Third Party Auditing of Environmental Management Systems

1. Third Party Auditing of Environmental Management Systems Challenges, Choices and Opportunities for Environmental Governance in the 21st Century ASPA Research Conference March 29, 2004 Portland, Oregon

2. Challenges A summary of findings and conclusions concerning third party certification of environmental management systems under the ISO 14001 standard and its prospects for public policy

3. EMS as a tool for public policy • Some envision third party audits of a firm’s EMS as a potential tool for public policy • EMS auditors could reduce the need for EPA inspections and enforcement • Until recently the SEC financial auditing system served as a potential model • Use of EMS auditors envisioned by some as a way to help public sector redirect resources toward firms requiring more compliance assistance (higher priorities)

4. Prospects for EMS audits as a public policy tool clouded • Stakeholder confusion about ends and means • Are EMS audits a form of private regulation, compliance substitute? • EMSs are business-controlled, lacking in credibility • Business sees EMS auditors as an environmental cop, unannounced inspector • Some business views EMSs as a justification for public benefits • Some view EMSs strictly “by business, for business”

5. Prospects clouded by confusion of EMS audits with other forms of auditing • Confusion of EMS auditing with financial audits, compliance audits and EPA voluntary programs that have auditing as a component • If EMS audits are to become a tool for public policy, it is necessary to first eliminate these sources of confusion

6. Why business developed EMSs What is an EMS? An EMS audit? How do EMS audits compare to: Financial audits Compliance audits Public voluntary programs with auditing component Implications of oft-conflicting expectations What EMS proponents must do to make EMS auditing more viable Context for EMS challenges

7. Why business developed environmental management systems • Globalization of raw materials extraction and manufacturing • International variation among environmental laws • International variation in capacity of organizations to enforce those laws • Global activism to promote greater product stewardship

8. What is an environmental management system (EMS)? • A formalized set of management procedures to improve environmental performance • Iterative housekeeping and accounting measures • Plan, check, do • May or may not employ third party independent auditors to certify organization conforms with international ISO 14001 standard

9. What does the ISO 14001 standard require of firms? • Develop an environmental policy and public environmental statement • Devise set of management practices to achieve environmental goals, including • Prevention of pollution • Continual environmental improvement • Identify all environmental impacts, regulated and unregulated • Develop an EMS – scope of which may be broad or narrow (cover all facilities and activities or simply a few) • May or may not use independent EMS auditors to verify EMS conforms with the ISO 14001 standard

10. What do EMS auditors do? • Check to ensure that an environmental management system is in place • See that management and employees understand what the system requires • Audit documents that show EMS is in place (manifests, permits, purchase orders

11. What don’t EMS auditors do? • Verify that a firm is in compliance with all applicable federal and state environmental laws • Monitor emissions, effluents • Measure against quantitative, verifiable benchmarks • EMS audits are subjective, based on auditor’s background, training, experience and scope of a firm’s EMS

12. Potential models for EMS audits as a tool for public policy • Financial auditing • Compliance auditing • Voluntary EPA programs based in part on environmental audits

13. Financial auditing • Until recently, served as a potential model for using ISO 14001 audits as a public policy tool • Recent scandals involving a few high profile firms, individuals and accounting firms have cast the promise of this model into doubt • Important similarities and differences between financial and EMS auditing that color EMS perceptions

14. How EMS audits compare to financial audits • Financial audits of publicly traded businesses are mandatory • Driven by a need to ensure transparency • Soundness of information helps prevent market failure, protect public investors • EMS audits, in contrast, are purely voluntary and private, internally-driven to improve a firm’s conformance with ISO

15. How EMS audits compare to financial auditing • Like EMS auditing, does not compare performance of one firm to that of another • Unlike financial accountants, EMS auditors are not required to adhere to externally-defined professional standards • SEC requires financial auditors to be licensed and independent of the organization they audit

16. How EMS audits compare to financial auditing • Like EMS auditing, SEC relies on private firms to monitor and assure quality • Unlike EMS auditing, financial auditors rely in part on “peer review” • Unlike financial system, EMS is a purely private system • Whereas SEC registers financial auditing systems and oversees accounting practices, the purely private National Accreditation Program (NAP) oversees EMS auditors in the US

17. How EMS audits compare to financial auditing • Difference in transparency between the two approaches • Financial audit findings are disclosed in public reports, but not the results of EMS audits • Shared concerns regarding auditor independence • Financial auditing firms, like EMS auditing firms also have lucrative consulting arms creating potential conflicts of interest

18. How financial audits color perceptions of EMS audits • While it initially appeared as a promising model for public policy, financial auditing is a poor benchmark and scandals have had “spillover effect” on to EMS auditing under ISO 14001 • EMS audits viewed as even less transparent than financial audits • EMS and financial audits both have potential for auditor conflicts of interest

19. Compliance auditing • Evaluate whether regulated industry is in compliance with federal environmental laws and regulations • Adopted voluntarily to identify and correct compliance problems before EPA inspectors • Use accelerated during 1980s in response to Superfund’s strict liabilities • Industry concerns about accidental audit disclosure, adoption of state audit privilege laws

20. How EMS audits compare to compliance auditing • EMS audits primarily are designed to ensure whether an organization’s management system conforms to ISO, not federal laws • ISO 14001 does not require an organization to maintain compliance with laws • EMS auditors are neither trained nor expected to serve as compliance auditors

21. How EMS audits compare to compliance auditing • Compliance auditors, in turn, do not evaluate EMSs • EMS auditors to look to see that a management system in place to prevent recurring legal violations, compliance auditors don’t • Compliance audits are more straightforward, EMS audits subjective, either “in compliance” or not

22. How compliance audits color perceptions about EMS auditing • Environmental groups and regulators worry that EMS audit findings might shield regulated facilities from liability for potential wrongdoing • Business, in turn, worries about inherent subjectivity of EMS audits and how third parties could potentially use audit data.

23. Voluntary EPA programs based on audits • EPA voluntary self-disclosure and audit policy • To encourage voluntary self-disclosure about compliance violations • Environmental Leadership Program • Fewer inspections in exchange for more compliance and EMS audits

24. Voluntary EPA programs based on audits • Star Track • Recognition and regulatory flexibility in exchange for implementing EMSs, self-reporting, and improved reporting • Performance Track • Couples the use of EMSs with performance reporting goals and incentives (e.g., reduced discretionary inspections)

25. Moving toward using EMS audits as tool of a public policy • Star Track • Idea was to move toward SEC quasi public/private approach • Required compliance and EMS audit • Replaced EPA inspectors with private compliance auditors • Published reports on environmental performance including data from EMS audit

26. How EMS audits compare to EPA audit initiatives • Although Star Track and P-Track have EMSs as a component, they are not explicitly related to the ISO 14001 standard and auditing under ISO 14001

27. How EPA programs color perceptions about EMS audits • Idea that enforcement, inspections could be privatized a la Star Track viewed with great suspicion among EPA’s enforcement officers • Although neither ELP nor Star Track relied on EMS auditing under ISO 14001 to achieve privatization, use of EMS auditing as a potential policy tool cast ISO 14001 audits into further doubt

28. Proceed with caution • Public environmental initiatives that provide administrative or regulatory benefits in exchange for EMS adoption must be cautious in concluding that policy goals will be achieved through voluntary, third party EMS auditing alone.

29. Choices and Opportunities Steps required to strengthen EMS audits and provide them with a necessary foundation as a tool for public policy

30. Challenges, Choices Opportunities: Recommendations to improve EMS audits

31. Distinguish EMS audits from other types of auditing • Imperative that auditing of EMSs under ISO is distinguished from other types of environmental auditing and auditing in general • SEC requires public reporting of financial performance, ISO 14001 does not • SEC harnesses peer review to monitor auditors, ISO 14001 does not • Financial auditing firms liable for bad audits, ISO auditing firms are not

32. Manage expectations • EMS auditors under ISO 14001 and their clients must play a greater role in managing public expectations • US National Accreditation Program is conducting outreach for state regulators • EMS auditors should promote greater uniformity in auditing procedures, adopting effective peer review and communicating high professional auditing standards more clearly in public policy discussions.

33. Consider ways in which to improve transparency • EMS audits are confidential, yet goal of such audits is to assure EMS conforms with ISO 14001 standard • Confusion rendered by this choice contrasts sharply with openness of financial reporting • US bodies that develop ISO 14001 standards should consider how public reporting can be more explicitly addressed

34. Consider peer review • ISO 14001 auditors should consider adopting SEC peer review system to make professional interpretation more uniform • Yet even SEC’s additional safeguards have been proven inadequate to ensure transparency and auditor independence • These conditions must be met well before ISO 14001 contemplated as a public policy tool

35. Ensure greater auditor independence • ISO 14001 in US restricts EMS auditors from providing consulting and auditing services to the same client • However, if EPA and state agencies seek to harness ISO 14001 auditing to achieve public goals, policy makers must adopt stronger measures to ensure auditor independence.

36. Show how EMS audits benefit the public • For the most part, firms still view ISO 14001 audits as “by business, for business” • State and federal regulators should inform public and other parties about how EMS auditing can promote bottom line and public health • Commission research, publish reports, issue statements of public policy

37. Moving forward • Actors and organizations outside ISO 14001 auditing system need to better understand how system works • Their expectations are too high and too low • Too high because expectation is that EMS audits enforce compliance • Too low because underestimate EMSs potential to drive continuous improvements in environmental performance

38. Moving forward • Disabusing stakeholders of these misperceptions affords challenges, choices, and opportunities that proponents of EMS audits ignore at their peril.