An accounting professor at Georgetown told me about his audit of the construction of the Watergate complex in Washington, DC. The way I remember it, he found four sets of books: one for the prime contractor in Italy, one for the limited partners in the US, one for tax calculations, and one more just to keep the stories straight. With currencies and layers of corporations, this all seems normal today.

Do environmental liabilities need multiple sets of books?

We have found the answer is simply “yes.”

One set of books is needed for reserve estimation, under FAS 5 or GASB 49. The duration of a company’s reserve horizon and the phase of a project usually mean reserve numbers can be robust and rigorous, or vague to non-existent for early-stage projects.

A second set of books is needed for cost recovery. When cashing out a small PRP or an insurer, the risk premiums and inflation of sunk costs, along with speculation about future costs, can trigger a widely different liability estimate from a reserve forecast.

A third set of books is important for an operating facility. Not every environmental  project is funded with reserve dollars. Often, there are capital expenditures or asset impairments which create different assets or liabilities on the balance sheet. Plus, there are normal environmental operating expenses.

Now that there are three sets of books, keep in mind that the backup may be different. The raw estimates, with price and quantity assumptions, are essential but volatile. The data displayed to management, in a portfolio summary, applies program-wide assumptions to each project. The disclosure to shareholders requires the application of rules regarding materiality and consistency across environmental projects and other contingent liabilities.

More than one set of books is just a part of our business.