Envirocompany Limited (EL) is a pulp and paper company that has been in operation for 50 years. Its shares trade on a major stock exchange. It is located in a small town in Northern Ontario and employs thousands of people. In fact, the town exists mainly because of the jobs created by EL. Its equipment is fairly outdated and pollutes the surrounding water and air with chemicals that have been shown to be carcinogens. The old equipment is part of the reason for the company's "success" since it is all paid for and requires little maintenance. The employees tolerate the pollution because EL gives them good jobs and keeps the local economy going.
Last year, a new chairman of the board of directors was appointed to EL, Charles Champion. He first became aware of the size of the pollution problem before being appointed to the board and he felt that he would like to do something about it. He took this mission as a personal challenge. In the first year of his appointment, he commissioned several in-depth studies on how EL might reduce or eliminate the pollution. He wanted to be careful to protect himself and the other members of the board because directors were increasingly being held personally liable for the actions of companies. The company has begun cultivating an image implying that it would like to become more environmentally conscious while at the same time preserving jobs.
Most studies pointed to the old machinery and recommended that it be replaced by new state-of-the-art equipment. Cost estimates ran into the millions of dollars and the board of directors felt that the company would not be able to survive that type of expenditure. One study proved that the company would not even be in business any more, given the cost of new environmentally friendly equipment, declining demand for unrecycled newsprint, and increasing competition from abroad. That study was quickly put away on a shelf.
Recent environmental studies have shown that the pollutants were seeping into the water table and finding their way into neighbouring communities. The studies showed that there were increasing incidences of birth defects in animals and humans in the affected areas, including increases in sterility for certain aquatic and marine life. This caused several politicians to start grandstanding and calling for tighter pollution controls and steeper fines.
In the past year, there have been reports of people living downstream getting sick, apparently from the chemical pollutants from EL. One individual threatened to sue, and EL's lawyers were privately acknowledging the potential for a class action suit. EL has insurance that would cover up to $1 million in damages.
Meanwhile, the accountants were struggling with how to account for the problem in the year-end statements.
Instructions
Adopt the role of the company controller and discuss the financial reporting issues.