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# 4120 - ENVIRONMENTAL COMPLIANCE AUDITS

There are over 10,000 pages of federal environmental regulations, in addition to state and local environmental regulations, that apply to companies of all sizes, from your neighborhood diner to the state's largest chemical plant. In most cases, the same regulations apply to county, township, and municipal government entities. These regulations are long, complex, sometimes contradictory, frequently changing, and often seemingly unreasonable. It is extremely challenging to maintain 100 percent compliance even if you are aware of all the applicable regulations. Noncompliance with this regulatory maze can result in severe civil or criminal penalties that could mean fines or possibly even jail time.

There are probably hundreds of attorneys and professional engineers in Ohio who devote their entire careers to deciphering these regulations and trying to figure out how to apply them in the "real" world. Most business owners have their hands full trying to run their businesses from day to day; they simply do not have the time or training necessary to stay on top of environmental regulations. Only the largest companies are able to afford a full-time environmental compliance officer, so how can your company ensure compliance with today's ever changing environmental regulations?

What a Compliance Audit Can Do

An environmental compliance audit may be your answer. An environmental audit can do four things for your company:

• Identify the environmental laws and regulations that apply to your facility, industry, business, or activity;
• Identify facilities, equipment, processes, or practices that are out of compliance, or potentially out of compliance, with applicable laws and regulations;
• Identify and prioritize the measures that must be taken to attain compliance; and
• Suggest policy and management system improvements that will help ensure compliance in the future.

An environmental compliance audit is different from an environmental site assessment or a "Phase I." A compliance audit evaluates the environmental compliance status of ongoing operations with numerous regulatory programs, while a site assessment only evaluates real property for the presence of environmental contamination and potential liability under the Comprehensive Environmental Response Compensation and Liability Act (CERCLA or Superfund). In some cases, a Phase I site assessment may be performed as part of the compliance audit.

Audits must be specifically designed to address the regulatory programs that impact the facility, industry, business, or practice being audited. Common areas of concern addressed by environmental compliance audits include:

• Air pollution emissions and permitting (including particulates or dust);
• Water pollution emissions and permitting (including wetlands issues);
• Solid waste disposal issues;
• Hazardous waste generation, storage, treatment, and disposal;
• Underground storage tank management;
• Reporting and recordkeeping requirements (emissions, hazardous materials, spills, disposal, training);
• Storm water management and permitting; and
• Emergency planning.

Many environmental audits also evaluate compliance with workplace health and safety rules of the Occupational Safety and Health Administration (OSHA). It makes sense to include an OSHA audit if you are already making the significant investment of time and money required for an environmental compliance audit. Environmental compliance audits are useful not only for pointing out compliance problems but also in preparing for a regulatory agency inspection or the sale of a business.

Organizing the Audit Team

Environmental audits must be performed by personnel that:

• Understand the technical processes and equipment being evaluated;
• Are familiar with the applicable federal, state, and local environmental regulatory programs (and OSHA if a safety audit is included); and
• Can apply the laws and regulations to "real world" situations in order to determine if compliance problems exist.

Not many small- to medium-sized businesses have this kind of expertise in-house. Even if they did, there is a significant advantage to having the audit performed independently, by an outside environmental consultant or law firm. Self-evaluation is often difficult because company personnel may not be able to provide an objective analysis of activities that could represent possible regulatory violations.

In most cases, environmental compliance audits should not be performed by an individual, but by a team. That team should be composed of an employee who is thoroughly familiar with your company's procedures, processes, equipment, and systems; one or two technical environmental consultants who are familiar with the applicable regulatory programs; and legal counsel who is familiar with environmental law and regulatory agency procedures.

Obviously, a comprehensive environmental compliance audit can take a significant amount of time, and if you are using qualified technical and legal professionals, an audit is not an inexpensive exercise. Additional costs of responding to deficiencies revealed by the audit must be anticipated and included in the budget. It is important to keep the cost in perspective, however, because in the long run, noncompliance with environmental regulations can be even more costly. Noncompliance can put you out of business and in jail. Civil penalties alone for many environmental violations can be as high as $25,000 per day per violation.

The Audit Procedure

Environmental audits are usually conducted in three phases. First, indepth interviews are conducted with management personnel in order to obtain a basic understanding of your operations and to determine which regulatory programs apply. This phase also includes an examination of any existing safety programs, material safety data sheets (MSDS), waste manifests, regulatory submittals, permits, past violation or accident reports, and company policies. The second phase is the on-site evaluation of the facility, processes, operations, and practices, including interviews with company employees. The final phase is the preparation of a written report or an oral presentation to management.

Caveat: Protect the Results of Your Audit

Never contract for an environmental compliance audit unless you are committed to responding promptly to existing and potential areas of noncompliance revealed by the audit. Environmental compliance audits represent a double-edged sword. The existence of an environmental compliance program is one mitigating factor that the Department of Justice takes into consideration when evaluating a case for possible criminal enforcement. On the other hand, the written audit report often points out actual or potential regulatory violations and if obtained by regulatory agencies, it could be used as evidence against you or your company that could establish the "knowing" element required for criminal enforcement of many environmental regulations. Even without an audit report, failing to examine your compliance status and pleading ignorance of the regulations or existing violations is not an effective defense against prosecution.

Under the guidance of legal counsel, the audit report can be protected under the attorney-client privilege, or another available privilege, from subsequent discovery by a regulatory agency or a third party. Specific steps must be taken early in the audit planning process in order to successfully claim this privilege; early involvement of legal counsel, therefore, is critical.

To protect the audit report as privileged information, the environmental consulting firm conducting the audit should be hired by the attorney and the contract should indicate that the audit is being performed at the attorney's request in order to assist the attorney in providing legal advice. The attorney should be present at all meetings between the consultant and the client. Communications concerning the audit should be directed to counsel and written communications should be marked "Privileged and Confidential" and "Attorney Client Privilege." Counsel should have the opportunity to edit a draft copy of the consultant's final report before it is issued to management. Distribution of the audit report should be restricted to management personnel who "need to know" and who have responsibilities that will have a direct impact on environmental compliance decisions. Counsel's opinion will also be necessary to evaluate any reporting obligations or potential liabilities that may result from the audit findings.

The audit report will contain recommendations that should be prioritized for timely implementation. Management must document their responses to those recommendations and record the date measures were taken to address deficiencies cited in the report. Audit reports should always be drafted with eventual disclosure in mind. Without this follow-up documentation, the audit report represents documentation of violations indicating that corrective actions were recommended but not instituted by management.

Conclusion

An audit without careful planning, timely implementation of recommendations, and regularly scheduled evaluations of progress and current conditions is nothing more than a "smoking gun" that regulators will eventually find hiding in your filing cabinet. Properly executed, an environmental audit performed by a professional audit team is a valuable tool for improving facilities, processes, and practices with environment, health, and safety in mind. Correcting current deficiencies and making plans for future compliance will add to the security of your business by helping you avoid potential environmental damage, personal injuries, and regulatory enforcement actions.

-- June 1996, Thompson Hine LLP, -- reprinted with permission of Ohio Contractors Association