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Fostering Regulatory Compliance: The Role of Environmental Self-Auditing and Audit Policies

Author

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  • Khanna Madhu

    (University of Illinois, Urbana Champaign)

  • Widyawati Diah

    (University of Indonesia)

Abstract

This paper examines the effect of voluntary efforts to self-audit on compliance with Clean Air Act regulations. It also examines the effect that state audit privilege and immunity laws have on the incentives for auditing and for improving compliance. Using data for a sample of S&P 500 firms, we correct for the endogeneity of the environmental audit decision by estimating a bivariate probit model with 'compliance status’ and 'decision to self-audit’ as two discrete choice variables. Our empirical analysis controls for compliance and self-auditing incentives created by regulatory and community-based pressures. We find that those facilities belonging to firms that have been subject to inspections in the past, that face a stronger threat of liabilities for Superfund sites, and that are more visible due to size are more likely to undertake an environmental audit. State audit privilege and immunity laws are not found to have a statistically significant effect on incentives for self-auditing. Facilities that self-audit are more likely to be in compliance with Clean Air Act regulations. However, audit privilege policies are found to have a statistically significant negative impact on compliance while audit immunity laws are found to have an insignificant impact on compliance.

Suggested Citation

  • Khanna Madhu & Widyawati Diah, 2011. "Fostering Regulatory Compliance: The Role of Environmental Self-Auditing and Audit Policies," Review of Law & Economics, De Gruyter, vol. 7(1), pages 125-160, May.
  • Handle: RePEc:bpj:rlecon:v:7:y:2011:i:1:n:7
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    References listed on IDEAS

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    Cited by:

    1. Earnhart, Dietrich H. & Glicksman, Robert L., 2015. "Coercive vs. cooperative enforcement: Effect of enforcement approach on environmental management," International Review of Law and Economics, Elsevier, vol. 42(C), pages 135-146.
    2. Earnhart, Dietrich & Mark Leonard, J., 2016. "Environmental audits and signaling: The role of firm organizational structure," Resource and Energy Economics, Elsevier, vol. 44(C), pages 1-22.
    3. von Engelhardt, Sebastian & Maurer, Stephen, 2012. "Industry Self-Governance and National Security: On the Private Control of Dual Use Technologies," Annual Conference 2012 (Goettingen): New Approaches and Challenges for the Labor Market of the 21st Century 66052, Verein für Socialpolitik / German Economic Association.
    4. Mary Evans & Lirong Liu & Sarah Stafford, 2011. "Do environmental audits improve long-term compliance? Evidence from manufacturing facilities in Michigan," Journal of Regulatory Economics, Springer, vol. 40(3), pages 279-302, December.
    5. Earnhart, Dietrich & Harrington, Donna Ramirez, 2014. "Effect of audits on the extent of compliance with wastewater discharge limits," Journal of Environmental Economics and Management, Elsevier, vol. 68(2), pages 243-261.
    6. Evans, Mary F. & Liu, Lirong & Stafford, Sarah L., 2015. "Standardization and the impacts of voluntary program participation: Evidence from environmental auditing," International Review of Law and Economics, Elsevier, vol. 43(C), pages 10-21.

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