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

Madhu Khanna and Widyawati Diah
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Widyawati Diah: University of Indonesia

Review of Law & Economics, 2011, vol. 7, issue 1, 125-160

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.

Date: 2011
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DOI: 10.2202/1555-5879.1483

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