An environmental audit is a self-evaluation of current compliance with applicable environmental regulations. The audit is typically performed by an outside environmental consultant. However, more sophisticated businesses can utilize advanced electronic compliance tools or their own EHS personnel.
An audit can be wide in scope (i.e. compliance with all applicable regulations) or it can review just one issue at a specific facility (Ex: Does a particular process need an air permit). Common areas of noncompliance identified in audits include:
- Failure to obtain permits or update expired permits;
- Failure to evaluate waste streams; and
- Failure to perform mandatory reporting (TRI and SARA are very common reporting violations)
There are many reasons why a company should consider performing an environmental audit, including the following:
1. Environmental Audit Policies and Immunity Laws
The states and federal government have laws and policies designed to encourage performing environmental audits. These policies and laws provide incentives as well as privilege over communications related to the audit.
U.S. EPA has its own environmental audit policy which encourages environmental audits and self-disclosure of violations. Under the current policy, U.S. EPA will provide penalty forgiveness if the company meets nine (9) requirements when making a self-disclosure. To take advantage of these incentives, regulated entities must voluntarily discover, promptly disclose to EPA, expeditiously correct, and prevent recurrence of future environmental violations.
Many states have passed environmental audit & immunity laws. Each state has different requirements with regard to self-disclosure and penalty forgiveness. However, in many cases the immunity laws provide very strong incentives to self-disclose and correct violations. The protections and incentives offered at the state level are often much better than available under U.S. EPA's audit policy.
- U.S. EPA maintains a list of all states that either have environmental audit and/or immunity laws
Many state's allow all records associated with the performance of an environmental audit to be privileged. U.S. EPA does not provide privilege for environmental audit. Therefore, in order to protect communications related to the audit from disclosure, the audit must be performed in a state that has passed an environmental privilege law.
Such privilege laws allow the company to review compliance and consultant with legal counsel prior to making a determination whether to self-disclose any violations identified during the audit. It is important to carefully review the exceptions to privilege. Some examples of common exceptions include:
- Criminal activities are not entitled to privilege
- If there is a mandatory duty under existing environmental regulations to report a violation (Ex: Title V certification of compliance)
- The audit cannot be performed after the company is aware it is the subject of a possible environmental enforcement action.
2. Buying a Business is the Perfect Time to Perform an Environmental Audit?
When purchasing a business it is often difficult to assess whether the seller has taken environmental compliance seriously. Most transactions rely upon three strategies to address the risk that the business being purchased may not be in compliance:
- Reps & Warranties in Purchase Agreement- This is the most common strategy. While a breach of a rep may provide buyer a right to indemnity, it doesn't protect buyer from the regulator. In the eyes of the law and regulator, the current owner is responsible for ensuring compliance.
- Data Room- It is common to request that documents related to environmental compliance be placed into the data room for the transaction. However, a data room that has no documents related to environmental issues does not mean there are no issues, it just means there may be no historical documents which help identify compliance issues.
- ASTM 1527-13 Phase I Environmental Assessment- An ASTM 1527-13 Phase I environmental assessment is geared to identifying historical releases of contamination, not whether a business or facility is in current compliance. Evaluation of compliance in terms of permitting, reporting or documentation are considered non-scope items for the typical Phase I environmental assessment.
As discussed above, each of these strategies have their limitations. A material compliance evaluation (i.e. audit) of the business or facility to be purchased is the best way to get a comprehensive evaluation.
3. The Risk of Noncompliance
You don't just need to be purchasing a business for an environmental audit to make sense. It is important to understand that noncompliance can expose the business to civil penalties. Most environmental statutes impose penalties on a per day basis. Therefore, the longer a business goes without correcting its violations, the larger the potential penalties.
It is important to determine the appropriate strategy for addressing noncompliance issues. Many companies simply turn in missing permits or reports without ever considering utilizing environmental audit laws or policies. However, the submission of those permits or records can immediately trigger a significant enforcement actions with penalties.
Once regulators identify serious noncompliance at a facility through their own inspections, it is much more likely that facility will get more intense scrutiny. This could mean more inspections or multi-media inspections. Most regulators are inclined to work with and provide leniency to companies that self-audit and correct their noncompliance.
4. Audit Laws and Strategies are Complex
If a business decides to conduct (or is thinking about conducting) an environmental audit, it is important to consult is experienced environmental attorney. Many of the laws and policies associated with privilege, immunity & self disclosure have unique and complicated requirements. It is important to put a strategy together before initiating an audit.