173 In February 2014, Ceramic Crucibles of America was notified by the state of Colorado that the state was investigating the company's Durango...
17-3 | In February 2014, Ceramic Crucibles of America was notified by the state of Colorado that the state was investigating the company’s Durango facility to determine if there were any violations of federal or state environmental laws. In formulating your opinion on the 2013 financial statements, you determined that, based primarily on management’s representations, the investigation did not pose a serious threat to the company’s financial well-being. The company subsequently retained a local law firm to represent it in dealing with the state commission. At the end of 2013, you concluded that the action did not represent a severe threat. However, you have just received the attorney’s letter, which is a little unsettling. It states: On January 31, 2014, the U.S. Environmental Protection Agency (EPA) listed the Durango site in Durango, Colorado, on the National Priorities List under the Comprehensive Environmental Response, Compensation, and Liability Act (Superfund). The site includes property adjoining the western boundary of Ceramic Crucibles’ plant in Durango and includes parts of Ceramic Crucibles’ property. The EPA has listed Ceramic Crucibles as one of the three “potentially responsible parties” (“PRPs”) that may be liable for the costs of investigating and cleaning up the site. The EPA has authorized $400,000 for a “Remedial Investigation and Feasibility Study” of the site, but that study will not begin until sometime later in 2014. Thus, we do not deem it possible or appropriate at this time to evaluate this matter with regard to potential liability or cost to the company. You immediately set up a meeting with Dave Buff, Ceramic Crucibles’ vice president; Ron Bonner, the company’s attorney; and Margaret Osmond, an attorney who specializes in EPA-related issues. At the meeting you ascertain that
Materiality for purposes of evaluating a potential loss is $10 million to $13 million. This is based on the assumption that the loss would be deductible for income tax purposes. In that case, the loss would represent a reduction in stockholders’ equity of 4.5 percent to 7.0 percent. Your best guess is that the company’s exposure does not exceed that amount. Further, based on the financial strength of the company and its available lines of credit, you believe such an assessment would not result in financial distress to the company. The creation of the Environmental Protection Agency (EPA) and that of the Comprehensive Environmental Response, Compensation, and Liability Act is a result of the increasing concern of Americans about pollution. An amendment to the act permits the EPA to perform the cleanup. The EPA has a national priorities list of several thousand sites thought to be severely damaged. The average cost of conducting remedial investigation and feasibility studies ranges from $750,000 to over $1 million, and such studies may take as long as three years. Cleanup costs can often exceed $10 million to $12 million. It is said that the current estimates of $100 billion to clean up nonfederal hazardous waste sites may be conservative. The law requires the EPA to identify toxic waste sites and request records from PRPs. The PRPs are responsible for the cost of cleanup, but if they lack the funds, the EPA uses its funds for the cleanup. The EPA has spent $3.3 billion from its trust fund and collected only $65 million from polluters since the passage of the legislation |