Up on Cripple Creek, a New Kind of Gold

An obscure accounting rule, combined with a shortage of urban real estate, is creating a rush to reclaim contaminated land. Now one company that made its fortune in the gold-rush era is cashing in again.

Berlin sees lots of sales of contaminated properties — banks advising companies on the sale or acquisition of contaminated properties often hire him as environmental engineer. He says there seems to be a “dramatic” disparity between the Big Four accounting firms and the rest of the market, as audit managers at small national and regional accounting firms are paying little attention to FIN 47, claiming that the future liability cannot be estimated accurately.

Others are tracking the effects of FIN 47 as well. In March consultancy Corporate Executive Board released a study on the impact of FIN 47, noting that companies are reporting disparate effects of the accounting rule. Consider the industrial manufacturing sector, says the study, in which United Technologies reports a $95 million FIN 47 charge, while Caterpillar simply calls its charge “immaterial.”

Perhaps the most tenacious tracker of the effects of FIN 47 on the balance sheet is the frequently updated Website for Advanced Environmental Dimensions, which recently noted that in an August 4 regulatory filing, argribusiness giant Archer Daniels Midland recorded a $9 million after-tax charge related to FIN 47.

While a $9 million charge will almost always be immaterial to a $37 billion behemoth like ADM, investors and analysts still say they want assurance that companies adhere to disclosure rules, especially rules that put what used to be a financial footnote onto the balance sheet.

As a matter of best practice, CFOs should ensure that processes are in place to identify asset retirement obligations (AROs), and assess, measure, and report the fair value of the obligations according to their own materiality determinations, counsels Kathryn Pavlovsky, a senior manager with Deloitte Financial Advisory Services. She warns that inadequacies in the ARO processes could result in the assignment of control deficiencies, or in the company being subject to other reporting risks.

The Advanced Environmental Dimensions Website also lists companies that disclose misstatements and deficiencies in financial controls attributed to AROs. For instance, such companies as US Neurosurgical, Waste Management, New Century Energy, and Millennium Chemical have issued restatements blaming the adjustment on accounting errors related to AROs.

Insurers are also keeping close tabs on the ripple effects of the accounting rule. “FIN 47 is the divergence of accounting and legal professions,” asserts Kenn Anderson, the central team leader for insurance broker Aon Environmental. “The $64,000 question is how to satisfy both masters.” Anderson explains that in the strictest sense, FIN 47 mandates that companies disclose the future cost of a legal cleanup obligation. But if the contamination remains unknown — or an estimate can’t be calculated — some attorneys argue that the legal obligation does not exist.

Nevertheless, the number of clients asking about insurance quotes related to environmental remediation and “toxic torts” (shareholder lawsuits) has increased by about 20 percent since the beginning of the year, reckons Anderson. “More often than not,” he says, “clients ask for help connecting the dots between the accounting side of the business and the risk-management side.”

The risk-management answer is more straightforward than the legal one: it doesn’t matter if the obligation is known or whether an estimate can be made, says Anderson. “If a company owned and operated and contaminated a site, they are responsible for cleanup.” The risk-management question is: “What do you do?” adds Anderson.

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