Where are we now? EPA's Audit Policy, Next Generation Compliance and Budgetary Implications

Posted on January 21, 2014 by Mary Ellen Ternes

The EPA Audit Policy, “Incentives for Self-Policing:  Discovery, Disclosure, Correction and Prevention of Violations,” adopted in 1995, 60 Fed. Reg. 66,706 (Dec. 22, 1995), amended at 65 Fed. Reg. 19,618 (Apr. 11, 2000), was targeted by EPA for abandonment in 2012.  Perhaps in response to resounding objections by industry and outside counsel, EPA has not yet dismantled this cherished avenue toward forgiveness. 

For counsel productively utilizing the EPA’s Audit Policy, EPA’s announcement that it intended to abandon the Audit Policy, particularly in the context of Next Generation Enforcement and budgetary cutbacks in “boots on the ground” inspections, created significant concern that industry would be caught in a communication and policy void that would lead to more punitive yet unnecessary enforcement proceedings.  While EPA has removed the possibility of e-reporting per its Audit policy electronic disclosure website, EPA has maintained regulated entities’ ability to utilize the Audit Policy by directly reporting to regional Audit Policy staff.  See EPA’s Audit Policy website here.  Hopefully, EPA will continue to recognize the many benefits resulting from continued support of the Audit Policy, particularly in the context of more remote enforcement strategies, fewer “boots on the ground” and heavier reliance on state enforcement resources.

Audit policy – History

In response to developing state audit privilege legislation, EPA developed an interim policy addressing the scope of “privilege” allowed for voluntary environmental audits and their findings.  60 Fed. Reg. 66,709 (March 31, 1995).  Seeking to avoid litigation regarding the scope of privileged environmental audit findings, EPA’s interim policy offered incentives to conduct voluntary audits where the findings were disclosed and promptly corrected.  EPA issued its final Audit Policy in 1995, with the specific purpose of enhancing protection of public health and the environment by encouraging regulated entities to voluntarily discover, disclose, correct and prevent violations of Federal enforcement law.  The benefits offered by EPA’s 1995 final Audit Policy included reductions in the amount of civil penalties, possible elimination of gravity-based penalties, and a determination not to recommend criminal prosecution of disclosing entities.  EPA’s adoption of the 1995 Audit Policy followed five days of dialogue, hosted by ABA’s SEER (then SONREEL) with representatives from regulated industry, states and public interest organizations which identified options for strengthening the former interim policy and included changes reflecting insight gained through this ABA dialogue, over 300 comments received and EPA’s practical experience in implementing the interim policy.  Since its adoption, EPA has issued several guidance documents, including EPA’s Audit Policy Interpretive Guidance (January 1997), Audit Policy; Frequently Asked Questions (2007); and EPA’s Audit Policy:  Tailored Incentives for New Owners, 73 Fed. Reg. 44, 991 (Aug. 1, 2008), all available here

Enforcement budgetary constraints

In the face of fierce political opposition and severe budgetary cutbacks, EPA issued public statements regarding areas where resources would be cut back or eliminated.  Specifically, on April 30, 2012, EPA’s OECA issued its “National Program Manager (NPM) Guidance” to EPA’s regional offices proposing to spend no resources processing self-disclosures under the Audit Policy beginning with EPA’s 2013 Fiscal Year. In the NPM Guidance, EPA stated its position that internal compliance reviews had become more widely adopted by the regulated community as part of good management, that most violations disclosed under the Policy were not in the highest priority enforcement areas for protecting human health and the environment, and that EPA could reduce its investment in the program to a limited national presence without undermining the incentives for regulated entities to do internal compliance reviews to find and correct violations with potentially a modified Audit Policy that is self-implementing.  See the FY2013 OECA NPM Guidance (Publication Number – Final: 305R12001) available here

With the issuance of the April 2012 NPM Guidance came a strong response by regulated entities.  Members of the national environmental bar, including individual practitioners, the American College of Environmental Lawyers and the Corporate Environmental Enforcement Council, reached out to the EPA and requested discussion, urging EPA to retain the Audit Policy.  See e.g., related ACOEL blog postings available here, and  CEEC letter to Cynthia Giles, Assistant Administrative, EPA OECA (Feb. 8, 2013), available here

Common arguments defending the continued implementation of the Audit Policy include the fact that the Audit Policy serves as the basis for a continued culture of compliance even in landscape of dynamic changes to industry and regulation, quantifiable benefits in achieving compliance, as well as serving as a consistent baseline for states adopting their own audit policies.

EPA’s Promotion of Next Generation Enforcement

In 2012, EPA began promoting its Next Generation Compliance initiative.  See Next Generation Compliance article from Environmental Forum, republished here.  With EPA’s NGC, EPA is seeking to streamline federal enforcement oversight with regulations adopting “built-in” compliance, advanced pollution monitoring, electronic reporting, increased transparency and innovative enforcement strategies.  EPA’s examples of “built-in” compliance include standards for manufacturers of mobile sources and air pollution control equipment, where compliance with standards are certified initially by the manufacturer, rather than relying initially on post-installation field testing.  Following installation of air pollution control equipment, EPA’s approach would utilize advanced pollution monitoring to evaluate compliance of operating air pollution control equipment.  Advanced pollution monitoring would also include fence-line monitoring and remote sensing techniques including infrared cameras.  Examples of electronic reporting include NPDES Electronic Reporting, see 78 Fed. Reg. 46006 (July 30, 2013) (proposed rule), and EPA’s Toxic Release Inventory electronic reporting data based, TRI-MEweb, available here. With electronic reporting, greater electronic availability of data allows greater transparency of reported data.  Finally, innovative enforcement strategies build on advanced monitoring, electronic reporting and third-party verification, coupled with industry sector approaches,  including industry wide recognition and notification of noncompliance, followed by set compliance deadlines and, if necessary, enforcement.

EPA’s Reduced Enforcement Goals for 2014-2018 

On November 19, 2013, EPA published its Draft 2014-2018 Strategic Plan, with public comment ending on January 3, 2014. 78 Fed. Reg. 69412 (Nov. 19, 2013).  Comparing EPA’s proposed 2014-2018 enforcement goals to its 2011-2015 enforcement goals shows that EPA intends to significantly cut back on the number of inspections as well as many other enforcement goals.  Specifically, EPA is reducing its 5-year cumulative inspection and evaluation goal from 105,000 inspections to 70,000 inspections.  EPA expects to initiate fewer civil judicial and administrative enforcement cases, setting its initiation goal at 11,600 compared to an earlier 19,500, and conclude fewer cases, 10,000 compared to an earlier 19,000.  Compare  Draft FY 2014-2018 EPA Strategic Plan, available here, to FY 2011-2015 EPA Strategic Plan, available here

Implications of NGC and Reduction in Inspections

EPA’s Next Generation Compliance approaches, coupled with significantly reduced inspections, may seem like a relief to some.  However, EPA’s NGC emphasizes remote monitoring methods and automatic electronic reporting.  In other words, data will be reported electronically, potentially without the necessary context required for a full compliance evaluation.  However, numbers alone do not allow a conclusive compliance determination.  Reliance on mere data without the context achieved with an in-person inspection raises risks that enforcement actions, albeit reduced in number, may be allowed to proceed despite facts that mitigate against taking such action.  Of course, this risk varies depending upon the regulatory program and may be less significant where delegated states maintain sufficient budgets for inspections.  However, this concern remains magnified where qualitative data, such as, for example, fence-line monitoring and use of remote infrared cameras, may be relied upon in the Clean Air Act enforcement context to create a presumption of noncompliance, potentially collected in a manner that is divorced from actual quantitative point-source emission data and permitted parametric operating conditions which facilities rely on to demonstrate ongoing compliance.  While regulated entities maintain documentation demonstrating ongoing compliance, the threat remains that such NGC techniques could mire entities in unnecessary enforcement actions where an in-person inspection could preempt such proceedings.  

In this uncertain enforcement environment, regulated entities will likely want to continue to directly rely on the assurance provided by EPA’s Audit Policy, as well as state audit policies adopted pursuant to, and maintained consistent with, EPA’s Audit Policy and the policies and principles therein.

Conclusion

As of January 2014, EPA continues to allow regulated entities to avail themselves of EPA’s Audit Policy by reporting to named regional EPA Audit Policy staff.  Hopefully, EPA’s dismantling of its electronic Audit Policy reporting program constitutes sufficient savings to allow EPA’s regional offices to continue accepting Audit Policy disclosures. 

EPA Audit Policy Options: What do you think?

Posted on January 7, 2013 by Mary Ellen Ternes

Environmental practitioners and their clients have benefitted greatly from the EPA’s historic implementation of the EPA Audit Policy.  Thus, the level of concern that has been expressed by environmental practitioners in response to EPA’s statements that the Audit Policy may not live through 2013 is not surprising.  For background, see Linda Bochert’s posting, “Dear EPA:  please don’t abandon your Audit Policy!”,  and FY2013 OECA National Program Manager Guidance.

EPA has discussed the basis for its proposal to abandon the Audit Policy in terms of perceived decreasing utility, which creates difficulty in justifying the expense of implementation.  The explanation goes something like this:  with the maturity of the environmental programs, regulated industry knows that it needs to comply by now, thus the incentives provided by the Audit Policy are no longer necessary.  Also, along with industry outgrowing the original purpose of the Policy, the cost of implementing the policy does not justify its continued implementation in this era of shrinking budgets, particularly given the relatively minor noncompliance events reported pursuant to the Audit Policy.

Has EPA really considered the entire calculus?  And, assuming one buys into the external benefits provided by the continued implementation of the Audit Policy, given what’s at stake, isn’t it worth developing options for implementation that don’t impose the same level of staff investment?

Many believe that the Audit Policy has served a purpose far greater than the mere forgiveness of the gravity component of the reported noncompliance events.  For many years, the EPA Audit Policy has provided regulated entities with a mechanism to conduct compliance audits with confidence that noncompliance issues can be corrected without fear of punitive enforcement action.  The Audit Policy continues to serve this purpose, despite the maturity of the environmental programs, because the nature of regulated entities and industry sectors is so dynamic.  Regulated entities are in a constant state of change, as are many EPA programs at any one time.  EPA’s assertion that the EPA’s Audit Policy is no longer needed contemplates regulated entities and applicable regulations as static and monolithic bodies and does not recognize the constant state of change across industry sectors and within individual entities, particularly in response to new and modified regulations.  Industry sectors also vary in their inherent levels of sophistication and adaptability to changing regulatory requirements, depending in large part upon the degree to which the industry has been pervasively regulated in the past.  New regulations across an industry sector upset the equilibrium and demand new management models and compliance approaches, requiring a period of education, acquisition of staff, operational and cultural adaptation to the new requirements.  Adaptation within industry sectors can be slowed when immediate demands are placed on sector resources for all entities in that sector simultaneously such as occurs with new industry sector-wide regulation, prioritizing rapid reaction to new regulation over comprehensive proactive compliance.  In this regulatory environment, the Audit Policy continues to serve the same purpose as it always has, to encourage a culture of compliance in the dynamic landscape in which regulated entities operate.

To read more and provide your own input on how you believe EPA should approach the future of the EPA Audit Policy, click here.