Role of an environmental auditor during M&A

When it comes to hiring an environmental auditor for a Merger & Acquisition (M&A) project, it is important to hire with end results in mind. The purpose of the audit is to look for critical items that can impact the M&A or cost of achieving compliance once the M&A is complete. Knowing what the senior leadership expects is paramount before hiring the environmental auditor. Competence of the environmental auditor is equally important.

Following are some of the issues to keep in mind:

1. Agree upon quantifiable key performance indicators (KPI) in advance of the M&A audit. Example: Number of NOV’s during the past three years; Number of permits in place; Potential to Emit versus Actual emissions; Potential for production increases, installation of retrofit technology, etc.
2. Determine the total time that the auditor will have to review the data room and to ask questions during the site visit. Usually the site visits are limited to half-day with lesser time for the environmental auditor.
3. Understand the difference between “minor” and “major” findings. Some findings: like incorrect signatory authority or incomplete Emergency Response Plans may be minor issues. Lack of applicability determinations or missing programs may be major issues, and should be the primary focus of the M&A audit.
4. Environmental findings should be finalized soon after the site visit and a concise executive summary should be shared with the senior M&A team.

Anecdote from an M&A audit: I once audited a power plant on behalf of a buyer. This facility was initially permitted as a baseload power plant but had to operate intermittently due to market conditions. Due to numerous startup & shutdowns, and not accounting for Carbon Monoxide (CO) emissions during startup and shutdown, the power plant was exceeding the annual emission limit. The compliance issue would require a permit modification, self-disclosure, and potential installation of a retrofit technology.  This finding was communicated soon after the M&A audit and became a critical item during the M&A agreement. Ultimately, the cost associated with the compliance issue was millions of dollars in installation of a CO catalyst and a negotiated settlement with the regulatory agency. The seller paid for it.

In-depth experience with the regulations matters! The environmental auditor’s role is to provide facts and findings to facilitate an informed decision; and not to make recommendations. If your M&A environmental auditor is writing voluminous reports with numerous inconsequential findings…Beware! You brought a hunting dog on a fishing trip!

If you have any questions contact Sam Joshi, P.E. at (215) 389-2811.