ISO 14000: Environmental auditing for the manufacturing sector

IS0 14000: Environmental Auditing for the Manufacturing Sector

Sharon Campbell and J. Ralph Byington

Sharon Campbell is an Associate Professor at the University of North Alabama. Her writings have focused on the implementation of environmental standards, I S 0 9000 and 14000, and the functions of the internal auditor. J. Ralph Byington is a Professor and the Accounting Department Chair at Georgia Southern University. He has published extensively in the financial accounting and auditing areas and is a frequent speaker on implemn- tation of accounting standards.

A new set of environmental management and auditing standards will impact manufacturing companies. The authors explain the new standards, and then discuss what measures manufacturing firms are actually taking based on a survey. They also review the applicability of the new standards to publicly-held manufacturers.

ndustry is pressured by diverse stakeholder groups to take responsibility for its effects on the natural environment. The I stakeholders include consumers, shareholders, investors,

communities, employees, and governments. Firms operating in the manufacturing sector in the United States are subject to a myriad of environmental regulations and to public scrutiny. Management has responded to these demands for increased environmental accountability by developing environmental management systems (EMS). An environmental management system is an organization’s structure of responsibilities and policies, practices, procedures, processes, and resources for protecting the environment and managing environmental issues. In an effort to provide a consistent, internationally recognized model for environmental management, the International Standards Organization (ISO) has developed a series of environmental management standards, IS0 14000.

Before the advent of IS0 14000, firms in the manufacturing sector had already developed organizational structures t Q address the issue of environmental protection. This article provides a description of three components of manufacturing firms’ EMSs: (1) structures providing evidence of top-level commitment to environmental protection, (2) structures designed to disseminate environmental protection values throughout the organization, and (3) environmental auditing. The data were obtained from a survey mailed to the directors of internal auditing of publicly-held manufacturing companies.

In the first section of the article, an overview of the IS0 14000 model is presented that includes the EMS standards and the environmental auditing standards. The recent response of the

CCC 1044-8136/98/0903107-12 Q 1998 John Wiley & Sons, Inc.

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Institute of Internal Auditors (IIA) to IS0 14000 is examined. The research design is presented in the second section, while the results of the survey are summarized in the third section. The article concludes with a discussion of the applicability of the IS0 framework for EMS to publicly-held manufacturers.

Title

IS0 14000 Following the success of the IS0 9000 series of quality management

standards, the International Standards Organization developed a series of environmental standards, IS0 14000. Before the standards had advanced from the draft stage, the IS0 14000 series was hailed as the international model for environmental management systems. The IS0 14000 EMS model is comprised of several guideline standards and one compliance standard, IS0 14001. The set of standards is divided into six categories: (1) environmental management systems, (2) environmental auditing, (3) environmental performance evaluation, (4) environmental labeling, (5 ) life-cycle assessment, and (6) environmental aspects in product standards.

Many ofthe standards are still invarious stages ofthe draft process. "he following five standards for environmental management systems and environmental auditing have been published (see Exhibit 1).

IS0 14001-ENVIRONMENTAL MANAGEMENT SYSTEMS IS0 14001 is the only standard of the IS0 14000 series through

which a company can obtain independent certification. In a world of

Exhibit 1. IS0 14000 Published Standards

IS0 14001

IS0 14004

Environmental Management Systems-Specification and Guidance for Use

Environmental Management Systems-General Guidelines on Principles, Systems and Supporting Techniques

IS0 14010

IS0 1401U1

Guidelines for Environmental Auditing-General Principles

Guidelines for Environmental Auditing-Audit Procedures-Auditing of Environmental Management Systems

IS0 14012 I Guidelines for Environmental Auditing-Qualification Criteria for Environmental Auditors

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I S 0 14000: Environmental Auditing for the Manufacturing Sector

The resulting EMS should address the organization’s environmental policy and promote continuous improvement of the system.

competing environmental claims, stakeholders desire a third-party seal of approval. A company that achieves registration to this specification standard can proclaim itself as an IS0 14001 company. Like the other IS0 standards, IS0 14001 is designed to be applied by any organization in any country regardless of the organization’s size, process, economic situation, and regulatory requirements.

IS0 14001 consists of five elements: (1) policy, (2) planning, (3) implementation and operation, (4) checking and corrective action, and (5 ) management review. This specification standard outlines the planning and operational elements of an effective EMS and requirements for review and improvement.

Senior management commitment is required before the commencement of an IS0 14001 program. Top management should provide a focus for the EMS by defining the organization’s environmental policy. Next, an initial review of the firm’s existing environmental program should be conducted. Based on the results of the initial review, a strategic plan is developed. The strategic plan sets the framework for the participation of the responsible and the affected parties within an organization. Objectives and targets are set by the organization, not by the IS0 14001 standard. After the EMS is implemented, its progress should be continually monitored. To facilitate the continuing effectiveness of the EMS, management should regularly review and evaluate results of audits, results of monitoring, corrective actions, and current and proposed legislation. The resulting EMS should address the organization’s environmental policy and promote continuous improvement of the system.

IS0 14010-14012-GUIDELINS FOR ENVIRONMENTAL AUDITING

The three published environmental auditing standards cover general principles of environmental auditing, auditing of EMS, and qualification criteria for environmental auditors. IS0 14010, the general principles standard, is intended to be used for EMS, environmental statement, or compliance audits. The scope of the audit is leR up to the organization. Since the standard has broad applicability, IS0 14010 presents simple guidelines for auditing:

1. 2.

3.

4.

5.

6.

Auditors should be objective, independent, and competent. The auditors should act with professionalism, confidentiality, and discretion under the orders of the client. IS0 14011 should be followed with a strict and systematic audit procedure. Audit criteria should be established before the audit, evidence collected to compare to the criteria, and findings written up based on this comparison. The level of assurance and risk in the findings should be established. A written report should be submitted to the client.

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Annex B of I S 0 14012 calls fir an entity to step forward and address the task of environmental auditor certification.

IS0 14011 Part 1 focuses on EMS audits by providing guidance on how to audit for IS0 14001. The audit is primarily concerned with conformance and effectiveness of the EMS. Thus, the auditors are to evaluate the level of conformance with company-set goals and objectives and to identify opportunities for improvement. They are charged to collect evidence, make sound judgments, protect documents collected, prepare working documents, interview people, and verify conformance and effectiveness of the EMS. IS0 14011 Part 1 also covers the elements of the final written audit report. The audit report is to include the audit plan; a list of critical criteria of the EMS under audit; a summary of the audit process; and a list of findings on conformance, effectiveness, and management review of each element of IS0 14001.

Next, the environmental auditing standards turn to the issue of the qualifications of an auditor conducting EMS audits. As stated within IS0 14012, a qualified auditor must meet the following minimum requirements:

1.

2.

3.

4. 5.

a college degree and two years of work experience in an environmental related job; training in methods of auditing, environmental regulations, environmental processes, environmental impacts, and EMS standards; experience as a trainee in a t least four audits for not less than 20 total days of duration under the guidance of a lead auditor; demonstrated competency in auditing; and strong communication skills, interpersonal skills, objectivity, and be well organized.

Environmental auditing requires a unique blend of auditing knowledge and of environmental regulations and issues. The need for a nationally or internationally recognized method of accrediting environmental auditors is clear. Annex B of IS0 14012 calls for an entity to step forward and address the task of environmental auditor certification.

THE INTERNAL AUDITING PROFESSION’S RESPONSE TO IS0 14000

During the 199Os, the internal auditing profession has deliberated over its role in environmental auditing. Scholars and leaders in the profession assert that internal auditors can and should provide important services in this area. Greenberg encouraged management to view environmental management as a component of internal control and to apply the principles of internal control to this critical area (see Richard S. Greenberg, “Applying Internal Control to Environmental Management,” Environmental Finance, (Spring 1992)). The internal auditor‘s responsibility for reviewing the organization’s system of internal control is established by the “Standards for the Professional Practice of Internal Auditing“ promulgated by the IIA. Section 320 ofthe

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The IIA provides opportunities for professional development in the area of environmental auditing.

Standards calls for the review of systems designed to ensure compliance with internal policies and external regulations:

Internal auditors should review the systems established to ensure compliance with those policies, plans, procedures, laws, and regulations that could have a significant impact on operations and reports, and should determine whether the organization is in compliance.

Lack of compliance with environmental policies, laws, and regulations can prove to be very costly in dollars and in damage to reputation. The oil spillage by the Exxon Valdez resulted in a $5 billion damage award. Although the internal auditing profession recognized the gravity of environmental risks, actual involvement by the internal auditing function in environmental auditing was typically low. Survey research of the manufacturing sector provided evidence that the internal auditing function either did not participate in environmental auditing or played a supporting role rather than a major role in the process. The major reasons for this limited involvement are lack of technical expertise in environmental areas and a lack of knowledge of environmental regulations.

The IIA provides opportunities for professional development in the area of environmental auditing. In 1993, the Institute published an introductory report that compiled the ideas and experiences of organizations with relatively high environmental risk into best management practices. Periodically the IIA conducts seminars on how to get started in environmental auditing. In January 1997, the IIA and the Environmental Auditing Roundtable, an organization of environmental professionals, announced an agreement to engage in a joint project to credential environmental auditors using criteria in the IS0 14000 document.

The joint venture resulted in the formation of the Board of Environmental Auditor Certifications (BEAC), an independent, nonprofit organization, to provide credible and professional certification of environmental auditors. The first certification offered by the BEAC is the BEAC 14000 Plus Certified Auditor. BEAC certification criteria build on the IS0 14012 auditor qualification criteria, 14011 audit procedures, and 14010 general principles. “Plus” refers to a strong compliance or conformance component. A certified environmental auditor should have sufficient knowledge of the regulatory compliance process and the types of systems used by the regulated community to effectively assess conformance to the IS0 14001 EMS specifications. Candidates for the certification must meet strict education, experience, formal environmental training, and other requirements. An additional requirement for certification is the successful completion of a three-hour professional exam. The Environmental Auditing Roundtable and the IIA offer a five-day comprehensive training course to assist candidates in preparing for BEAC certification. The first in a series of courses was offered in the summer of 1997.



WHAT ARE COMPANIES DOING? Let’s now look at what publicly-held companies are doing in this

area. A study was conducted to find out. The subjects of this study were publicly-held companies that report to the U.S. Environmental Protection Agency’s (EPA) Toxics Release Inventory (TRI). The TRI was mandated by the Emergency Planning and Community Right- to-Know Act of 1986, also known as Title I11 of the Superfund Amendments and Reauthorization Act. Manufacturing facilities with ten or more employees are required to report their estimated releases and transfers of listed toxic chemicals if they meet the activity thresholds for any of the reportable chemicals. Seven industry classifications were chosen because of their reported impact on the environment and their inclusion in previous research.

Primary data were collected by means of a mail survey of companies operating in one or more of the following industry groups:

SIC Codes 20 24,25, & 26

28 29 & 30 33 & 34 35 & 36 37

Industry Food and kindred products Forestry products-lumber, wood

Chemicals and allied products Petroleum refining and plastics Primary and fabricated metals Machinery and electronic equipment Transportation equipment

products, and paper

In the absence of an established survey instrument, an instrument was developed to elicit information on selected attributes of EMS. Information contained in previous surveys on environmental management and environmental auditing and in related nonempirical literature was considered in the development of the instrument. The survey instrument was reviewed by professionals in the fields of internal auditing and environmental auditing and modified based on the professionals’ suggestions.

SURVEY RESULTS Questionnaires were mailed to the directors of internal auditing

of 599 publicly-held manufacturing companies. Useable responses were received from 186 respondents, yielding a response rate of 31.1 percent.

Top-Level Commitment to Environmental Protection A corporate environmental program will succeed only if

environmental responsibility is ingrained in the corporate culture and championed from the top down, so that individuals feel accountable for their actions. Environmental management programs are often compared to total quality management programs, which rely on integration of the quality philosophy across all levels of the corporation. Similarly, committed support to environmental management h m all levels of the

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I S 0 14000: Environmental Auditing fir the Manufacturing Sector

Component of Environmental Management System Percentage

Written Environmental Policy Statement (n=182) Recency of Practice-63 percent after 1988

Corporate-Level Environmental Management Function (n=182) Recency of Practice- 42 percent aRer 1988

Board of Directors Responsible for Environmental AfTairs (n=180)

81%

78%

60%

n= number of observations

corporation is essential. The responding companies’ structures for environmental protection commonly include these components: (1) writ ten environment a1 policy statement, (2) corpora te-level environmental management function, and (3) board of directors’ responsibility for oversight of environmental affairs. The percentage of organizations reporting these attributes is presented in Exhibit 2.

Over 80 percent of the responding organizations have issued written environmental policy statements to institutionalize their firms’ environmental management values. Issuing environmental policy statements is a recent corporate practice. Over 60 percent of the responding companies with written environmental policy statements originally issued the statements after 1988.

As shown in Exhibit 2, 78 percent of the respondents indicated that their companies have a corporate-level environmental management function. Corporate environmental management groups help develop overall environmental policy, advise top management on environmental matters, and support and monitor operating entities in implementing the corporate policy. Although the corporate- level environmental management function is a recent component of the environmental protection structure for many companies, it is noteworthy that 39 percent of the companies reporting when the environmental management function was established indicated that it was established before 1986. This suggests that some of the organizations have relatively mature environmental management functions. A study of major U.S. chemical companies reported that the earlier the environmental function was established and integrated with production, the better the organizational environmental record.

Approximately 60 percent of the respondents indicated that the board of directors or a committee of the board is charged with the



responsibility of oversight of environmental affairs. The Principles of the Coalition for Environmentally Responsible Economies, formerly called the Valdez Principles, call for board responsibility for environmental policy and for other forms of management commitment to environmental protection. The prevalence ofwritten environmental policy statements, corporate-level environmental management functions, and board-level responsibility for environmental affairs provides evidence of top-level management commitment to environmental protection in the responding organizations.

Dissemination of Environmental Protection Values Although leadership from top management is essential for the

success of corporate environmental programs, the commitment and cooperation of additional personnel are also necessary. The broad issue of employee education is addressed by the International Chamber of Commerce’s fourth principle of environmental management, which states that organizations should educate, train, and motivate employees to conduct their activities in an environmentally responsible manner.

Survey responses regarding environmental awareness programs for employees are presented in Exhibit 3. Over 90 percent of the responding companies indicated that they conduct some form of an environmental awareness program for their employees. Often, as indicated by 68 percent of the manufacturers, these programs target

Exhibit 3. Dissemination of Environmental ProtectionValues

Zomponent of Environmental Management System

Employee Environmental Awareness Programs (n=178)

Focus on Employees Directly AfFected by Environmental Regulations 68%

Measurable Environmental Goals (n=174)

For Employees 48% Goal Attainment Considered in Pay 68% Goal Attainment Considered in Promotions 37%

For Management 100%

n= number of observations

Percentage

91%

49%

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Environmental auditing is a component of environmental management, and its scope should be more comprehensive than regulatory compliance alone.

employees who are directly affected by regulatory compliance requirements. Over 37 percent of the companies reporting employee environmental awareness programs indicated that periodic programs are conducted for employees directly affected by regulatory compliance. A one-time program for new employees directly affected by regulatory compliance is offered by4 percent ofthe manufacturers. An additional 26 percent ofthe companies provide frequent programs for employees directly affected by regulatory compliance and periodic awareness programs for other employees.

The results of the survey questions on the existence and use of environmental goals are also presented in Exhibit 3. Almost 50 percent of the responding companies indicated that they have set measurable environmental goals. All of the companies with environmental goals have set specific goals for management, and 48 percent have such goals for employees. Further, the group of companies with environmental goals indicated whether the degree of attainment of environmental goals is used in determining promotions and changes in compensation in their companies. In this group, 68 percent reported that the attainment of environmental goals is considered in determining changes in compensation, and 37 percent indicated that the attainment of such goals is considered in determining promotions.

ENVIRONMENTAL AUDITING Environmental auditing is an additional component of an

organization’s structure for environmental protection. Environmental auditing is an umbrella term that encompasses a wide range of activities. In a report published by the IIA Research Foundation, environmental auditing is defined as “an integral part of an environmental management system whereby management determines whether the organization’s environmental control systems are adequate toensurecompliancewithregulatoryrequirementsandinternalpoliues.” This definition reflects that environmental auditing is a component of environmental management, and that its scope should be more comprehensive than regulatory compliance alone.

Respondents were instructed that, for the purposes ofthe survey, the terms environmental audit and environmental auditing refer to audits, reviews, assessments, and any other type of environmental auditing activity conducted by the company using external or internal personnel. Environmental audits of seven areas of an organization’s activities were considered in this research:

1. compliance with environmental laws and reporting requirements;

2. compliance with company environmental policies and procedures;

3. environmental management systems; 4. environmental risks and liabilities of property acquisitions

and divestitures;



Compliance with Environmental Regulations

Programs BE Facilities for the TSD of Hazardous Wastes

5. the company’s facilities and programs for the treatment, storage, or disposal (TSD) of hazardous wastes;

6. pollution prevention and waste minimization programs; and 7. financial accounting for environmental liabilities.

92%

89%

At a minimum, environmental auditing is used as a tool to assess whether the organization’s activities are within the legal bounds of environmental regulations. The manufacturing sector is oRen subject to multiple federal, state, and local environmental regulations. Principal federal environmental laws include the Clean Air Act, the Clean Water Act, the Resource Conservation and Recovery Act (RCRA), the Toxic Substances Control Act, the Comprehensive Environmental Response, Compensation and Liability Act (CERCLA), and the Superfund Amendments and Reauthorization Act (SARA). The CERCLA and SARAlegislation together are commonly known as the Superfund laws.

As shown in Exhibit 4, environmental auditing is a common component of the environmental management systems of manufacturers. Three types of environmental audits are conducted by approximately 90 percent of the companies. Each of the three types is related to regulatory compliance: (1) compliance with environmental laws and reporting requirements; (2) programs and facilities for the TSD of hazardous wastes; and (3) environmental

Exhibit 4. Environmental Audits

1 Areas Audited (n=183) I Percentage I

Environmental Liabilities & Risks of Property Transfers

88%

Pollution Prevention & Waste Minimization Programs

81%

Compliance with Company Environmental Policies I 79%

Financial Accounting for Environmental Liabilities

66%

1 Environmental Management Systems 65% I I I n= number of observations I



Many of the responding companies take a comprehensive approach to environmental auditing rather than limiting the audits to areas directly related to regulatory compliance.

liabilities and risks of property acquisitions and divestitures. Regulatory compliance audits can include one or more phases or

levels, ranging from a preliminary assessment that is performed primarily by reviewing documents, to the detailed, site-specific environmental investigation that can include the use of monitoring devices and laboratory analyses. RCRA and the Supefind laws are an impetus for audits of the treatment, storage, and disposal ofhazardous wastes and audits ofpotential acquisitions and divestitures of property. With an emphasis on prevention, RCRA focuses on the management of hazardous waste fiom point of production through point of disposal. Acquisition and divestiture audits, also known as transactional audits, are performed prior to the sale or purchase of real property to assess the environmental risks and liabilities associated with the property. Under the Superfhnd legislation, liability for clean up of waste sites can be imposed on past and present owners of the site.

Many of the responding companies take a comprehensive approach to environmental auditing rather than limiting the audits to areas directly related to regulatory compliance. Approximately 80 percent of the companies perform audits of pollution prevention and waste minimization programs and of compliance with company environmental policies. Pollution prevention and waste minimization programs focus on avoidance of waste rather than on disposal and cleanup. These programs are concerned with the efficient use of resources rather than merely reacting to environmental regulations. Environmental audits are also conducted to determine whether internal environmental policies are being followed and whether the environmental objectives are being attained.

Approximately 65 percent of the responding companies perform audits of environmental management systems and of financial accounting for environmental liabilities. Organizational structure for environmental protection must be sufficient for the company to achieve compliance with external regulations and internal policies. Thus, a review of the system and an evaluation ofits performance are important environmental management tools.

While auditing contingent liabilities is a traditional financial audit area, contingent environmental liabilities can pose special problems. Statement of Financial Accounting Standards (SFAS) No. 5, Accounting for Contingencies, requires the recognition of a liability when it is probable that a liability has been incurred and the amount of the loss can be reasonably estimated. Often multiple entities are named as potentially responsible parties for Supefind sites, making it particularly difficult to assess the probability of the obligation and to estimate the costs for one party.

SHOULD MANUFACTURERS ADOPT THE NEW STANDARDS?

Firms in the manufacturing sector are positioned to reap the benefits of becoming an IS0 14001 company. Though adoption of the IS0 environmental standards is voluntary, companies may find that

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adoption is necessary, or at least beneficial, ifthey are to be competitive in the global marketplace. In addition, stakeholder groups are likely to view adoption of the IS0 14000 model as an indication of good stewardship of the environment. The published standards of IS0 14000 address EMS and environmental auditing. IS0 14001 is the EMS specification standard through which a company can obtain independent registration or certification. This research indicates that publicly-held manufacturers already have in place many of the elements of an IS0 14001 EMS. Top-level commitment to environmental protection, dissemination of environmental protection values throughout the organization, and environmental auditing are necessary components of the comprehensive IS0 model that are currently present in many of the responding organizations.

The new BEAC environmental auditor certification is a positive step in addressing the issue of environmental auditor qualifications. Internal auditing's involvement in environmental auditing has been impeded by the internal auditor's lack of technical expertise in environmental auditing and lack of knowledge of environmental regulations. The comprehensive training program sponsored by the IIA and the Environmental Auditing Roundtable will assist internal auditors in bridging the gap between environmental auditing and more traditional internal auditing areas. +


ISO 14000: Environmental auditing for the manufacturing sector

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