three hundred thousand dollars. The Form R's toxic chemical release reports go to EPA and many of the computerized environmental data bases have Form R's available now on-line.
Every manufacturing plant should have release and spill reporting programs. You will find different requirements on chemical release and spill reporting and in different regulatory programs. A number of these laws also require you to train your employees and have contingency plans.
Under superfund, you can be liable as a potentially responsible party if you are an owner of the contaminated property now or at the time that the hazardous substance was put there, or if you are an operator of the facility now or at the time that the substance was put there. Banks that foreclosed on contaminated properties eventually were held liable as PRP's and discovered superfund. The banks didn't think this was fair because they didn't pollute. Well, the superfund law has nothing whatsoever to do about being fair. The superfund law is designed to clean up hazardous waste sites and get the money from people other than the U.S. taxpayers, and there is absolutely nothing fair about it. But banks think that they should have different rules and they actually did get somewhat different rules. The EPA lender liability rule was a cookbook approach to what banks could do and what banks could not do to avoid owner or operator liability under superfund. In February, 1994 a court vacated the rule, stating you cannot promulgate this cookbook approach to give somebody special treatment and make it binding on third parties as well.1 The court held Congress did not give EPA the power to make this kind of rule. Two weeks later the Clinton Administration released a Superfund Reauthorization bill which would give EPA the power to make rules on lender liability.
The Clean Air Act illustrates the current trend in terms of punishing polluters because it is the most recent of the major environmental laws. Congress has some new ideas here. First, we have field citations. Inspectors can write tickets for up to $5,000.00 a violation. Administrative penalty orders can be issued up to two hundred thousand dollars. Citizen suits for penalties and attorney's fees are permitted under the 1990 amendments and I expect a lot of citizen suit enforcement. EPA is now authorized to offer bounties to people who turn in polluters. There is a new provision in the Clean Air Act that says if the guy who turns the valve says that his boss told him to do it, the worker cannot be prosecuted criminally under the clean air act. In addition to civil penalties and injunctive relief, all environmental laws have criminal fines and imprisonment as a sanction.
In 1991, the United States Department of Justice released a guidance for prosecutors that said when we think about prosecuting people we will consider whether the corporation has an effective program to ensure environmental compliance. The directive is summarized in Figure 3. This procedure is only a guidance. In the federal prosecution system you have the attorney general in Washington and you have the U.S. attorneys in every town where there is a federal court. For civil cases, in order for the government to file suit, EPA has to go to the Justice Department in Washington. The criminal referral goes from the regional office to the EPA national office, to the Department of Justice in Washington. At all three levels they have to decide that the case is bad enough that they should file a civil action in court.
In the criminal area, the only person who has to decide whether to file a criminal prosecution for violation of the law is the United States Attorney in that town. He doesn't have to go to EPA. He doesn't have to go to the Department of Justice in Washington. It is interesting that it's a lot harder to file a civil case than it is a criminal case. The memo stating the government will consider your attempts to comply is not a law, it's not a regulation, it's a guidance memo. It is a good discussion of when companies make an attempt to comply with environmental laws and when they don't. But what the Guidance said was if you voluntarily report all of your sins, cooperate in the investigation, have preventive measures and compliance programs in place, which include compliance audits, we will think about this when we're thinking about whether to put you in jail. This memo has generated a whole new industry in the environmental auditing field, the environmental compliance audit.
How do you evaluate an environmental compliance program? EPA published a guidance on how they thought people should do environmental audits and what kinds of things should be in them.2 EPA and DOJ are pretty sophisticated about what companies are doing and what they should be doing. You find a lot of companies out there that clearly do not have the staff to keep up with their requirements. There are paper titles where people have responsibilities in eight other areas and they never get around to doing any environmental work. You find a lot of environmental compliance plans that are not appropriately funded. A checklist for auditing an environmental management program is attached as Figure 4.
Many companies commission environmental compliance audits to determine if their operations meet all requirements of environmental laws. As environmental compliance costs increase and the penalties for non-compliance become more severe, the environmental compliance audit will become more important in environmental compliance management programs.
Harry F. Klodowski, Jr. is an environmental attorney in Wexford, Pennsylvania who has done audits of steel and chemical plants, and represented industrial clients in air, water and waste matters. Harry Klodowski is a director of Environmental Information Association and is a past President of Environmental Information Association of Pennsylvania.
POSSIBLE ENVIRONMENTAL COSTS
- personal injury or exposure claims of employees and the public;
- private property damage;
- public natural resource loss or damage;
- penalties for non-compliance with laws and regulations;
- permit certification application fees and costs;
- remediation or control equipment costs, (capital and operational);
- identification and response to enforcement situations;
- Emissions or Discharge fees
- potential catastrophic incidents;
- decreased value of the asset and/or operation
EMERGENCY PLANNING AND COMMUNITY RIGHT TO KNOW ACT
42 U.S.C. § 11001
- Chemical Inventory Reports
- Release Reporting "Extremely Hazardous Substances"
- MSDS files
- "Form R" Annual Release Reports
Form R's Required
- 10 or more Employees
- SIC 20-39 (Manufacturing)
- Chemicals listed 40 CFR § 372.65
- 25,000 pounds manufactured
- 10,000 pounds used
U.S. DEPARTMENT OF JUSTICE 1991
"Factors in Decision on Criminal Prosecutions for Environmental Violations in the Context of Significant Voluntary Compliance or Disclosure Efforts by the Violator."
- Voluntary Disclosure
- Preventative Measures and Compliance Programs
- Pervasiveness of Noncompliance
- Internal Disciplinary Action
- Subsequent Compliance Efforts
AUDIT CHECKLIST: ENVIRONMENTAL MANAGEMENT
BUDGET AND PERSONNEL
- List employees in environmental, health, and safety related positions and their qualifications, degree of experience, etc.
- Are functioned staffed adequately?
- Obtain history of expenditures in environmental, health and safety
- Obtain list of past budget forecast and requests in these areas
- Have projects and needs identified in 3 and 4 been completed? Were needs adequately budgeted?
- Obtain copy of present budget forecast. Are all projects adequately budgeted?
- What necessary projects or needs are not budgeted? What are likely costs? Are there likely impacts of new or expected laws or regulations?
- What is the age, condition, expected life, etc. of pollution control and safety equipment? What expenditures may be expected?