Vaughn Cook is a Central Region Assurance Partner with Ernst & Young, a global public accounting firm, and has 18+ years of experience serving various industries, including energy and utilities. Specific companies he has served include CONSOL Energy Inc., CNX Gas Corporation, and EQT Gas Corporation. Cook’s responses have been consolidated and edited for clarity.
1. How do corporations currently disclose risks of fracking and other environmental risks to investors?
Disclosures of matters such as these generally manifest themselves in the Risk Factors discussion within a company’s annual report that is filed on Form 10-K with the SEC. The Risk Factors are presented in Item 1A, which places them in the front portion of the annual filing, near the beginning of the document. To the extent that a company concluded that such risks were significant, it would also include a similar discussion in any securities offerings that it may issue. Finally, to the extent that a company has had any environmental actions taken against it that have or may have a significant impact on the company’s financial statements, disclosure of those matters would be included in the footnotes to the company’s financial statements.
2. From an audit perspective, how important is it for companies to disclose the risks of fracking to investors?
While fracking has been a very popular topic in the media, in my experience with various public and private companies operating in the industry in our Appalachian region, I have not encountered any instances where issues related to fracking have had a significant impact on the financial statements. As a result, from an audit perspective, fracking has not introduced any significant risks to the financial statements and, therefore, audit-related disclosures regarding fracking are generally not necessary and have not been included. While disclosures and discussion regarding fracking may be relevant to investors to better understand the operations and strategy of the companies in which they invest, the perspective of those disclosures would come from a topic other than the audit.
3. In the past few years, shareholder concerns have been increasing about the risks of fracking. What responsibility do you think corporations have to disclose the risks of fracking to investors?
Companies face a difficult balancing act relative to providing shareholders appropriate insight into their operations while trying to provide information that isn’t overly technical such that an average investor actually gains less clarity, rather than more, from that information. In my opinion, fracking has received excessive focus when, in reality, the limited issues that have arisen from well development in this area have been unrelated to fracking. For the most part, the developers in this region have operated responsibly and have worked diligently to ensure that their well development operations have minimal impact on the surrounding environment. However, given the excessive attention that fracking has received, it may be beneficial for some corporations to provide more information in an effort to dispel the misconceptions associated with this development technique.
4. How much power do investors have in pressuring corporations to release reports detailing risks of fracking?
As shareholders, investors always have the right to put forth proposals for consideration by the Board of Directors and direct vote by the shareholders. Any appropriately submitted shareholder proposal will be put forth to the overall shareholder group for a vote. Certain companies have received such shareholder proposals that have been voted on by the overall shareholder group. However, I am not aware of any such proposals that received the necessary levels of shareholder support and votes for passage.
5. Because the role of financial reporting is to give investors, creditors, and other external users relevant information to make decisions, what role do you think annual reports can play in corporations disclosing risks to investors?
From a pure financial reporting perspective, unless a company’s fracking activities have led to financial reporting consequences, the financial reporting process does not provide a relevant platform to discuss fracking, as the financial statements may have appropriately not reflected any impact from fracking. However, as a company’s annual report may be the only financial document reviewed by an average investor, the Risk Factor discussion of fracking and other environmental matters may provide an effective platform to discuss any such potential risks that a company may face. In the current state of investor reporting, annual reports are highly regulated and consistent among SEC registered companies. Therefore, a separate investor report may introduce more confusion relative to this topic because no regulatory framework exists to ensure consistency for such reporting.
6. As environmental concerns increase, do you see an increasing number of investors, communities, and advocacy groups increasing pressure on corporations to disclose risks of fracking and other activities that have potential negative impacts on the environment?
Shareholder and advocacy group activity in this area has increased, likely fueled by the attention on fracking within the media. However, although I’ve seen and heard of shareholder proposals at certain SEC registrants, companies that file financial statements or other documents with the SEC, to provide deeper insight and information relative to a company’s fracking and overall well-development activities, I am not aware of any such proposals receiving adequate shareholder support for passage.