EPA’s self-audit policy – a case study

iStock_peekingUnder EPA’s Audit Policy – finalized on April 11, 2000 – if a company discover environmental violations through its own voluntary audit, it can report the violations to EPA within 21 days of discovery and seek significant reduction in civil penalties from the agency. The company must meet nine conditions to be eligible for a 100% reduction of the gravity portion of the civil penalty. (More on the gravity portion later).

The 9 conditions are:

  1. The audit must be systematic.
  2. It must be voluntary.
  3. Prompt disclosure of violations within 21 days.
  4. Audits must be independent of permit or settlement conditions.
  5. Correct violation within 60 days.
  6. Prevent recurrence of violation.
  7. No repeat violations.
  8. No serious harm to human health or environment.
  9. Cooperate with agency.

EPA’s civil penalty polciy has two portions: Gravity and economic benefits portions. The gravity portion of the civil penalty refers to the part of penalty that pertains to how much damage is done to the environment or the severity (gravity) of the violation. The economic benefits portion is the amount of money the violator has saved by not being in compliance.  For example, if you have been dumping your toxic wastes into the river for a year, you have saved a certain amount of money by not having to pay for the proper disposal of those wastes. The economic benefits portion of the civil penalty would be the amount of money you have saved that the agency wants from you.

Click here for a list of frequently asked questions about EPA’s self-audit policy.

On april 30, 2004, subsidiaries of Koch Industries purchased 40 manufacturing plants from DuPont. Twelve of these facilities are located in the United States. The company entered into a corporate-wide auditing agreement with EPA under EPA’s self-audit policy and uncovered over 680 violations of water, air, hazardous waste, emergency planning and preparedness and pesticide regulations. The company disclosed these violations in accordance with EPA’s  audit policy agreement. 

As part of a Consent Agreement, EPA waived the gravity portion of the civil penalty but fined the company $1.7 million as the economic benefits portion of the civil penalty. This would be the amount of money EPA estimated the company would have saved by not being in compliance from the time it acquired those 12 facilities to the time when all the violations are corrected.  The company also agreed to spend between $240 and $500 million to correct all the environmental violations at those facilities.

This is a classic case of how a large company can take advantage of EPA’s self-auditing policy to start over with a clean slate. By agreeing with EPA to conduct a self-audit, the company averted the gravity portion of the penalty and paid only $1.7 million for over 680 violations. Without the self-audit agreement beforehand, the company would have to pay a substantial gravity portion of the civil penalty in addition to the $1.7 million for economic benefits. 

This particular case has helped EPA to develop a separate self auditing policy designed specifically for “new owners” of facilities. If you acquire a facility and conduct a voluntary self-audit of that facility within 9 months from the date of acquisition, you may be eligible for waiver of the gravity portion of the civil penalty under the “new owner” policy which relaxes some of the nine conditions cited above.

You will still be liable for the economic portion of the civil penalty.


2 responses to “EPA’s self-audit policy – a case study

  1. Yes – the operative words are “may not always”. There is no silver bullet or one size fit all solution. The decision to go with the self-audit policy must be a management and legal decision that should not be taken lightly. In the case I cited, management made the right decision – in my opinion.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google+ photo

You are commenting using your Google+ account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )


Connecting to %s