A Guide to Environmental Auditing

March/April 1993 

Environmental auditing is an important management tool that can help your company assess its compliance status, and much more.

BY FRANK J. PRIZNAR

Frank J. Priznar is a vice president of Roy F. Weston Inc. (Washington, D.C.), as well as founder and past president of the Institute for Environmental Auditing (Alexandria, Va.).

If you want to determine where your company stands in terms of environmental compliance, what can you do? For many firms, the answer is to conduct an environmental audit. Such audits can do more than just assess your environmental compliance status, however. They can also help your company expedite the sale of a property, satisfy legal obligations, keep ahead of new regulations, and improve public relations, among other benefits.

To get the most out of an audit, therefore, you must first define what you want to know and what you want the audit to accomplish. After deciding those points, you must match your needs to the most appropriate type of environmental audit, as each one has a different purpose and provides different information.

Choosing the Right Audit

One of the most common types of environmental audits is known as an environmental liability site assessment (ELSA). Typically performed in conjunction with real estate transactions to learn if there are environmental liabilities that affect the value of a property, ELSA's aim at detecting issues such as contaminated soil or groundwater, the need for new or upgraded pollution-control equipment, and the transferability of environmental permits. The financial implications of ELSA findings, such as the cost of removing and disposing of contaminated soil, can then be taken into account before a final deal is made.

In today's real estate market, experienced dealmakers understand that knowledge is power at the negotiating table, so more than 90 percent of commercial property conveyances rely on an ELSA for important environmental data. And because the cost of environmental issues can be enough to significantly change, or even kill, a deal, it is not unusual for a buyer and a seller to commission separate ELSAs, each of which might cost $5,000 to $10,000 if performed by an outside firm.

Another common type of audit, an environmental compliance audit (ECA), is designed to produce a status report on where a business's operations stand regarding existing environmental regulations. While some may believe that ignorance is bliss, the findings of an ECA offer business owners and operators an opportunity to fix any potential compliance problems before their facilities are targeted for a surprise regulatory agency inspection that could result in devastating fines.

ECAs, which can cost about $8,000 to $15,000, typically concentrate on compliance with the Resource Conservation and Recovery Act (RCRA), the Clean Air Act, the Clean Water Act, and the Toxic Substances Control Act, although other federal environmental rules, as well as state and local statutes, may also be examined. In addition, some ECAs encompass Occupational Safety and Health Act issues because the process for detecting violations of that act is similar to that for finding noncompliance with environmental regulations.

An environmental management systems audit (EMSA) goes a step further to help companies learn the root causes of compliance violations, such as environmental lines of authority, qualifications of responsible staff, training, and communication. EMSAs are commonly performed for companies that have a track record of noncompliance and want to learn why, but they can be equally important to firms that seem to be spending an excessive amount of time or money on routine environmental issues and want to find ways to improve their systems. The cost of such audits can run $15,000 to $50,000.

A total environmental risk audit (TERA)—the last of the most common types of audits—focuses on assessing nonregulated but quantifiable risks. The best way to describe TERAs is with an example: Suppose a property is found to have soil contamination that, though below the concentration limit specified by the applicable regulations, could still pose environmental risk. The contamination could move to the groundwater and cause an addressable regulatory issue, for instance, or the regulatory standard could be lowered in the future to below the contamination level, thus triggering a violation or a variety of other hypothetical scenarios that could cause problems for the property owner. TERAs are designed to predict these risks and provide guidance on appropriate courses of action. Because they require unique customization, TERAs can be expensive, generating bills of up to $100,000.

See the table on page XXX for a general comparison of these audit types. Keep in mind, however, that each company's needs are different and factors such as a company's size, complexity, operating history, location, and period to be audited will affect the scope and cost of any audit.

Auditing Basics

Environmental audits can be conducted by internal employees, external professionals, or a combination of both. Employing a staff person who can perform such audits not only costs much less than hiring an outside auditor, but the practice also enables the employer to conduct audits whenever it wishes and maintain control of the audit findings, as few companies want an external auditor having knowledge of noncompliance issues. A staff auditor also offers the advantages of knowing the firm's products and processes, the location of its environmental permits and records, and its general policies. When hiring an internal expert, look for someone who has the personal traits that make a good auditor, namely attention to detail and natural curiosity. For advice on commissioning outside help, see the section that follows, "Going Outside."

If you choose to go the internal route, it may be helpful to involve outside help as well, especially if the audit program is new. A professional environmental auditor can provide checklists, help customize the audit program to the business, and recommend the appropriate audit scope. Perhaps most important, an outside auditor can teach auditing techniques to designated company employees, who will then be better able to complete their own audits in the future.

If your company chooses not to involve an outside auditor, however, you can get advice from a professional auditors' association, such as the Institute for Environmental Auditing (IEA) (Alexandria, Va.). The Environmental Protection Agency also offers some information on auditing, including policy statements, but no staff person responsible for assisting in this area. In addition, there are books on environmental auditing, newsletters, computer programs, and videotapes. Reading about environmental auditing, however, is like reading about how to ride a bicycle—it is a lot easier to have someone with experience show you how to do it.

In general, environmental audit programs—both internal and external—can be broken down into three stages: start-up, operation, and upgrading. In the start-up stage, you must make plans for completing the audit, as well as for responding to the findings. Completing the audit involves defining the scope of the audit (for example, will it focus on RCRA concerns or all environmental regulations?), preparing audit checklists (formulate them in-house or buy preprinted ones?), arranging the audit process so that operations are not unduly disrupted, and choosing an audit team (internal or external?).

Many audit programs fail because not enough forethought is given to what should be done if significant findings are discovered, such as serious noncompliance issues. There is a saying in the auditing profession: "Don't ask the question if you can't deal with the answer." In fact, if you discover noncompliance problems and fail to respond properly, you could be in deeper trouble than if you did not know.

The operation stage deals with the physical details of conducting the audit. In a typical ECA, for example, about three days are spent preparing, another two or three are spent verifying conditions—that is, looking around and asking questions—and another three are spent preparing a report. These estimates vary widely, of course, but if the audit takes much more time than this, you should ask why. In addition, though these examples focus on ECAs—which are conducted more often and require less expertise and knowledge than ELSAs, EMSAs, and TERAs—the information is relevant to the other audit types.

A typical audit team consists of at least two people. If you have an outside consultant working with you, ask if you can have some of your staff involved to gain experience. This will slow up the audit and probably cost more, but it could be worthwhile because of the valuable training it can offer. If the auditor does not want you to be involved in the audit, find another auditor.

In the final step of the operation stage—preparing reports—auditors must make sure to use accurate, thorough language and protect the confidentiality of the findings. While there are legal measures to minimize the chances of disclosure, none can be guaranteed, and part or all of the reports may someday be reviewed in court. To help protect the confidentiality of the report, its distribution should be limited. In general, only a company's officers and environmental experts need to know audit results.

The upgrading stage offers internal auditors an opportunity for more on-the-job training and provides company officials a chance to learn if there are ways to improve the existing program. This can be accomplished by sending internal auditors to training courses, or retaining an external auditor to evaluate the existing program and/or work with the internal auditors on an audit. In addition, as part of the company's audit upgrade, the audit checklists should be reviewed for new environmental requirements at least once a year.

Going Outside

For companies that do wish to hire external environmental auditors, there are many consultants available, but it is important to use caution. Some specialize in one or more types of audits. Others offer only some of the skills or knowledge required to complete certain audits. Still others can conduct the gamut of audits, start to finish. While it is generally more expensive to retain outside consultants to conduct audits than to use in-house personnel, there are instances in which outside consultants can provide needed skills that could be lacking internally. These typically are in the areas of new technology, environmental audit computer systems, changing regulations, and environmental health or toxicology.

To find the best outside consultant for your firm, ask the following questions

• Does the auditor know your business?

• Is environmental auditing the auditor's full-time occupation?

• Does the auditor adhere to generally accepted principles and practices?

• Does the auditor have an objective perspective?

• Does the auditor instill confidence by virtue of his or her knowledge and expertise?

• Does the auditor belong to an association of auditing professionals?

If an auditor does not answer these questions to your satisfaction, you can call the IEA for assistance or move on to the next candidate.

Be especially wary of outside consultants who, while offering audit services, hope to secure more lucrative cleanup work. Since their interest lies in finding a problem that will lead to another job, they may not pay attention to all the details of the audit. Retaining such a consultant could result in an incomplete audit, not to mention unwanted—and perhaps unneeded—proposals for larger projects.

 Keep in mind that an attorney may also have a role in your firm's audit program. An attorney can provide a thorough understanding of environmental laws and administrative procedures and help identify legal constraints that derive largely from statutes, regulations, common law, and court settlements. Also, an attorney can reduce the chances of outside disclosure of audit findings, as communications between attorneys and their clients are deemed privileged and confidential.

Armed with this basic knowledge, you should be able to select the right auditing path for your company. In the end, your environmental auditing efforts can help you accurately assess how well your operations comply with existing—and even future—regulations, and more.