Presentation on theme: "Third Party Auditing of Environmental Management Systems"— Presentation transcript:
1 Third Party Auditing of Environmental Management Systems Challenges, Choices and Opportunities for Environmental Governance in the 21st CenturyASPA Research ConferenceMarch 29, 2004Portland, Oregon
2 ChallengesA summary of findings and conclusions concerning third party certification of environmental management systems under the ISO 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 policyEMS auditors could reduce the need for EPA inspections and enforcementUntil recently the SEC financial auditing system served as a potential modelUse 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 meansAre EMS audits a form of private regulation, compliance substitute?EMSs are business-controlled, lacking in credibilityBusiness sees EMS auditors as an environmental cop, unannounced inspectorSome business views EMSs as a justification for public benefitsSome 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 componentIf EMS audits are to become a tool for public policy, it is necessary to first eliminate these sources of confusion
6 Context for EMS challenges Why business developed EMSsWhat is an EMS? An EMS audit?How do EMS audits compare to:Financial auditsCompliance auditsPublic voluntary programs with auditing componentImplications of oft-conflicting expectationsWhat EMS proponents must do to make EMS auditing more viable
7 Why business developed environmental management systems Globalization of raw materials extraction and manufacturingInternational variation among environmental lawsInternational variation in capacity of organizations to enforce those lawsGlobal activism to promote greater product stewardship
8 What is an environmental management system (EMS)? A formalized set of management procedures to improve environmental performanceIterative housekeeping and accounting measuresPlan, check, doMay or may not employ third party independent auditors to certify organization conforms with international ISO standard
9 What does the ISO 14001 standard require of firms? Develop an environmental policy and public environmental statementDevise set of management practices to achieve environmental goals, includingPrevention of pollutionContinual environmental improvementIdentify all environmental impacts, regulated and unregulatedDevelop 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 standard
10 What do EMS auditors do?Check to ensure that an environmental management system is in placeSee that management and employees understand what the system requiresAudit 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 lawsMonitor emissions, effluentsMeasure against quantitative, verifiable benchmarksEMS 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 auditingCompliance auditingVoluntary EPA programs based in part on environmental audits
13 Financial auditingUntil recently, served as a potential model for using ISO audits as a public policy toolRecent scandals involving a few high profile firms, individuals and accounting firms have cast the promise of this model into doubtImportant 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 mandatoryDriven by a need to ensure transparencySoundness of information helps prevent market failure, protect public investorsEMS 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 anotherUnlike financial accountants, EMS auditors are not required to adhere to externally-defined professional standardsSEC 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 qualityUnlike EMS auditing, financial auditors rely in part on “peer review”Unlike financial system, EMS is a purely private systemWhereas 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 approachesFinancial audit findings are disclosed in public reports, but not the results of EMS auditsShared concerns regarding auditor independenceFinancial 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 14001EMS audits viewed as even less transparent than financial auditsEMS and financial audits both have potential for auditor conflicts of interest
19 Compliance auditingEvaluate whether regulated industry is in compliance with federal environmental laws and regulationsAdopted voluntarily to identify and correct compliance problems before EPA inspectorsUse accelerated during 1980s in response to Superfund’s strict liabilitiesIndustry 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 lawsISO does not require an organization to maintain compliance with lawsEMS 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 EMSsEMS auditors to look to see that a management system in place to prevent recurring legal violations, compliance auditors don’tCompliance 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 wrongdoingBusiness, 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 policyTo encourage voluntary self-disclosure about compliance violationsEnvironmental Leadership ProgramFewer inspections in exchange for more compliance and EMS audits
24 Voluntary EPA programs based on audits Star TrackRecognition and regulatory flexibility in exchange for implementing EMSs, self-reporting, and improved reportingPerformance TrackCouples 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 TrackIdea was to move toward SEC quasi public/private approachRequired compliance and EMS auditReplaced EPA inspectors with private compliance auditorsPublished 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 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 officersAlthough neither ELP nor Star Track relied on EMS auditing under ISO to achieve privatization, use of EMS auditing as a potential policy tool cast ISO audits into further doubt
28 Proceed with cautionPublic 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 generalSEC requires public reporting of financial performance, ISO does notSEC harnesses peer review to monitor auditors, ISO does notFinancial auditing firms liable for bad audits, ISO auditing firms are not
32 Manage expectationsEMS auditors under ISO and their clients must play a greater role in managing public expectationsUS National Accreditation Program is conducting outreach for state regulatorsEMS 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 standardConfusion rendered by this choice contrasts sharply with openness of financial reportingUS bodies that develop ISO standards should consider how public reporting can be more explicitly addressed
34 Consider peer reviewISO auditors should consider adopting SEC peer review system to make professional interpretation more uniformYet even SEC’s additional safeguards have been proven inadequate to ensure transparency and auditor independenceThese conditions must be met well before ISO contemplated as a public policy tool
35 Ensure greater auditor independence ISO in US restricts EMS auditors from providing consulting and auditing services to the same clientHowever, if EPA and state agencies seek to harness ISO 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 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 healthCommission research, publish reports, issue statements of public policy
37 Moving forwardActors and organizations outside ISO auditing system need to better understand how system worksTheir expectations are too high and too lowToo high because expectation is that EMS audits enforce complianceToo low because underestimate EMSs potential to drive continuous improvements in environmental performance
38 Moving forwardDisabusing stakeholders of these misperceptions affords challenges, choices, and opportunities that proponents of EMS audits ignore at their peril.