Environmental liabilities typically have been difficult to quantify due to the inherent uncertainty surrounding these projections. The promulgation of the Sarbanes-Oxley Act, along with studies by the Government Accountability Office, has pushed full disclosure of environmental liabilities to the forefront of corporate policy. Currently, prior to the adoption of ASTM standards by the Securities and Exchange Commission, Monte Carlo simulation can be used to provide defensible cost ranges, including defining what liabilities can be reasonably estimated. Using Crystal Ball as a Monte Carlo simulation tool, the uncertainties of environmental liability can be robustly, reliably, and defensibly quantified to provide a comprehensive environmental liability portfolio, which satisfies the requirements of the Securities and Exchange Commission reporting obligations.
The promulgation of the Sarbanes-Oxley Act in 1993 and the reaction to business practices such as were witnessed at Enron are fueling attention to the estimation of environmental liabilities that must be reported to the Security and Exchange Commission (SEC). Additionally, there are supporting trends in the environmental community that are causing an increase in attention to environmental liabilities in both public and privately held companies.
This paper discusses the use of Crystal Ball in estimating environmental liabilities for compliance with SEC requirements
and other purposes in environmental management. Objectives of probalistic estimates include:
- Compliance with SEC requirements,
- Fulfillment with investor and customer demands for environmentally responsible business practices, and
- Establishment of reliable and defensible environmental liability estimates to address future disputes.
2 ENVIRONMENTAL LIABILITY ESTIMATES
Environmental liabilities typically run in the millions of dollars with wide variations of costs depending on the extent of contamination, the length of time it takes to complete a clean-up, environmental regulatory requirements and other factors. To assist the reader’s understanding of the factors involved, we use the following example in the text that follows:
- 4,000 to 16,000 tons of contaminated soil needing removal.
- Application of a contaminant extraction technology estimated to operate between two to ten years.
- Nearby river sediment contamination that is yet to be fully investigated.
SEC requires that all liabilities that are “probable” and “reasonably estimated” be estimated and reported, as follows:
- No disclosure required if the event is not reasonably likely to occur (doubts or uncertainty about whether the event will occur should be resolved in favor of disclosure).
- No quantitative threshold for materiality.