Estimating Environmental Reserves

Estimating Environmental Reserves

It’s that time of year that you dread. There are piles of papers on your desk that continue to grow despite the extra hours you have been spending in the office. The paperwork seems insurmountable when all of the sudden you see an email reminder that next year’s environmental reserve estimate is due Monday morning for the accountant’s review. In the past, when you submitted your version of the estimate, there was endless back and forth with the accountant to provide clarification on your numbers and submit additional documentation. You wonder with this year’s deadline looming: how can we streamline this process? What is the accountant looking for? Does he not trust my judgment?

When an accounting audit is performed on a company with environmental liabilities, it often results in headaches for both the accountant and the project manager. There is overlap between the needs of both parties, but the difference between accounting and management practices leads to a paperwork nightmare. By understanding the perspective of the accountant, you will see small changes that you can make as a manager to help smooth these differences and create a more efficient auditing process.

Here are four tips to help you work more efficiently with your accountants:

  1. Understand what needs to be recorded. Activities that are conducted under environmental laws such as Superfund, RCRA Corrective Action, and Voluntary Remediation are considered “probable and estimable” and thus are reported in a company’s finances. However, future obligations associated with ongoing operations are not recorded until the obligation is incurred (i.e. the expected future costs associated with the closure of a landfill will not be recorded until the landfill is actually being closed).
  2. Use the best estimate, not worst case scenario. Often times, when creating cost estimates, a range of possibilities are used from the “low cost” scenario, where liabilities are minimal, to the “high cost” scenario, where conservative assumptions are used. Accountants are only concerned with the best estimate, meaning they want to have the most accurate cost estimate and not necessarily the worst case scenario. That being said, if there is no best estimate, an accountant will estimate parts of the liability and sum these values together and/or use the minimum amount in a range of estimates since this provides a probable value.
  3. Keep track of important documents. Documents needed for an audit include, but are not limited to lease/purchase agreements, insurance documents, contractual documents, regulatory correspondence, all acquired permits, technical investigation reports, memorandums with status updates, remediation activity reports, and Consent Decrees.
  4. Know the hierarchy of audit information. It is the accountant’s job to be unbiased in reviewing cases with environmental liabilities and, as such, she should be an independent expert focused on reviewing the aforementioned documents. In performing an audit, the accountant gives preference to information developed by the auditor themselves, then to third-party documentation, and finally to evidence provided by the manager. Oral information is considered the least reliable form of evidence to use in an audit.

Keep these four things in mind when you provide information to your accountants and you can look forward to a simpler, more effective audit process.

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Business Development Leader
Environment & Remediation

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