Accounting for Land & Water Rehabilitation Costs in the Mining Industry
Robert Haas #919-125-475
ADMS 4510 Winter 2002
Environmental Issues in Accounting Kate Bewley
ADMS 4510 Winter 2002: Student #919-125-475 Robert Haas
Table of Contents
Description
Page
Abstract...............................................................................................................3
Introduction .........................................................................................................4
Descriptive Section
Reporting environment in which financial statements are produced ...............................6
Environmental reporting in the mining industry ..........................................................10
Discussion & Analysis .........................................................................................15
Conclusion ..........................................................................................................25
Bibliography ........................................................................................................27
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ADMS 4510 Winter 2002: Student #919-125-475 Robert Haas
Abstract
This essay focuses on how the management of mining companies have
accounted for costs associated with the rehabilitation of land and water
resources post-extraction operations.
Additionally,
accounting
theories
are
considered
in
ascertaining
management’s possible motivations regarding its reporting practices. Moreover,
these theories are reviewed to determine whether management is justified in its
approach, and if not justified, why such an approach has often been tolerated in
the past. A prediction of future reporting practices, regarding this issue, is also
provided.
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ADMS 4510 Winter 2002: Student #919-125-475 Robert Haas
Introduction
The rehabilitation of land and water resources is an issue of critical
importance on a number of levels.
Should these resources not be properly rehabilitated, or be fouled beyond
repair, the negative externalities which may accrue can be enormous. Such
consequences may include negative health consequences for humans along with
significant damage to the ecosystem. Consequently, future generations along
with non-human life forms may also be negatively impacted. Thus this issue
affects numerous stakeholders. Many of these issues, however, are beyond the
scope of this paper.
Alternatively, this essay will consider this topic from a strictly financial
perspective. Thus, focusing on a narrower group of stakeholders, namely:
shareholders and potential investors. (For the balance of this paper, the word
investors will be used to describe both shareholders and potential investors).
Huge costs are often associated with such land rehabilitation projects.
These costs can be so great, in fact, as to overwhelm a company’s financial
resources. Potentially forcing the company into bankruptcy. Consequently, a
company’s management must clearly monitor such financial costs. Furthermore,
cost information pertaining to this issue is clearly of great interest to investors.
This essay focuses on how these financial costs have been accounted for
in the past. The Canadian Institute of Chartered Accountants (CICA) and Price
Waterhouse conducted such studies in 1994 and 1995 respectively. These
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ADMS 4510 Winter 2002: Student #919-125-475 Robert Haas
studies examined the reporting practices of mining companies, as reflected in
their 1993 financial statements. (One hopes that reporting practices, pertaining to
this issue have improved in the ensuing years).
The remainder to this paper has been divided into three sections: a
Descriptive Section, a Discussion & Analysis, and a Conclusion.
In the Descriptive Section the reader will be provided with prerequisite
information. This information will provide the reader with a reference point so as
to better understand the Discussion & Analysis portion of the paper.
A synopsis of how land and water rehabilitation costs have been reported,
by the management of mining companies (in their 1993 financial statements)
along with an analysis of accounting theories, will be outlined in the Discussion &
Analysis.
A review of the two preceding sections along with a prediction of future
reporting practices will be provided in the Conclusion.
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ADMS 4510 Winter 2002: Student #919-125-475 Robert Haas
Descriptive Section
In this section, the reader will be provided with prerequisite background
information pertaining to two issues:
1. Reporting environment in which financial statements are produced.
2. Environmental reporting in the mining industry.
Reporting environment in which financial statements are produced:
Major corporations play a significant role in the Canadian economy. The
majority of these corporations can be characterized by a corporate structure in
which there is a separation of ownership from management, or stewardship. In
other words, the majority of investors do not work for these businesses.
Such
a
corporate
structure
places
investors
at
an
information
disadvantage to managers. Unlike managers, investors cannot attain first-hand
information about these firms. Instead, these investors must settle for secondary
information. That is information provided by others. Such secondary information
would include a company’s annual report along with media reports.
In an Accounting Theory context this information imbalance is referred to
as “adverse selection” (Scott, p.3), which is defined as:
…a type of information asymmetry whereby one or more parties to a business
transaction, or potential transaction, have an information advantage over other
parties.
In order to minimize the effects of adverse selection one must first
ascertain what type of information would be of use to investors. In order to do
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ADMS 4510 Winter 2002: Student #919-125-475 Robert Haas
this, assumptions about investors must be made. The most important assumption
being that investors are rational, that is that they make decisions so as to
maximize their expected utility, or satisfaction, from wealth (Scott, p. 7).
In his book, Financial Accounting Theory, William Scott (Scott) defines the
provision of useful information, to rational investors, as the decision usefulness
approach (p. 7). Donald E. Kieso discusses this same concept in his textbook:
Intermediate Accounting. The following passage is taken from the Kieso test:
Without the pervasive criterion of decision usefulness, there would be no
justification for accounting activity or a basis on which to assess the costs of
providing reports. Usefulness is dependent on the extent to which there is an
appropriate linking of decision makers and their capacity to understand financial
information with the primary and secondary qualities of the information,
recognizing there are constraints on the information that can be provided.
p. 46
Information that fits the criteria of the decision usefulness concept is often
of a financial, or accounting, nature. Furthermore, the heart of the accounting
information presented to investors is an enterprise’s financial statements.
Preparing these financial statements is the responsibility of the company’s
management (CICA Handbook, para. 5400.10); a task often delegated to its
accounting
employees.
These
accounting
employees,
who
report
to
management, maintain the company’s books and records and produce the
company’s financial statements.
Furthermore, and perhaps most importantly, under the real-world
conditions in which accountants operate, “net income does not exist as a welldefined economic construct” (Scott, p. 36, author’s italics). This is as a result of
the uncertain conditions under which companies operate, coupled with the
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ADMS 4510 Winter 2002: Student #919-125-475 Robert Haas
flexibility provided by Generally Accepted Accounting Principles (GAAP). Not
surprisingly, there can often be significant differences between many of these
justifiable results. Despite this fact, however, there is generally only one reported
“bottom line”. Or at the very least, one “bottom line” of major interest to the
majority of investors.
It should also be noted that investors and managers might be viewed as
separate constituency groups, which often have competing interests. The
presentation of financial information provides an example of such a conflict. For
example, the “best” measure of net income to inform investors, that is, to control
adverse selection may not be a reporting method which best serves
managements’ interests (Scott, p. 4).
According to Scott:
Managers’ interests are best served by information that is highly correlated with
their effort in running the firm.
p. 4
More cynically, one may believe that managers’ interests are best served
by a presentation, which most effectively furthers their own financial and
professional interests. Various management teams will have differing vested
interests, thus, different reporting strategies may be pursued.
For example, many management contracts are incentive based and are
tied to a company’s reported profitability. Consequently, managers may want to
maximize reported “net income” so as to increase their bonuses. Alternatively, if
management holds a significant number of the company’s shares then
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ADMS 4510 Winter 2002: Student #919-125-475 Robert Haas
management may pursue a reporting policy which smoothes-out reported
earnings on a year-over-year basis, reducing earnings volatility, and thus
maximizing long-term share value.
It is true that one requirement of the Ontario Securities Commission is that
companies, which are publicly traded on an Ontario Exchange, prepare audited
financial statements. Thus the financial statements of these companies must be
vetted by outside auditors, who are often referred to as external accountants. In
order to vet the financial statements effectively, these external accountants must
be independent of management.
Unfortunately, there is evidence to suggest that auditors may not always
be completely independent of management. The reality is that management is
often in a position to exert pressure on its external auditors to tow-the-line. For
example, management often offers these external auditors lucrative consulting
work. This work is in addition to the audit work.
The revenues generated from this auxiliary work can often be as great, or
greater, than the fees generated from the audit work itself. A recent Globe and
Mail (Globe) article refers to monies the Canadian Imperial Bank of Commerce
(CIBC) paid to its external auditors during the banks 2001 fiscal year in an article
titled CIBC restricts its auditors:
CIBC’s two auditors were paid a total of $10.9-million for audit-related services
last year and another $15.6-million for other consulting.
Globe, B4, March 1, 2002
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Should the auditor’s position differ too markedly from management’s
preferred reporting practice the external auditor may be jeopardizing future
contracts. These contracts may not only include future audit work, but
additionally lucrative auxiliary contracts as well. Such economic realities may
compromise the auditor’s independence.
The investing public is viewing such conflicts with greater skepticism in the
wake of the Enron scandal. Such skepticism recently prompted the CIBC to
prohibit its two audit firms from vying for future consulting work. The CIBC
announced this new position at its annual shareholders’ meeting in Halifax, Nova
Scotia, on Thursday, February 28, 2002 (Globe, B1, March 1, 2002).
Environmental reporting in the mining industry:
In Canada there is environmental legislation relating to the rehabilitation of
land and water resources, post-mining operations. Under this legislation, the
company involved in the extraction of resources is responsible for the
rehabilitation process of ensuring that land and water resources are restored to
their natural state after extractive operations has been completed. Additionally,
the Mining Act of Ontario (1996) requires mining companies to file “closure plans”
describing how land and water resources will be rehabilitated which must be
approved by the Ministry of Mining (Li and McConomy, p. 281).
Consequently, there is no uncertainty with respect to the existence of the
liability. Firms that operate the mines bear the responsibility for future
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ADMS 4510 Winter 2002: Student #919-125-475 Robert Haas
remediation work (Li and McConomy, p. 282). Clearly, however, there will be a
degree of uncertainty surrounding the dollar quantum of the liability.
The CICA refers to these site reclamation costs as “future removal and
site restoration costs”. The CICA has outlined its position, pertaining to how
these costs should be recorded, in paragraphs 3060.39 to .41 of the CICA
Handbook. (This section was added to the Handbook in the year 1990). These
paragraphs state:
When reasonably determinable, provisions should be made for future removal
and site restoration costs, net of expected recoveries, in a rational and
systematic manner by charges to income.
Dec. 1990
Future removal and site restoration costs include costs, net of expected
recoveries, for dismantling and abandoning a property. Provisions are needed to
accrue the liability for future removal and site restoration costs, when the
likelihood of their incurrence is established as a result of environmental law,
contract, or because the enterprise has established a policy to restore a site, and
when such costs can be reasonably determined. Provisions are recorded as
liabilities and are not classified with accumulated amortization.
When future removal and site restoration costs cannot be reasonably
determined, a contingent liability may exist.
(See CONTINGENCIES, Section
3290.)
This regulation had an adoption date of December 1991. Additionally, at
paragraph 3060.63 of the Handbook, the CICA outlines additional information,
which it considers desirable to disclose:
Additional desirable disclosures include:
(a)
the accumulated provision for future removal and site restoration costs
and the major assumptions used and the basis for determining the
provision; and
(b)
the amount of the future removal and site restoration costs charged to
income for the period. (paragraph 3060.63)
It would seem that the standard articulated in paragraphs 3060.39 to .41
of the Handbook would have been unnecessary had GAAP been properly
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ADMS 4510 Winter 2002: Student #919-125-475 Robert Haas
enforced. Consequently, consideration as to why the CICA deemed it necessary
to promulgate this standard will be considered. This issue will be considered in
the Discussion & Analysis section of this paper. Why the information described in
paragraph 3060.63 is considered desirable as opposed to being mandatory will
be considered here.
When discussing the theories underlying accounting standards one
naturally gravitates towards Section 1000 of the Handbook. For the concepts
outlined in Section 1000 are often considered an underpinning to the entire
Handbook.
Paragraph 1000.02 of the Handbook states:
The Committee expects this Section to be used by preparers of financial
statements and accounting practitioners in exercising their professional judgment
as to the application of generally accepted accounting principles and in
establishing accounting policies in areas in which accounting principles are
developing.
The influences of the decision usefulness approach on Section 1000 of
the CICA Handbook are unmistakable. For example, at paragraph 1000.18 of the
Handbook the CICA identifies qualitative characteristics, which make information
useful to investors: understandability, relevance, reliability, and comparability.
The information alluded to in paragraph 3060.63 would meet many, if not all of
these characteristics.
Consequently, from a theoretical standpoint it seems surprising that the
disclosures alluded to in paragraph 3060.63 of the Handbook are considered
desirable, as opposed to being mandatory. (The quality of information provided to
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ADMS 4510 Winter 2002: Student #919-125-475 Robert Haas
investors, is another issue, which will be considered at greater length in the
Discussion & Analysis portion of this paper).
So why would the CICA, through the Accounting Standards Board, issue a
standard which does not conform more directly to the decision usefulness
approach? Alternatively drafting an accounting standard that, even if fully
complied with, could leave the most diligent of investors with incomplete and
inadequate information.
In an attempt to answer this question the author refers back to Scott. It is
Scott’s conviction that accounting standards cannot be determined by rigorous
economic calculation. This is as a result of two realities:
1. The complexity of accounting information.
2. The forces unleashed by the interaction of the various competing
constituency groups.
Alternatively,
Scott
argues,
a
political
process
determines
the
development of accounting standards (p. 6). Furthermore, from a practical
standpoint, a standard will only be effective if practitioners are prepared to
administer it. Thus, before a standard is adopted an exposure draft of the
proposed standard is issued. This allows all affected constituencies to comment
on the proposed accounting policy change, and to make recommendations (p.
224).
Consequently, it is often necessary to “water-down” an accounting
recommendation, from its original position, before the standard can be adopted
into the CICA Handbook. This “compromising” of standards can be unfortunate
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ADMS 4510 Winter 2002: Student #919-125-475 Robert Haas
from an investor’s standpoint. For if the information described at paragraph
3060.63 were made mandatory, as opposed to merely desirable, it would go a
long way in ensuring that investors were provided with additional useful
information pertaining to this issue.
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ADMS 4510 Winter 2002: Student #919-125-475 Robert Haas
Discussion & Analysis
After reading paragraphs 3060.39 to .41 of the CICA Handbook, one may
be perplexed as to why the CICA considered the inclusion of these paragraphs
necessary. For, as previously alluded to, had GAAP been properly enforced it
would seem that this standard would have been unnecessary.
James C. McKeown takes a similar stand. The following is a quote from
an article he wrote in the Journal of Accounting, Auditing, & Finance in the
Summer of 1999:
… GAAP clearly requires that the liability for removal costs should have been
recognized with appropriate charges to operations each year, but that GAAP was
not being enforced properly before an explicit standard was adopted. After all,
removal costs are simply part of salvage value, which should be included in the
depletion computation. Thus, the change in reporting behaviour could indicate
there was a need for a change in standards or a need for improvements in
enforcement, possibly through regulatory review of the statements filed by these
companies.
p. 318
McKeown’s interpretations are reasonable. He suggests that the CICA
found that mining and oil & gas companies were not adequately reporting costs,
pertaining to future land rehabilitation costs. One could argue that in an attempt
to rectify this situation the CICA issued the standard: “future removal and site
restoration costs”. Following the recommendations of this standard will result in a
firm reporting increased reported liabilities and reduced reported profitability.
Based on the impact this standard will have on the company’s reported financial
statements one can understand why management may be less than enthusiastic
to embrace this standard.
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ADMS 4510 Winter 2002: Student #919-125-475 Robert Haas
However, management does have some flexibility in the adoption of this
standard. For like many other standards in the Handbook it permits accounting
practitioners latitude of flexibility while still remaining in compliance with the
standard. So if management can convince its external auditors that a liability for
these costs cannot be “reasonably determined”, then these future costs will have
no immediate impact on the numbers reported in the company’s financial
statements. Thus isolating this information from the balance sheet. The result
being that there is no direct impact on current reported net income or on financial
ratios (such as earnings-per-share or price-earnings ratio), and possibly no
impact on current bonuses payable to management.
Allusions to a future liability will alternatively be buried in the company’s
notes to the financial statements. This may be a myopic accounting practice from
the firm’s standpoint. Although perhaps not so from management’s point of view,
for should a problem surface in the future the incumbent management team may
no longer be running the company. Thus they may neither be called upon to
account for their actions nor to defend their reporting practices. One can certainly
understand management’s preference for reporting the issue in this manner.
However, are there any circumstances under which the aforementioned method
may be justified?
Li and McConomy published an article in the Summer 1999 edition of the
Journal of Accounting, Auditing & Finance in which they paraphrase
managements’ most viable argument:
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ADMS 4510 Winter 2002: Student #919-125-475 Robert Haas
Establishing a firm’s environmental liabilities in general involves uncertainty
because of future cleanup technology developments, the evolution of
environmental legislation, and changes in sites’ environmental sensitivity.
p. 287
While there is certainly merit to this argument, a suggestion by
management that they cannot “reasonably determine” a liability value is quite
contestable. According to a report by Feasby and Jones in 1994:
The homogeneous nature of mining and oil and gas extraction operations makes
it possible to share similar site remediation technology and to develop a general
framework regarding cost estimation of reclamation activities.
Li and McConomy p. 283
Ultimately, Li and McConomy also challenge management’s position.
They write:
… it can be assumed that managers of mining and oil and gas companies have
private information regarding future removal and site costs.
p. 283
Later in this article Li and McConomy write the following, which suggests
an even stronger conviction of their belief that these costs can be reasonably
forecast:
The fact that companies have to file site closure plans and provide financial
securities for site cleanup costs to provincial governments suggests that site
reclamations costs are reasonably determinable. Unfortunately, information
about which companies provide financial securities for future site cleanup and the
amount provided is not accessible to the public.
p. 283
Paragraph 3290.04 of the CICA Handbook also supports this position:
In the preparation of the financial statements of an enterprise, estimates are
required for many on-going and recurring activities.
Land and water restoration costs would constitute such a recurring activity for a
mining company.
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ADMS 4510 Winter 2002: Student #919-125-475 Robert Haas
Furthermore, land and water rehabilitation costs represent a significant, or
material, cost to mining companies. If management has no perception of the
future costs involved, then how is management in a position to estimate the
future profitability of a project? Should this be the case then one must question
the prudence of a management team, which would commit a company to such
commercial activity. This can be likened to undertaking a project blind. Hardly
what one would expect from a professional management team running a multimillion dollar enterprise.
While it is conceded that there will be some subjectivity regarding the
quantum of the liability, it would appear that management would be in a position
to determine a reasonably accurate dollar range.
An accountant has some choice as to what dollar value to report, for a
liability, when the value of that liability falls within a dollar range.
The Financial Accounting Standards Board (FASB) produced FASB
Interpretation No. 14; Reasonable Estimation of the Amount of a Loss (FIN 14)
which indicates how such a situation should be reported. FIN 14 states that one
should not delay the accrual of a loss until a single amount can be reasonably
estimated. Alternatively, FASB states:
[when] “it is probable that an amount had been impaired or a liability had been
incurred,” and information available indicates that the estimated amount of loss is
within a range of amounts, it follows that some amount of loss has occurred and
can be reasonably estimated.
… When some amount within the range appears at the time to be a better
estimate than any other amount within the range, that amount shall be accrued.
When no amount within the range is a better estimate than any other, however,
the minimum amount in the range shall be accrued. … and paragraph 10
requires disclosure of the nature of the contingency and the additional exposure
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ADMS 4510 Winter 2002: Student #919-125-475 Robert Haas
to loss if there is at least a reasonable possibility of loss in excess of the amount
accrued.
Based on the preceding information it seems reasonable to presume that
management could provide some value, to report on the balance sheet,
pertaining to land rehabilitation costs.
As previously stated, paragraph 1000.18 of the Handbook lists the
characteristics, which are used to gauge the quality of the information presented
to investors. These characteristics being: understandability, relevance, reliability,
and comparability.
If no dollar value is listed, on the balance sheet, the information does not
fair well when measured against these benchmarks. Investors will “understand”
that there is a liability, but with no dollar value presented the investor has little
concept of the impact the liability will have on the firm’s future profitability.
Similarly, with no dollar value presented the “relevance” of the information is
highly compromised. The information fairs best on the “reliability” scale in that
there is definitely a liability; however, the “reliability” can also be seriously
compromised depending on the wording chosen. For the wording may not
accurately reflect the situation. On the “comparability” scale the information is
also poor. Land and water rehabilitation costs are liabilities, which do not pertain
to all businesses. Instead this type of liability only pertains to businesses in
particular industries. How helpful would this note disclosure be to an investor who
is comparing a potential investment in a mining company against an investment
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ADMS 4510 Winter 2002: Student #919-125-475 Robert Haas
in a business, which is not exposed to a liability pertaining to land and water
rehabilitation costs? One might conclude not very helpful at all.
Thus far, the reader has been provided with background information
pertaining to the reporting environment in which financial statements are
produced. A brief explanation of the political climate (created by the interaction
between competing constituency groups) in which accounting standards evolve
has also been discussed. Additionally, a background as to how land rehabilitation
costs are to be reported as per paragraphs 3060.39 to .41 of the CICA
Handbook, along with the flexibility afforded accounting practitioners in
implementing this standard, has been provided. Moreover, managements’
possible motivation for administering the standard in a certain manner has been
considered.
Having provided the reader with this background information, the author
will now review how future land rehabilitation costs were reported in the 1993
financial statements of numerous mining companies. The CICA and Price
Waterhouse conducted these respective studies. Li and McConomy prepared a
synopsis of these studies. Their synopsis is reproduced here:
Two studies followed the implementation of the new accounting standard. A
CICA study (CICA [1994]) examined 863 corporate annual reports in 1993 and
found that 206 of them made reference to future removal and site restoration
costs. However, only 52 companies disclosed all the information suggested by
the new accounting standard. Another study by Price Waterhouse (1995)
reviewed the 1993 annual reports of 28 mining companies. The study found that
only 9 of 28 companies disclosed the current provision for the year and 13
indicated their accumulated provision at the end of the fiscal year. In addition, the
study found that most of the discussions of restoration and reclamation (in either
the notes to the financial statements or in the Management Discussion and
Analysis [MD&A]) were merely generic. For example, only about half of the
discussions were comprehensive enough for the reader to understand the
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ADMS 4510 Winter 2002: Student #919-125-475 Robert Haas
underlying issues (Price Waterhouse [1995, p. 86]). These studies suggest that a
lack of full disclosure of corporate environmental liability information persisted
after implementation of the new accounting standard.
p. 280
From a review of this analysis one can determine that investors were often
provided with very limited information, even after the implementation of this
Accounting Standard. A review of the CICA study reveals that of the 206 firms
which made reference to future removal and site restoration costs, in their
corporate annual reports, that only 52 disclosed all information suggested by the
new standard. This means that almost 75% of these firms did not provide
investors with information, which would in all likelihood, assist them in making
investment decisions.
The results of the Price Waterhouse study were equally discouraging.
Their study found that only 32% of the mining companies disclosed the current
provision for the year. Furthermore, discussions of restoration and reclamation
costs were often described in the most vague and generic of fashions. To quote
from the Li and McConomy article again: “only about half of the discussions were
comprehensive enough for the reader to understand the underlying issues” (p.
280).
For the reasons previously articulated in this paper one would hope that,
in the majority of cases, management had a reasonably close estimate of land
rehabilitation costs. Considering the potential enormity of such costs, to presume
otherwise would be to suggest that management was running the business in the
dark, so to speak.
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ADMS 4510 Winter 2002: Student #919-125-475 Robert Haas
However, both of the aforementioned studies suggest that investors were
often provided incomplete and inadequate information pertaining to this issue.
Vague note disclosure of the matter, combined with no liability reflected on
the balance sheet reports the manner in a fashion, which can best be described
as “manager-friendly”. Thus the aforementioned studies pertaining to the 1993
financial statements of mining entities suggested that opportunistic reporting, on
the part of managers, was not uncommon.
Consequently there was significant opportunity for improvement in the
information provided to investors, surrounding land rehabilitation costs. However,
it is this author’s assertion that there appears to be room for tempered optimism
regarding improved reporting of this issue in the future.
These
1993
results,
while
less
than
impressive
represented
a
considerable improvement over the reporting practices of mining companies prior
to the introduction of Section 3060. The following is another quote from the Li
and McConomy article:
Prior to 1990, only a few firms provided future removal and site restoration
disclosures. Of the 166 sample firms, only 11 (6.6%) provided the environmental
disclosures envisioned by the Capital Assets section in 1989.
p. 292
Furthermore there are reasons to believe that, in the current political
climate, stakeholders will be less tolerant in their acceptance of incomplete and
inadequate information surrounding environmental issues. There are a number of
reasons for this point of view.
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ADMS 4510 Winter 2002: Student #919-125-475 Robert Haas
First, the continued fallout from the Enron scandal has significantly
impacted the current political climate. From the reports of the media one could be
forgiven for believing that not only is Enron being investigated, but rather the
entire accounting profession is as well. It also seems likely that the accounting
firm most entangled in this debacle, Arthur Anderson (Anderson), will not survive
this ordeal. Instead, it appears that Anderson will be litigated out of existence.
The scale of the deceit, pertaining to the Enron scandal, has been so
significant that it appears that the Securities and Exchange Commission in the
United States will mandate significant accounting changes. These changes will
likely result in the need for a far more stringent audit before an accounting firm
will feel comfortable in issuing an unqualified opinion of a firm’s financial
statements in the future.
These changes in the United States will have an inevitable impact on the
accounting profession in Canada.
A second event that has likely already impacted the political climate in
Canada is the Walkerton tragedy. One can reasonably presume that the public
will take a greater interest in safeguarding its land and water resources in the
post-Walkerton era. Although this event dealt with inadequate safeguards
pertaining to the treatment of a community’s drinking water it has likely resulted
in bringing environmental issues to the forefront.
Should the fallout of a mining companies operations result in significant
environmental degradation a less tolerant public is likely to push for a more
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ADMS 4510 Winter 2002: Student #919-125-475 Robert Haas
aggressive legal response and demand greater financial compensation.
Therefore, a mining company that is not careful in its protection of the
environment may find itself seeking bankruptcy protection. Furthermore, a
prudent accounting firm will be reluctant to be associated with such a firm, for
obvious reasons.
Consequently, should the management of a mining company report
environmental issues in a less than forthcoming manner they are less likely to
receive an unqualified audit opinion (from their external auditors) than might have
been the case in the past. Thus finding it more difficult to attract financing for
current and future operations.
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ADMS 4510 Winter 2002: Student #919-125-475 Robert Haas
Conclusion
The rehabilitation of land and water resources post-extraction operations
is of great concern to our society.
Such rehabilitation work is also of significant concern to mining companies
as such projects represent considerable expenses for these firms. These costs
can be so significant, in fact, as to threaten a firm’s very existence.
Studies conducted prior to 1990 suggested that companies operating in
the Mining Industry were routinely reporting very limited information, pertaining to
this issue. In response to this problem the CICA promulgated paragraphs
3060.39 to .41 of the Handbook. A 1994 study conducted by the CICA, along
with an independent 1995 study conducted by Price Waterhouse, indicated that
there had been an improvement in the reporting practices of mining firms postimplementation of this standard. Although both studies indicated that there was
considerable room for improvement regarding reporting practices pertaining to
this issue.
It is this author’s assertion that prior to the Enron and Walkerton scandals
apathy was widespread amongst the majority of stakeholders. Consequently,
questionable reporting practices were often tolerated. These two events however
have impacted the current reporting climate. Furthermore, accounting is not
static. Instead it is constantly evolving, being shaped by the forces, which exert
pressure on it.
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ADMS 4510 Winter 2002: Student #919-125-475 Robert Haas
In response to these new pressures it seems that there will be an
improvement regarding the reporting of this issue by mining companies in the
future. Thus, one may be justified in believing that there is room for limited
optimism regarding future reporting practices pertaining to land and water
rehabilitation costs. Increased vigilance on the part of all affected stakeholders
would go a long way in justifying this author’s tempered optimism.
26
ADMS 4510 Winter 2002: Student #919-125-475 Robert Haas
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