EPA’S Audit Policy – Incentives For New Owners

by Steve Case

Case, Steven
(402) 341-3070


Purchasers of a business engage in various precautions, such as conducting due diligence and negotiating warranties and indemnities, to limit or protect against liabilities – which may include tax, regulatory and employment matters.  Purchasers also seek to protect against environmental liabilities, which carry the risks of significant penalties and business disruption.  EPA recently provided purchasers with one more tool to protect against environmental liabilities of an acquired business.


EPA’s April 11, 2000 policy on “Incentives for Self Policing: Discovery, Disclosure, Correction and Prevention of Violations,” commonly referred to as the “Audit Policy,” is one of EPA’s tools to encourage companies to attain compliance – by voluntarily discovering, promptly disclosing, correcting, and preventing the reoccurrence of environmental violations.  EPA wants to expand the use of the Audit Policy by tailoring incentives for new owners of businesses and facilities.  In May 2007, EPA published a Federal Register Notice inviting public comment on offering tailored incentives for new owners.  Public comments were generally supportive.

On August 1, 2008, EPA published in the Federal Register its “Interim Approach to Applying the Audit Policy to New Owners” (“Interim Approach”).  Under the Interim Approach, incentives are aimed at new owners that want to make a “clean start,” at recently acquired facilities or businesses, by addressing environmental non-compliance that began prior to the acquisition. EPA believes that the Interim Approach will allow it to test this strategy and learn from practical experience.  The Interim Approach is effective as of its publication date, August 1, 2008.  EPA is seeking public comment on the Interim Approach through October 30, 2008.  Based on public comments, and experience in implementing the Interim Approach, EPA will finalize, revise or discontinue these tailored incentives for new owners.


In order for a new owner of a business or facility to qualify for the tailored incentives, within nine months of the transaction closing, the new owner must:

  • Properly disclose violations to EPA, or enter into an audit agreement with EPA; and
  • Meet all of the conditions of the Audit Policy, as modified for new owners.

If these requirements are met, the new owner may have the penalty mitigated for environmental violations.  Generally, a penalty has two components: gravity and economic benefit.  Under the Audit Policy, up to 100% of the gravity component may be mitigated.  Under the Interim Approach, the new owners may also have the economic benefit component mitigated.
Under the Interim Approach, the penalty mitigation is as follows:

  • No penalties will be assessed against the new owner for the period before the date of acquisition;
  • Penalties for economic benefit associated with avoided operation and maintenance costs will be assessed against the new owner, but only from the date of acquisition; and
  • No penalties for economic benefit associated with delayed capital expenditures or with unfair competitive advantage will be assessed against the new owner if the violations are corrected in accordance with the Audit Policy (i.e., within 60 days of discovery or other reasonable timeframe to which EPA agrees).


The Audit Policy has 9 conditions that must be met in order for a party to be eligible for penalty mitigation.  The Interim Approach modifies certain of these conditions in the new owner context.  The modified conditions as applied to new owners are as follows:

  • Systematic Discovery Condition.  The Audit Policy provides that violations must be discovered through either an environmental audit or compliance management system, in order for a disclosing party to receive 100% mitigation of gravity based penalties (if a violation is discovered outside such a review, and meets all other Audit Policy conditions, 75% mitigation is available).  Under the Interim Approach, EPA waives this condition for violations discovered through pre-acquisition due diligence. EPA recognizes that new owners’ pre-closing due diligence is by its nature  a one-time event, and allows violations discovered as a result to be considered for full penalty mitigation.
  • Prompt Disclosure Condition.  The Audit Policy provides that violations must be promptly disclosed to EPA in writing, within 21 days of discovery.  Under the Interim Approach, for violations discovered pre-closing, a new owner would have up to 45 days after closing to disclose the violations.  For violations discovered post-closing, a new owner would have to disclose violations within 21 days after discovery, or within 45 days after the transaction closing, which ever time period is longer.
  • Excluded Violations Condition.  The Audit Policy excludes certain violations from penalty mitigation. Excluded are violations that resulted in serious actual harm, or may have presented an imminent and substantial endangerment, to human health or the environment.  Under the Interim Approach, where such violations occurred prior to the acquisition, EPA will allow such violations to be eligible for penalty mitigation, absent a fatality, community evacuation or other seriously injurious or catastrophic event.

The other 6 conditions of the Audit Policy remain the same, or substantially the same, under the Interim Approach.


A company purchasing a facility or business has various tools available to protect itself from environmental violations that occurred prior to closing. These tools include:  pre-acquisition due diligence; structure of the transaction (e.g., asset versus stock purchase); negotiating environmental representations, warranties and indemnities; careful evaluation of the likelihood of enforcement action; state audit and leniency policies, and; development and implementation of an action plan to correct the violation(s).  EPA’s Interim Approach is one more tool now available for new owners to protect or limit their exposure.

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