Third Party Auditing of Environmental Management Systems Challenges, Choices and Opportunities for Environmental Governance in the 21st Century ASPA Research.

Third Party Auditing of Third Party Auditing of Environmental Management Environmental Management

Systems Systems

Challenges, Choices and Challenges, Choices and Opportunities for Environmental Opportunities for Environmental Governance in the 21st CenturyGovernance in the 21st Century

ASPA Research Conference March 29, 2004

Portland, Oregon

ChallengesChallenges

A summary of findings and conclusions A summary of findings and conclusions concerning third party certification of concerning third party certification of environmental management systems environmental management systems under the ISO 14001 standard and its under the ISO 14001 standard and its

prospects for public policyprospects for public policy

EMS as a tool for public EMS as a tool for public policypolicy

Some envision third party audits of a Some envision third party audits of a firm’s EMS as a potential tool for public firm’s EMS as a potential tool for public policypolicy

EMS auditors could reduce the need for EMS auditors could reduce the need for EPA inspections and enforcementEPA inspections and enforcement

Until recently the SEC financial auditing Until recently the SEC financial auditing system served as a potential modelsystem served as a potential model

Use of EMS auditors envisioned by some Use of EMS auditors envisioned by some as a way to help public sector redirect as a way to help public sector redirect resources toward firms requiring more resources toward firms requiring more compliance assistance (higher priorities)compliance assistance (higher priorities)

Prospects for EMS audits as a Prospects for EMS audits as a public policy tool cloudedpublic policy tool clouded Stakeholder confusion about ends and Stakeholder confusion about ends and

meansmeans Are EMS audits a form of private regulation, Are EMS audits a form of private regulation,

compliance substitute?compliance substitute? EMSs are business-controlled, lacking in EMSs are business-controlled, lacking in

credibilitycredibility Business sees EMS auditors as an Business sees EMS auditors as an

environmental cop, unannounced inspectorenvironmental cop, unannounced inspector Some business views EMSs as a justification for Some business views EMSs as a justification for

public benefitspublic benefits Some view EMSs strictly “by business, for Some view EMSs strictly “by business, for

business” business”

Prospects clouded by confusion Prospects clouded by confusion of EMS audits with other forms of EMS audits with other forms

of auditingof auditing Confusion of EMS auditing with Confusion of EMS auditing with

financial audits, compliance audits financial audits, compliance audits and EPA voluntary programs that and EPA voluntary programs that have auditing as a componenthave auditing as a component

If EMS audits are to become a tool If EMS audits are to become a tool for public policy, it is necessary to for public policy, it is necessary to first eliminate these sources of first eliminate these sources of confusionconfusion

Context for EMS challengesContext for EMS challenges

Why business developed EMSsWhy business developed EMSs What is an EMS? An EMS audit?What is an EMS? An EMS audit? How do EMS audits compare to: How do EMS audits compare to:

Financial auditsFinancial audits Compliance auditsCompliance audits Public voluntary programs with auditing Public voluntary programs with auditing

componentcomponent Implications of oft-conflicting expectationsImplications of oft-conflicting expectations What EMS proponents must do to make What EMS proponents must do to make

EMS auditing more viableEMS auditing more viable

Why business developed Why business developed environmental management environmental management

systemssystems Globalization of raw materials Globalization of raw materials

extraction and manufacturingextraction and manufacturing International variation among International variation among

environmental lawsenvironmental laws International variation in capacity of International variation in capacity of

organizations to enforce those lawsorganizations to enforce those laws Global activism to promote greater Global activism to promote greater

product stewardshipproduct stewardship

What is an environmental What is an environmental management system (EMS)?management system (EMS)?

A formalized set of management A formalized set of management procedures to improve environmental procedures to improve environmental performanceperformance Iterative housekeeping and Iterative housekeeping and

accounting measuresaccounting measures Plan, check, doPlan, check, do May or may not employ third party May or may not employ third party

independent auditors to certify independent auditors to certify organization conforms with organization conforms with international ISO 14001 standardinternational ISO 14001 standard

What does the ISO 14001 What does the ISO 14001 standard require of firms?standard require of firms?

Develop an environmental policy and public Develop an environmental policy and public environmental statementenvironmental statement

Devise set of management practices to achieve Devise set of management practices to achieve environmental goals, includingenvironmental goals, including Prevention of pollutionPrevention of pollution Continual environmental improvementContinual environmental improvement

Identify all environmental impacts, regulated and Identify all environmental impacts, regulated and unregulatedunregulated

Develop an EMS – scope of which may be broad or Develop an EMS – scope of which may be broad or narrow (cover all facilities and activities or simply a narrow (cover all facilities and activities or simply a few)few)

May or may not use independent EMS auditors to May or may not use independent EMS auditors to verify EMS conforms with the ISO 14001 standardverify EMS conforms with the ISO 14001 standard

What do EMS auditors do?What do EMS auditors do?

Check to ensure that an environmental Check to ensure that an environmental management system is in placemanagement system is in place

See that management and employees See that management and employees understand what the system requires understand what the system requires

Audit documents that show EMS is in Audit documents that show EMS is in place (manifests, permits, purchase place (manifests, permits, purchase ordersorders

What don’t EMS auditors What don’t EMS auditors do?do?

Verify that a firm is in compliance with all Verify that a firm is in compliance with all applicable federal and state environmental applicable federal and state environmental lawslaws

Monitor emissions, effluentsMonitor emissions, effluents Measure against quantitative, verifiable Measure against quantitative, verifiable

benchmarksbenchmarks EMS audits are subjective, based on EMS audits are subjective, based on

auditor’s background, training, experience auditor’s background, training, experience and scope of a firm’s EMSand scope of a firm’s EMS

Potential models for EMS Potential models for EMS audits as a tool for public audits as a tool for public

policypolicy Financial auditingFinancial auditing Compliance auditingCompliance auditing Voluntary EPA programs Voluntary EPA programs

based in part on based in part on environmental auditsenvironmental audits

Financial auditingFinancial auditing

Until recently, served as a potential model Until recently, served as a potential model for using ISO 14001 audits as a public policy for using ISO 14001 audits as a public policy tooltool

Recent scandals involving a few high profile Recent scandals involving a few high profile firms, individuals and accounting firms have firms, individuals and accounting firms have cast the promise of this model into doubtcast the promise of this model into doubt

Important similarities and differences Important similarities and differences between financial and EMS auditing that between financial and EMS auditing that color EMS perceptionscolor EMS perceptions

How EMS audits compare to How EMS audits compare to financial auditsfinancial audits

Financial audits of publicly traded Financial audits of publicly traded businesses are mandatorybusinesses are mandatory

Driven by a need to ensure transparencyDriven by a need to ensure transparency Soundness of information helps prevent Soundness of information helps prevent

market failure, protect public investorsmarket failure, protect public investors EMS audits, in contrast, are purely EMS audits, in contrast, are purely

voluntary and private, internally-driven to voluntary and private, internally-driven to improve a firm’s conformance with ISOimprove a firm’s conformance with ISO

How EMS audits compare to How EMS audits compare to financial auditingfinancial auditing

Like EMS auditing, does not compare Like EMS auditing, does not compare performance of one firm to that of performance of one firm to that of anotheranother

Unlike financial accountants, EMS Unlike financial accountants, EMS auditors are not required to adhere to auditors are not required to adhere to externally-defined professional standardsexternally-defined professional standards SEC requires financial auditors to be licensed SEC requires financial auditors to be licensed

and independent of the organization they and independent of the organization they auditaudit

How EMS audits compare to How EMS audits compare to financial auditingfinancial auditing

Like EMS auditing, SEC relies on private Like EMS auditing, SEC relies on private firms to monitor and assure qualityfirms to monitor and assure quality

Unlike EMS auditing, financial auditors rely Unlike EMS auditing, financial auditors rely in part on “peer review”in part on “peer review”

Unlike financial system, EMS is a purely Unlike financial system, EMS is a purely private systemprivate system Whereas SEC registers financial auditing Whereas SEC registers financial auditing

systems and oversees accounting practices, systems and oversees accounting practices, the purely private National Accreditation the purely private National Accreditation Program (NAP) oversees EMS auditors in the USProgram (NAP) oversees EMS auditors in the US

How EMS audits compare to How EMS audits compare to financial auditingfinancial auditing

Difference in transparency between the Difference in transparency between the two approachestwo approaches Financial audit findings are disclosed in Financial audit findings are disclosed in

public reports, but not the results of EMS public reports, but not the results of EMS auditsaudits

Shared concerns regarding auditor Shared concerns regarding auditor independenceindependence Financial auditing firms, like EMS auditing Financial auditing firms, like EMS auditing

firms also have lucrative consulting arms firms also have lucrative consulting arms creating potential conflicts of interestcreating potential conflicts of interest

How financial audits color How financial audits color perceptions of EMS auditsperceptions of EMS audits

While it initially appeared as a promising While it initially appeared as a promising model for public policy, financial auditing model for public policy, financial auditing is a poor benchmark and scandals have is a poor benchmark and scandals have had “spillover effect” on to EMS auditing had “spillover effect” on to EMS auditing under ISO 14001under ISO 14001

EMS audits viewed as even less EMS audits viewed as even less transparent than financial auditstransparent than financial audits

EMS and financial audits both have EMS and financial audits both have potential for auditor conflicts of interestpotential for auditor conflicts of interest

Compliance auditingCompliance auditing

Evaluate whether regulated industry is in Evaluate whether regulated industry is in compliance with federal environmental laws compliance with federal environmental laws and regulationsand regulations

Adopted voluntarily to identify and correct Adopted voluntarily to identify and correct compliance problems before EPA inspectorscompliance problems before EPA inspectors

Use accelerated during 1980s in response Use accelerated during 1980s in response to Superfund’s strict liabilitiesto Superfund’s strict liabilities

Industry concerns about accidental audit Industry concerns about accidental audit disclosure, adoption of state audit privilege disclosure, adoption of state audit privilege lawslaws

How EMS audits compare to How EMS audits compare to compliance auditingcompliance auditing

EMS audits primarily are designed to EMS audits primarily are designed to ensure whether an organization’s ensure whether an organization’s management system conforms to ISO, not management system conforms to ISO, not federal lawsfederal laws

ISO 14001 does not require an ISO 14001 does not require an organization to maintain compliance with organization to maintain compliance with lawslaws

EMS auditors are neither trained nor EMS auditors are neither trained nor expected to serve as compliance auditorsexpected to serve as compliance auditors

How EMS audits compare to How EMS audits compare to compliance auditingcompliance auditing

Compliance auditors, in turn, do not Compliance auditors, in turn, do not evaluate EMSsevaluate EMSs

EMS auditors to look to see that a EMS auditors to look to see that a management system in place to prevent management system in place to prevent recurring legal violations, compliance recurring legal violations, compliance auditors don’tauditors don’t

Compliance audits are more Compliance audits are more straightforward, EMS audits subjective, straightforward, EMS audits subjective, either “in compliance” or noteither “in compliance” or not

How compliance audits color How compliance audits color perceptions about EMS perceptions about EMS

auditingauditing Environmental groups and regulators Environmental groups and regulators

worry that EMS audit findings might worry that EMS audit findings might shield regulated facilities from shield regulated facilities from liability for potential wrongdoingliability for potential wrongdoing

Business, in turn, worries about Business, in turn, worries about inherent subjectivity of EMS audits inherent subjectivity of EMS audits and how third parties could and how third parties could potentially use audit data.potentially use audit data.

Voluntary EPA programs based Voluntary EPA programs based on auditson audits

EPA voluntary self-disclosure and EPA voluntary self-disclosure and audit policyaudit policy To encourage voluntary self-disclosure To encourage voluntary self-disclosure

about compliance violationsabout compliance violations Environmental Leadership ProgramEnvironmental Leadership Program

Fewer inspections in exchange for more Fewer inspections in exchange for more compliance and EMS auditscompliance and EMS audits

Voluntary EPA programs based Voluntary EPA programs based on auditson audits

Star TrackStar Track Recognition and regulatory flexibility in Recognition and regulatory flexibility in

exchange for implementing EMSs, self-exchange for implementing EMSs, self-reporting, and improved reportingreporting, and improved reporting

Performance TrackPerformance Track Couples the use of EMSs with Couples the use of EMSs with

performance reporting goals and performance reporting goals and incentives (e.g., reduced discretionary incentives (e.g., reduced discretionary inspections)inspections)

Moving toward using EMS Moving toward using EMS audits as tool of a public policyaudits as tool of a public policy

Star TrackStar Track Idea was to move toward SEC quasi Idea was to move toward SEC quasi

public/private approachpublic/private approach Required compliance and EMS auditRequired compliance and EMS audit Replaced EPA inspectors with private Replaced EPA inspectors with private

compliance auditorscompliance auditors Published reports on environmental Published reports on environmental

performance including data from EMS performance including data from EMS auditaudit

How EMS audits compare to How EMS audits compare to EPA audit initiativesEPA audit initiatives

Although Star Track and P-Track Although Star Track and P-Track have EMSs as a component, they are have EMSs as a component, they are not explicitly related to the ISO not explicitly related to the ISO 14001 standard and auditing under 14001 standard and auditing under ISO 14001ISO 14001

How EPA programs color How EPA programs color perceptions about EMS auditsperceptions about EMS audits

Idea that enforcement, inspections could Idea that enforcement, inspections could be privatized a la Star Track viewed with be privatized a la Star Track viewed with great suspicion among EPA’s enforcement great suspicion among EPA’s enforcement officersofficers

Although neither ELP nor Star Track relied Although neither ELP nor Star Track relied on EMS auditing under ISO 14001 to on EMS auditing under ISO 14001 to achieve privatization, use of EMS auditing achieve privatization, use of EMS auditing as a potential policy tool cast ISO 14001 as a potential policy tool cast ISO 14001 audits into further doubtaudits into further doubt

Proceed with cautionProceed with caution

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

Choices and OpportunitiesChoices and Opportunities

Steps required to strengthen EMS Steps required to strengthen EMS audits and provide them with a audits and provide them with a

necessary foundation as a tool for necessary foundation as a tool for public policypublic policy

Challenges, Choices Challenges, Choices Opportunities:Opportunities:

Recommendations to improve Recommendations to improve EMS auditsEMS audits

Distinguish EMS audits from Distinguish EMS audits from other types of auditingother types of auditing

Imperative that auditing of EMSs under Imperative that auditing of EMSs under ISO is distinguished from other types of ISO is distinguished from other types of environmental auditing and auditing in environmental auditing and auditing in general general SEC requires public reporting of financial SEC requires public reporting of financial

performance, ISO 14001 does notperformance, ISO 14001 does not SEC harnesses peer review to monitor auditors, SEC harnesses peer review to monitor auditors,

ISO 14001 does notISO 14001 does not Financial auditing firms liable for bad audits, Financial auditing firms liable for bad audits,

ISO auditing firms are notISO auditing firms are not

Manage expectationsManage expectations

EMS auditors under ISO 14001 and their EMS auditors under ISO 14001 and their clients must play a greater role in clients must play a greater role in managing public expectationsmanaging public expectations US National Accreditation Program is US National Accreditation Program is

conducting outreach for state regulatorsconducting outreach for state regulators EMS auditors should promote greater EMS auditors should promote greater

uniformity in auditing procedures, adopting uniformity in auditing procedures, adopting effective peer review and communicating high effective peer review and communicating high professional auditing standards more clearly in professional auditing standards more clearly in public policy discussions.public policy discussions.

Consider ways in which to Consider ways in which to improve transparencyimprove transparency

EMS audits are confidential, yet goal of EMS audits are confidential, yet goal of such audits is to assure EMS conforms such audits is to assure EMS conforms with ISO 14001 standardwith ISO 14001 standard Confusion rendered by this choice contrasts Confusion rendered by this choice contrasts

sharply with openness of financial reportingsharply with openness of financial reporting US bodies that develop ISO 14001 US bodies that develop ISO 14001

standards should consider how public standards should consider how public reporting can be more explicitly reporting can be more explicitly addressedaddressed

Consider peer reviewConsider peer review

ISO 14001 auditors should consider ISO 14001 auditors should consider adopting SEC peer review system to make adopting SEC peer review system to make professional interpretation more uniformprofessional interpretation more uniform

Yet even SEC’s additional safeguards have Yet even SEC’s additional safeguards have been proven inadequate to ensure been proven inadequate to ensure transparency and auditor independencetransparency and auditor independence

These conditions must be met well before These conditions must be met well before ISO 14001 contemplated as a public policy ISO 14001 contemplated as a public policy tooltool

Ensure greater auditor Ensure greater auditor independenceindependence

ISO 14001 in US restricts EMS auditors ISO 14001 in US restricts EMS auditors from providing consulting and auditing from providing consulting and auditing services to the same clientservices to the same client

However, if EPA and state agencies However, if EPA and state agencies seek to harness ISO 14001 auditing to seek to harness ISO 14001 auditing to achieve public goals, policy makers achieve public goals, policy makers must adopt stronger measures to must adopt stronger measures to ensure auditor independence.ensure auditor independence.

Show how EMS audits benefit Show how EMS audits benefit the publicthe public

For the most part, firms still view ISO For the most part, firms still view ISO 14001 audits as “by business, for 14001 audits as “by business, for business”business”

State and federal regulators should State and federal regulators should inform public and other parties about inform public and other parties about how EMS auditing can promote how EMS auditing can promote bottom line and public healthbottom line and public health Commission research, publish reports, Commission research, publish reports,

issue statements of public policyissue statements of public policy

Moving forwardMoving forward

Actors and organizations outside ISO 14001 Actors and organizations outside ISO 14001 auditing system need to better understand auditing system need to better understand how system workshow system works

Their expectations are too high and too lowTheir expectations are too high and too low Too high because expectation is that EMS audits Too high because expectation is that EMS audits

enforce complianceenforce compliance Too low because underestimate EMSs potential Too low because underestimate EMSs potential

to drive continuous improvements in to drive continuous improvements in environmental performanceenvironmental performance

Moving forwardMoving forward

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