My name is Patricia Bangert. I am the Director of Legal Policy for the Attorney General's Office in Colorado. I am submitting this testimony on behalf of Gale Norton, the Attorney General of the State of Colorado. We appreciate the opportunity to address the important subject of state voluntary audit laws.


We want to accomplish three things in this testimony. First, we want to clear up some misconceptions about our State voluntary audit law. Second, we want to tell you about some problems we've been having in fully implementing the law. Third, we want to urge you to take legislative action.

Colorado had one of the first voluntary audit laws in the country. Under the audit law, businesses, individuals, and other regulated entities may claim a privilege from disclosure in civil, administrative and criminal matters for voluntary self-evaluations if violations found in the evaluation are corrected. A "voluntary self-evaluation" is a self-initiated assessment, audit or review, not otherwise expressly required by law, performed for a company or person to determine whether the entity or individual is in compliance with environmental laws.

The Colorado law was also the first to grant a limited immunity from fines for disclosures of violations discovered in audits. Specifically, the law grants businesses, individuals, and other regulated entities immunity from fines for civil, administrative and negligent criminal violations when a violation is discovered in a self-audit and corrected. Colorado legislators were careful to craft exceptions to both privilege and immunity provisions so that the provisions could not be misused. I will explain some of those exceptions below.

Myths and Realities

We think that our law is a positive step forward in protecting the environment of Colorado. Others, however, oppose our statute and the voluntary audit laws of other states. We think that much of this opposition is based upon some basic misunderstandings of the language and effects of the statutes. We want to mention here three basic misunderstandings and attempt to correct them. These myths and the realties are as follows:

1. Myth: The audit law allows companies to hide information from regulators. Reality: Audit laws do not in any way affect the ability of regulators to get information necessary to determine compliance with the laws. In fact, audit law encourages the creation of information and the undertaking of analyses that would not otherwise be available to a company or regulator.

The Colorado voluntary audit law applies to voluntary self examinations. The statute does not allow companies to hide information that is required to be reported to regulatory agencies. The law does not allow companies to shield factual information necessary to determine compliance with the environmental regulations. Federal and state environmental regulators have no less authority to inspect and monitor facilities under the audit law than they did before its passage.

What the audit law does, in reality, is to encourage companies and other regulated entities to develop information that neither they nor the regulators had before the law was passed, specifically, to encourage companies to voluntarily examine their own environmental compliance and to correct any deficiencies. This is especially important for small businesses. Large companies can protect audits through the privilege accorded attorney-client communications. Small companies often cannot afford to hire attorneys, and, thus, need the ability to voluntarily evaluate their compliance with environmental laws without providing regulators a blueprint for enforcement action. This is accomplished in the audit law through the privilege provisions. The immunity provisions of the audit law encourage both large and small businesses to report violations discovered and work with the State Department of Public Health and Environment to correct them.

2. Myth: The audit law would result in greater environmental degradation by allowing companies to commit violations of the environmental laws and then hide the violations. Reality: The audit law represents a positive environmental gain because it results in violations being discovered and corrected, violations that probably would not have been found absent an audit.

The Colorado audit law applies only if violations discovered in a voluntary self-audit are corrected. The privilege does not apply if a company finds a violation and that violation is not corrected. In addition, immunity will not be granted if the violation reported is not corrected. In short, there is a positive environmental gain from the voluntary audit law. Self-examinations that would not otherwise be done are being done; violations that would not have been discovered are being discovered and corrected.

3. Myth: The audit laws away the authority of regulators to prevent harm to the public and the environment. Reality: Regulators have ample authority under the audit law to prevent abuses or harm to the public and to the environment.

A court or administrative law judge can order the disclosure of an audit if any person can show: (1) that the person or entity seeking the privilege is not acting to correct violations found in the audit; (2) that compelling circumstances require the audit to be disclosed; (3) that the privilege is being asserted for a fraudulent purpose or that the audit was done to prevent disclosure in an ongoing or imminent investigation; or (4) that information in the audit shows a clear, present and impending danger to the public health or environment outside of the facility. Further, the privilege from disclosure granted in the audit law does not apply to any information or documents required to be maintained, reported or available to regulators under any law or regulation; information acquired independently by regulators; or documents prepared before or after the audit.

In addition, disclosure immunity may not be granted for violations not corrected, or for disclosures required to be made under an entity's permit; or to entities with a history of violations. Finally and most important, disclosure immunity goes only to fines for civil, administrative and negligent criminal penalties. The regulators retain full authority to issue compliance orders, to get injunctive relief, to secure any remedy other than fines, and to prosecute criminally those who blatantly violate the environmental laws.

The Colorado Experience

From the passage of the Colorado audit law to this date, twenty-five entities have made twenty-eight disclosures and requests for immunity under the law. (Some companies made more than one disclosure and request for immunity.) The Department of Public Health and Environment granted seventeen of these requests in whole, one request in part, and denied five requests. Five requests are still pending. The violations involved the following programs: water (five disclosures), air (fifteen disclosures), and waste (eight disclosures).

Of the disclosures made, many have led to actions that will provide long-term environmental benefits and will enhance compliance. These benefits include: conducting staff training in environmental procedures; modifying company practices that result in violations; and discontinuing certain emissions entirely. In addition, disclosures were received from at least nine companies or emission sources that were not known to the State's regulators because they were operating without certain permits, and were not likely to have been discovered independently by State inspectors. These self-identified companies are now "in the system" and their compliance can be tracked by regulators. In fact, many of the violations reported would not have been found by regulators under the State's present regulatory scheme, or by company officials, absent a self-evaluation.

Colorado's voluntary audit law, then, has resulted in positive environmental gains. More could be done, however. There are thousands of permitted facilities in Colorado. Twenty-eight voluntary disclosures constitute a very low percentage of regulated entities. We believe that more persons and entities would utilize the provisions of the audit law if not for independent action and threats of action by the Environmental Protection Agency against companies utilizing the audit laws.

EPA Interference and the Potentially Failed Experiment

Another aspect many people fail to understand about the Colorado voluntary audit law is that it is an experiment. Many years ago, Justice Holmes described the states as the "laboratories for democracy." The audit laws are perfect examples of states experimenting with a concept that may potentially result in significant environmental gains. The "command and control" method of environmental regulation has proven to be less than totally effective in promoting compliance with environmental laws. For one thing, we simply do not have the resources to do all the inspections and monitoring that would be needed to get one-hundred percent compliance. Everyone now agrees that something more is needed to encourage companies to voluntarily look at their own compliance and correct deficiencies. Many states are experimenting with audit laws to determine whether those laws may be part of that "something more."

Colorado's voluntary audit law applies only to audits, and, thus, to disclosures arising from those audits performed before June 30, 1999. Our lawmakers gave the audit experiment five years to prove itself or fail. Because of interference by a federal agency, that experiment may never be fully completed. Specifically, the Environmental Protection Agency appears to be doing its best to ensure the failure of the audit experiment.

We would point to two principal ways in which EPA is thwarting state initiatives in the voluntary audit area:

1. Requiring states to change their audit laws by utilizing the power to revoke state delegations under the environmental statutes; and

2. Threatening or taking actions against companies who utilize audit laws under the Agency authority to overfile and request information.

The Environmental Protection Agency has made no secret of its dislike for state audit laws. We have no doubt that the Agency truly believes that its position on those laws is the correct one. The problem this presents for the states, however, is that the Agency is utilizing its various authorities under the environmental laws to compel states to change their audit statutes and to discourage companies from utilizing those laws.

First, EPA has successfully intimidated several states into amending their audit laws. As you know, EPA has the authority to delegate, and the authority to revoke delegations of authority to carry out many of the environmental laws to the states. For several years, EPA has threatened to revoke delegations under the Clean Water Act, the Clean Air Act and RCRA in states with audit laws.

Of late, the Agency has embarked upon a course of negotiating individually with states to address issues with delegated programs. The results of the negotiations, not surprisingly, have been that the states are required to change their laws so that their provisions are satisfactory to the federal agency. Also not surprisingly, the new state statutes look very much like EPA's own audit policy. For example, in Texas, the EPA required the State, among other changes, to eliminate the application of immunity and privilege provisions to criminal actions and to eliminate immunity where a violation results in a serious threat to health or the environment or where the violator has obtained a substantial economic benefit from the violation. What is left in the Texas statute -- a privilege in civil actions and immunity from the gravity component of civil and administrative fines -- looks very much like the EPA Final Policy on Environmental Audits. In short, EPA has embarked upon a campaign to make state audit policy's mirror images of its own. It is truly a sad state of affairs when a federal agency can dictate the contents of legislation to a sovereign state.

Several months ago, EPA began negotiations with Colorado state officials regarding our audit law. The Agency required negotiations after receiving a petition from a citizen group requesting the Agency to revoke the State's delegation under the Clean Water Act. Those negotiations are ongoing and we would be happy to keep you informed about their progress.

The second way in which EPA is thwarting state initiatives in the audit area is by discouraging companies from utilizing audit laws. The Agency has successfully done this by taking actions, or threatening action, which appears to retaliate against companies that do not use the provisions of the audit law. These actions include overfilings and burdensome requests for information. Our experience in Colorado has been that EPA has dramatically increased actual and threatened overfilings. From October of 1995 through September of 1996, EPA overfiled in only two cases in the entire United States. In the first four months of this year, EPA overfiled in three cases in Colorado alone and has threatened to overfile in at least ten more. In each instance in which EPA has overfiled, violations were corrected and there was no continuing harm to the public or the environment. The EPA brought its case solely because it disagreed as a policy matter with the amount assessed in fines by the State against the violator. Following are the companies against which EPA overfiled and the fines sought by the State and by EPA:

CompanyState FineEPA Fine

Denver Radiation$160,000$466,000


Platte Chemical $400,000$1,2000,000

In addition, EPA has specifically threatened to overfile against three entities regarding disclosures made under Colorado's audit law: the Denver Water Board, Total Petroleum, and Western Mobile. Perhaps as a prelude to an overfile, the Agency has burdensome requests for information to at least one of these entities.

The Denver Water Board, a quasi-governmental entity supplying water to Denver residents, voluntarily audited its environmental compliance in 1995. During the course of that audit, it found several violations of the Colorado Water Quality Control Act and hazardous waste requirements for small quantity generators. Immediately following its discovery of the violations, the Water Board began to take corrective action. All violations were corrected to the satisfaction of the State Department of Public Health and Environment and the Board requested immunity from fines. That request is presently under consideration by the Health Department. In all probability, none of the violations discovered in the Board's audit would have been found by regulators or the Board absent the voluntary self-evaluation.

The EPA rewarded the Water Board for its initiative by requesting hundreds of pages of documents from the Board regarding the violations. Nothing can be more intimidating to companies wanting to use the audit law than the EPA actions.

Under the State's audit law, information disclosed by a business or person seeking immunity from fines becomes public upon disclosure. This information may then become a blueprint for enforcement actions by EPA if it wishes to overfile or seek further information. Potential federal action, then, discourages the use of the audit law. In fact, I have personally spoken to several attorneys representing Colorado companies and they have indicated that they would not advise their clients to utilize the audit law because of the threat of federal action. These companies--specifically those large enough to hire experienced environmental counsel--will simply protect audits under attorney-client privilege.

What is lost under the present state of the laws is the means and incentive for small companies to do audits and for all companies to voluntarily disclose and correct violations. This brings us to the subject of federal legislation.

The Need for Federal Legislation

We believe that some type of federal legislation is required in order to fully carry out the audit experiment. As you know, there have been numerous bills introduced in the past several sessions of Congress, ranging from a federal audit privilege and disclosure immunity bill to legislation simply prohibiting federal action against an entity utilizing a state disclosure immunity provision. We do not comment here on which type of bill might be preferable. Because of the real and perceived threat of federal action against companies and persons utilizing audit laws, we would urge you to consider at least some legislation protecting entities who disclose violations to state regulators.

The Department of Justice and EPA have argued that EPA's Final Policy Statement on Environmental Audits is sufficient to provide businesses and individuals with the protection they need under federal law. But EPA's policy is just that--a policy that can be changed at will, and on a case-by-case basis, by the Agency. The Final Statement says:

The policy is not final agency action, and is intended

as guidance. It does not create any rights, duties,

obligations, or defenses, implied or otherwise, in any


In light of that disclaimer, the promises contained in the Policy do not carry a lot of weight. The EPA Policy, then, is insufficient to provide the type of protection that is needed to make the state audit experiment successful. Unfortunately, the EPA will not voluntarily stop its aggressive war on state audit programs. Federal legislative action, then, is needed to bring about a cease fire.

In Conclusion

On behalf of Gale Norton and myself, we again thank you for this opportunity to testify regarding state audit laws. We would be happy to offer any help that we can provide in securing legislative solutions to the problems outlined here.