The United States Congress enacted the Sarbanes-Oxley Act of 2002 (the "Act") in response to a series of corporate financial crises that shook the public's faith in the financial markets. The Act mandates more rigorous corporate governance practices, expands public companies' disclosure obligations, and imposes fines and prison terms for directors, executive officers and others for certain federal securities law violations. Separate and apart from the Act, both Congress and the SEC are considering proposals to adopt more rigorous environmental liability reporting requirements.

This article provides a brief summary of federal securities laws and regulations, as well as guidance from the SEC and various accounting authorities, applicable to the assessment and disclosure of environmental liabilities. It also highlights provisions of the Act that we believe will have a substantial impact on public companies with environmental liability concerns.

Three sections of Regulation S-K (which provides the disclosure requirements for periodic reports filed with the SEC) require the disclosure of environmental liabilities: Item 101, relating to the description of a company's business; Item 103, relating to disclosure of legal proceedings; and Item 303, relating to Management's Discussion and Analysis of Financial Condition and Results of Operations.

In addition, the SEC and other accounting authorities have published bulletins and statements regarding the assessment and disclosure of environmental liabilities, including:

• Statement of Financial Accounting Standards No. 5: addresses accounting and reporting of loss contingencies, such as site clean-up or remediation.
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• SEC Staff Accounting Bulletin 92: using a question and answer format, provides guidance regarding accounting and disclosure obligations for contingent environmental liabilities.
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• American Institute of Certified Public Accountants Statement of Position 96-1: provides guidance with respect to the recognition, measurement, display and disclosure of environmental liabilities, including benchmarks for making materiality determinations at various stages of assessment and remediation.

With the passage of the Act, environmental liability assessments and disclosures will be subject to unprecedented scrutiny. At the same time, the Act increases the personal accountability of corporate officers and directors for inaccurate or misleading disclosures. Among its numerous provisions, the Act:

• Establishes new certification, attestation, internal control and disclosure control requirements, as well as increased penalties and statutes of limitations for violations of these and other securities laws.
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• Creates new sanctions for CEOs and CFOs, including the possible disgorgement of bonuses and income from equity-based incentives in connection with certain financial restatements, gives the SEC the ability to "freeze" an executive's compensation under certain circumstances, and increases the SEC's powers to bar persons from future service as officers or directors of public companies.
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• Establishes new requirements for codes of ethics, codes of conduct or codes of corporate responsibility.
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• Enhances protections for corporate whistleblowers, including requiring procedures for whistleblowers to report directly to the audit committee, increasing the penalties for taking action against whistleblowers, and increasing civil and criminal protections for whistleblowers.
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• Imposes significant monetary and criminal penalties for fraudulently influencing, coercing, manipulating or misleading an accountant engaged in an audit to render a company's financial statements financially misleading.

Unfortunately, even the most sophisticated companies acknowledge that assessing and quantifying environmental liabilities can be extremely challenging. For example, making "materiality" determinations with respect to contingent environmental liabilities, quantifying a company's pre-allocation share of remediation expenses at a joint site, determining diminished value or marketability of environmentally impaired property, and assessing potential claims or penalties following an industrial accident or spill are complex exercises that require specialized, multi-disciplinary expertise and analysis.

In order to minimize the possibility of inaccurate or misleading disclosure, companies and their directors and executive officers increasingly rely on counsel and consultants to assist in evaluating internal controls and disclosure procedures, conduct due diligence, analyze and document "material" environmental liabilities, and review existing environmental liability disclosures for compliance with applicable securities laws, including the Act.