Self-Auditing Remains Important Enforcement Risk Mitigation Tool for Industry
Environmental regulatory compliance auditing is a critical and central component of an effective environmental management system (EMS). To encourage companies to establish and maintain formal environmental management systems (including auditing), the EPA has long maintained a formal policy directing enforcement staff to waive the punitive portion of any penalties that would otherwise be assessed for violations if they are (1) discovered independently by a company through its EMS or a compliance audit, (2) voluntarily disclosed to EPA and (3) promptly corrected. While there are additional qualifying criteria, the so-called Audit Policy (“Incentives for Self-Policing: Discovery, Disclosure, Correction and Prevention of Violations,” 65 FR 19618 (Apr. 11, 2000)) has been used successfully by companies for many years in connection with compliance self-auditing programs. In a move welcomed by industry, the EPA last amended the Audit Policy in 2008 to provide special penalty mitigation incentives for new owners designed to encourage robust and comprehensive environmental compliance auditing in connection with merger and acquisition activities, allowing newly acquired companies to start with a “clean slate.”
Future of Audit Policy Was in Doubt
Notwithstanding the popularity of the Audit Policy among companies with strong environmental compliance programs, the EPA has been considering changing or dropping the program. In practice, the administrative process involved in processing company disclosures and issuing formal notices of audit policy compliance require significant EPA enforcement staff time, focused on enforcement issues important to disclosing companies but not necessarily an enforcement priority for the EPA. In 2012, EPA signaled that, particularly in a time of more limited budget resources and declining staff levels, it was looking for ways to reduce Agency investment in the Audit Policy program. Industry saw many submissions seemingly languish, and many feared the program was being or would be abandoned.
EPA Recommits to Audit Policy Program, Announces Changes
On June 10, 2015, the EPA confirmed its strong support for self-auditing among industry and announced changes to the Audit Policy implementation process designed to provide nearly the same benefits, while at the same time allowing the Agency to significantly reduce the staff resources allocated to Audit Policy matters. The heart of the change is adoption of a centralized electronic reporting process, referred to as the “eDisclosure Portal,” which will use forms and pull-down menus designed to efficiently collect and present all information needed to determine whether a disclosure qualifies for the penalty mitigation and other incentives under the Audit Policy. It will be designed to make the process almost entirely self-executing. The trade-off for this increase in efficiency is less certainty in some respects for industry, and a less flexible approach to addressing individual circumstances.
For example, the software will track initial discovery, disclosure, compliance correction and certification dates, and automatically notify the submitter that it does not qualify if an Audit Policy time deadline is missed. However, in most circumstances the system also will be able to automatically grant up to 30 additional days to complete compliance corrections — normally required within 60 days. Additional time, up to a total of 180 days, may be requested if justified; however, EPA will not rule on the sufficiency of the justification until it rules on whether the entire disclosure qualifies under the Audit Policy, likely long after the period has expired. Accordingly, companies taking more than 90 days to make compliance corrections will be risking that the Agency will later find that the extension was not warranted. For corrections requiring large investments and perhaps permit changes that might require more than 180 days to complete, companies may not be able to use the Audit Policy at all and may have to rely on traditional enforcement response policies for fair consideration of the company’s voluntary efforts.
Policy Changes Trade Process and Finality for Efficiency and Practical Comfort
The closure process also will be less certain. Currently, once the necessary compliance corrections are made, the EPA reviews the submitted information and documentation and makes a determination whether the disclosure met the nine Audit Policy criteria and qualified for penalty mitigation. If so, the EPA issues a “notice of determination” (with or without an accompanying administrative order or consent decree) that formally concludes the enforcement matter. In contrast, under the anticipated eDisclosure approach, the EPA will not rule on the disclosure report until such time — if ever — that it is contemplating an enforcement response for the particular disclosed matters. Until that time, or the expiration of the statute of limitations, the extent of the disclosing company’s liability exposure will be in limbo and, depending on the circumstances, may be viewed and carried on the books as material contingent, unasserted liability.
This approach frees the EPA to focus on cases consistent with its own priorities and resource levels rather than whatever compliance issues industry has discovered in the period. Presumably these would be the more significant disclosed violations where the submitter’s compliance with the Audit Policy is unclear or where significant economic benefit should be recovered. For disclosing companies, they will no longer routinely obtain finality for violations disclosed under the Audit Policy; however, their transaction costs and investment of management time for such disclosures are likely to be much less and, with good preparation and attention to deadlines, with little additional practical enforcement risk where the obligations are clear and can be timely corrected. The EPA has indicated that in exceptional cases, it is willing to consider auditing arrangements outside the eDisclosure process, but it appears that those arrangements will be rare.
Two other classes of self-disclosed violations will also get special treatment. Annual chemical storage and use reporting violations under the Emergency Planning and Community Right-to-Know Act (EPCRA) will not be allowed any time extensions, but submitters will automatically receive a “notice of determination,” essentially closing the matter. Nearly half of all disclosures under the Audit Policy have been of this type. In contrast, Audit Policy disclosures for newly acquired businesses will continue to be handled entirely outside the eDisclosure system, using current procedures. The special incentives under the Audit Policy for new owners include a number of features that are incompatible with the anticipated eDisclosure system, including extended disclosure deadlines and negotiated auditing agreements. The EPA’s continued dedication of staff resources to these kinds of disclosures reflects the significant practical value and environmental benefits attributed to compliance auditing conducted in connection with acquisitions.
The eDisclosure system and aspects of implementation policy are still in development; however, the EPA expects to launch the new system in fall 2015. As currently envisioned, the new system may provide less certainty and less flexibility to industry than current procedures, but the lower transaction costs and practical comfort it offers should provide enough incentive to keep companies auditing, disclosing and correcting violations in most cases and, in these times of limited resources, may present the best possible compromise.
James Votaw is a partner in the Washington DC, office of Manatt, Phelps & Phillips, LLP. His practice focuses on conventional, nanoscale, industrial, pesticidal and specialty chemical product regulation, policy and approval matters; environmental, health and safety law compliance auditing and enforcement defense; and associated business counseling and litigation issues. He can be reached at 202-585-6610 or firstname.lastname@example.org.
This column is part of a series of articles by law firm Manatt, Phelps & Phillips, LLP’s Energy, Environment & Natural Resources practice. Earlier columns in the fifth edition of this series discussed Evaluating Climate Change Impacts in NEPA Reviews, California’s Legislative Proposal on Climate Change, The Ban on Crude Oil Exports, California Governor’s Energy and Climate Plan and Fracking Is Not One-Size-Fits-All.