By: Amy Bauer
Third party EH&S audits provide a critical perspective to M&A deals that many do not consider. Without that perspective right from the start, the organization could find out too late it 1) paid too much for the acquisition or 2) invested too much to fix issues. If a target company is exceeding permit limits, currently negotiating with a regulatory agency about violations, operating without necessary permits and approvals, or putting worker health and safety at risk, all of which will be identified during an audit, this will no doubt impact the deal’s bottom line.
Continuous compliance with EH&S laws and regulations is time-consuming, costly, and challenging. Some companies incorporate third party EH&S audits as part of their overall compliance program. As consultants, we are asked to manage and conduct many different types of third party audits. The “what is an audit” is easy – a systemic objective tool to assess regulatory compliance in the workplace. But the “why audit” varies and is often difficult to explain to an organization.
EHS Support asked our lead auditors to expand on the importance of third party EH&S compliance and/or management system audits during the M&A, and what a buyer should know before initiating an audit.
Why and when should an EH&S auditor become involved in the M&A process?
Audit participation can add value to the M&A process and this value can be enhanced if auditors are allowed access throughout the M&A process beginning with the strategic planning stage. EH&S auditors can provide objective feedback to management, and with an experienced understanding of the type of industry, can begin to identify material risks very early in the process before ever stepping foot onsite. If a post-acquisition audit is planned (and we will explain why it should) and the auditor has little involvement during the beginning stages, it can be difficult and time consuming to understand the key risks to develop an audit plan. The more the auditor knows on the front end, the more detailed and focused they can be before, during and after the audit, resulting in a more cost and time effective process.
The use of auditors during pre-acquisition stage may be rejected by the owner of the target company because they do not want to present their inefficiencies, weaknesses, or outright violations, possibly affecting the sale price. Getting that independent, objective view to identify the potential data gaps in the target company’s systems as soon as possible in the due diligence process provides a “no surprise” bottom line. We offer a simple solution by initially conducting a limited high level EH&S compliance review add-on to the Phase I Environmental Site Assessment (ESA), which will identify potential issues and ultimately focus efforts during the post-acquisition audit.
In reality, auditors have a greater level of involvement post-acquisition. One of the audit team’s main tasks post-close is to audit the integration process, not only to identify any gaps, but help establish the “who, what, when, where, and why” of how to fix the problem and eliminate future risk. The key to performing a successful post-acquisition audit starts by having a good understanding of the business, its current risks, knowing who the key stakeholders are, and having a defined set of deliverables, again, all of which should be communicated as early in the M&A process as possible.
What are the benefits of an EH&S audit?
Simply stated, the audit process is designed to identify and correct EH&S compliance issues before “something bad happens.” Besides promoting successful integration post-acquisition (and down the line, a profitable divestiture), the benefits of conducting third party audits are numerous:
- Identify actual or potential compliance issues before they become a problem
- Determine the root cause of compliance problems to prevent a recurrence
- Prepare for announced or unannounced regulatory compliance audits by Federal, state, or local regulators
- Provide independent eyes on the operations to voice an objective assessment
- Maintain a good corporate image in the community
- Avoid potential Notice of Violations (NOVs) and potential fines
- Institute best management practices to further protect your company from spill or release incidents
- Encourage a responsible culture within the company
- Prepare for new regulations in the pipeline that may impact operations and future compliance
- Reduce the risk of business and personal liability
- Identify ways to improve the efficiency and cost effectiveness of the compliance program.
What are the challenges of an EH&S audit?
Even though there are many benefits to conducting third party EH&S audits there are several challenges our clients should at least to be aware of going into an audit:
- The expense of conducting the EH&S audit. Depending on the complexity of the site it may require two or three auditors for a period of one to three days plus time to prepare the audit report.
- Facility EH&S staff, management personnel, and operations staff are a critical part of a successful audit. Their time is required prior to, during, and after the on-site audit. For example, preparing documentation for the auditors, participating in the audit process, and implementing the corrective action plan.
- Facility personnel will need to dedicate time and resources to correct audit findings.
- Once findings are identified and presented to on-site personnel it is the responsibility of the site to correct these deficiencies. If no action is taken, a regulatory agency may view these as more serious “knowing violations”.
- And we get this question quite a bit – Should the findings be disclosed to the regulatory agency? Many states have audit privilege laws to protect the facility from fines. This may mean involving internal or outside legal counsel.
As long as all parties are aware of these potential challenges, a third party EH&S audit is a critical tool for a sound EH&S program.
Does EH&S auditing fix a problem?
No. The audit discovers the noncompliance issue, identifies its root cause, and potential cost to fix the problem (and prevent future occurrence). It is up to the well-designed corrective action plan and full implementation to correct a finding, which if not discovered by a regulatory agency, can come up again 3 to 5 years down the road during divestiture.
Can we rely on the facility personnel to tell us what is wrong?
Not necessarily. Facility EH&S staff are extremely busy keeping up with day-to-day activities at the site and putting out fires. It is difficult to objectively look at your site for compliance issues. It takes an objective viewpoint to look at regulatory compliance and identify systemic problems. EHS Support has expert auditors trained and experienced in conducting audits. Because our auditors work with many industry sectors we see many approaches to compliance and opportunities for best management practices which we can share with the site. Often we tell a company, just let us audit one of your sites and you will see the benefit.
Why use a third party EH&S auditor?
There are many reasons. The most significant are:
- Ensure your facility is in total compliance with EH&S regulations and has a sound EMS
- Independent and objective viewpoint
- Experienced auditors
- Knowledgeable of many industry sectors and experience with Federal and state regulations
What are EHS Support’s recommendations for a successful audit?
- Identify potential problems or areas of concern to the auditors. No matter how experienced, don’t rely on the auditor to know the facility or its history as well as you do.
- Surprise audits have their value, but for a scheduled audit provide enough information to the auditors to be prepared (e.g., location of EH&S records, personnel available to interview, best times to observe certain production areas while in process).
- Ensure your auditor is adequately trained and experienced. You don’t want a junior or mid-level auditor. This is the time to use a senior level auditor who has the facility experience and interviewing techniques.
- Checklists are an effective tool to ensure all technical areas are adequately addressed. Checklists are not all inclusive and the auditor should understand what to look for beyond what’s on paper.
- Finally, take action after the audit. Ensure findings are corrected and procedures are put in place to avoid repeat findings.
If your company is looking for a highly qualified EH&S auditing firm to be involved in your M&A process, please contact Amy Bauer or Bruce Martin.