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| Problem
3-6 |
|
| Analyzing Environmental
Liability Disclosures |
|
| The
U.S. government actively seeks the identification and cleanup of sites that
contain hazardous materials. The Environmental Protection Agency (EPA)
identifies contaminated sites under the Comprehensive Environmental Response
Compensation and Liability Act (CERCLA). The government will force parties
responsible for contaminating the site to pay for cleanup whenever possible.
Also, companies face lawsuits for persons injured by environmental pollution.
Potentially responsible parties include current and previous owners and
operators of hazardous waste disposal sites, parties who arranged for
disposal of hazardous materials at the site, and parties who transported the
hazardous materials to the site. Potentially responsible parties should
accrue a contingent environmental liability if the outcome of pending or
potential action is probable to be unfavorable and a reasonable estimate of
costs can be made. Amounts for environmental liabilities can be large. For
example, Exxon paid damages totaling $5 billion for the highly publicized
Exxon Valdez tanker accident. Estimates to clean up sites identified by the
EPA range as high as $500 billion to $750 billion. The “superfund” sites are
sites with the highest priority for cleanup under CERCLA. Estimates to clean
up these sites alone total $150 billion. The responsible parties face
additional lawsuits as well and these potential losses are not included in
these totals. |
|
| Required: |
| a. Discuss why environmental
liabilities are especially difficult to measure. |
| Environmental
liabilities are especially difficult to measure due to the unexpected nature
and extreme uncertainty found in environmental exposure when dealing with
property damage, cleanup costs, third party bodily damage, damages to natural
resources, etc. The timing of an
environmental disaster is impossible to predict as is the degree or size of
the disaster. |
| b.
Discuss how you would adjust the financial analysis of companies that are
predisposed to environmental legal action but have not accrued any contingent
loss amounts. For example, how might
you adjust your beliefs about the financial position of Union Carbide and it
competitors following the Bhopal tragedy? |
| If a
company is predisposed to environmental legal action but has not accrued any
contingent loss amounts, it would be better to include an amount in the
company’s loss reserves. The amount in
the ‘loss reserves’ can be adjusted as more information is gathered. My beliefs about the financial position of
Union Carbide and it’s competitors following the Bhopal tragedy would be that
it would continue a negative downturn as the losses due to envinronmental
factors increased. |
| c. Identify three industries that you consider
as likely to face significant environmental risk. Explain. |
| Gas and oil, aside from facing the usual
risks to water and soil, this industry also faces risk of
“fracking” which is blamed for sinkholes and earthquakes. |
| If not
properly regulated, the mining industry has the potential of releasing
substances that are harmful to the water, soil and air; not to mention the
depletion of natural resources. |
| Logging
is an industry that could face significant environmental risk because even
though timber can be considered a renewable resource, clear-cut logging of
old-growth/forests changes the biome for an extended period of time as it
takes years and years for the new trees to replace the ones taken. |
