Turning Themselves In: Why Companies Disclose Regulatory Violations (original) (raw)
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The Causes and Consequences of Industry Self-Policing
SSRN Electronic Journal, 2007
Innovative regulatory programs are encouraging firms to police their own regulatory compliance and voluntarily disclose, or "confess," the violations they find. Despite the "winwin" rhetoric surrounding these government voluntary programs, it is not clear why companies would participate and whether the programs themselves do anything to enhance regulatory effectiveness. Tasked with monitoring the legality of its own operations, why would a firm that identifies violations turn itself in to regulators rather than quietly fix the problem? And why would regulators entrust regulated entities to monitor their own compliance and enforce the law against themselves? This paper addresses these questions by investigating the factors that lead organizations to self-disclose violations, the effects of selfpolicing on regulatory compliance, and the effects of self-disclosing on the relationship between regulators and regulated firms. We investigate these research questions in the context of the US Environmental Protection Agency's Audit Policy.
The Regulator's Role in Encouraging Self-policing: Evidence from the EPA's Audit Policy
2012
Explicitly designed "to encourage self-policing" to "promote [more] ethical and lawful conduct [in] the health care industry" "detail the steps taken to cure the violation and to prevent any recurrence" Designed to encourage environmental compliance auditing 5 US EPA's Audit Policy Objective and approach implement environmental auditing: "systematic, objective, and periodic" to encourage greater compliance with laws and regulations that protect human health and the environment encourage regulated entities to voluntarily discover, and disclose and correct violations of environmental requirements Incentive Mitigates 75% or 100% of gravity-based (punitive) penalty for regulatory violations facilities self-disclose Key conditions Self-disclosures must arise from: "systematic discovery of the violation through an environmental audit or the implementation of a compliance management system" Voluntary discloser must make assurances that it will "prevent recurrence of the violation"
Big field, small potatoes: An empirical assessment of EPA's self-audit policy
SSRN Electronic Journal, 2004
Environmental self-auditing is said to deserve and require encouragement. Although firms can audit themselves more cheaply and effectively than regulators, they are deterred for fear that information they uncover will be used against them. To reduce this disincentive, EPA's "Audit Policy" lowers punitive fines when firms promptly disclose and correct self-discovered violations. While some contend that the Audit Policy is inadequate, EPA touts its success based on the policy's track record. Our examination of that track record leads us to question EPA's claim. Comparing the violations in these cases with those detected by standard EPA enforcement suggests that the typical self-audited violation is relatively minor. Cases arising under the Policy are more likely to concern reporting violations and less likely to concern emissions. The relative insignificance of self-audited violations raises a number of policy questions, including whether the Audit Policy should be revised to play a larger role in enforcement.
Coming Clean and Cleaning Up: Is Voluntary Disclosure a Signal of Effective Self-Policing?
SSRN Electronic Journal, 2008
As regulators increasingly embrace cooperative approaches to governance, voluntary public-private partnerships and self-regulation programs have proliferated. However, because few have been subjected to robust evaluation, little is known about whether these innovative approaches are achieving their objectives and enhancing regulatory effectiveness. In the context of a federal government program that encourages companies to voluntarily self-police and self-disclose regulatory violations, we examine how participation affects the behaviors of regulators and regulated facilities. We find that on average, facilities that committed to self-police experienced a decline in abnormal events resulting in toxic pollution, and that regulators reduced their scrutiny over self-policing facilities. Upon closer examination, we find strong evidence of these effects among facilities with clean past compliance records, but find no such evidence of among facilities with more problematic compliance histories. These findings support the theoretical promise of meaningful self-policing practices and suggest that voluntary disclosure can serve as a reliable signal of future compliance-but only among a subset of facilities.
2008
State-level statutes provide firms that engage in environmental self-audits, and that selfreport their environmental violations, with a variety of different regulatory rewards, including "immunity" from penalties and "privilege" for information contained in selfaudits. This paper studies a panel of State-level industries from 1989-2003, in order to determine the effects of the different statutes on toxic pollution and government inspections. We find that, by encouraging self-auditing, privilege and limited immunity protections tend to reduce pollution and government enforcement activity; however, more sweeping immunity protections, by reducing firms' pollution prevention incentives, raise toxic pollution and government inspection oversight.
Discovery vs. Disclosure: EPA's Audit Policy and Hazardous Waste Compliance
2003
EPA's Audit Policy is a voluntary self-policing program that reduces penalties for violations of environmental regulations. This paper examines the Audit Policy's effect on compliance with hazardous waste regulations using data for 9,500 facilities across the U.S. The analysis also considers the effect of state audit and self-policing programs. The federal Audit Policy appears to decrease the number of reported hazardous waste violations as do state programs that only include audit privilege. However, state programs that include both audit privilege and immunity appear to encourage violation. Finally, state self-policing programs that do not require audits appear to decrease violations. *The College of William & Mary, Williamsburg, VA, 23187. Email: slstaf@wm.edu.
Coming Clean and Cleaning Up: Does Voluntary Self-Reporting Indicate Effective Self-Policing
Regulatory agencies are increasingly establishing voluntary self-reporting programs both as an investigative tool and to encourage regulated firms to commit to policing themselves. We investigate whether voluntary self-reporting can reliably indicate effective self-policing efforts that might provide opportunities for enforcement efficiencies. We find that regulators used self-reports of legal violations as a heuristic for identifying firms that are effectively policing their own operations, shifting enforcement resources away from those that voluntarily disclose. We also find that these firms that voluntarily disclosed regulatory violations and committed to self-policing improved their regulatory compliance and environmental performance, which suggests that the enforcement relief they received was warranted. Collectively, our results suggest that self-reporting can be a useful tool for reliably identifying and leveraging the voluntary self-policing efforts of regulated companies.
Should you turn yourself in? The consequences of environmental self-policing
Journal of Policy Analysis and Management, 2007
Facilities that self-police under the Environmental Protection Agency's Audit Policy are eligible for reduced penalties on disclosed violations. This paper investigates whether self-policing has additional consequences, in particular whether self-policing reduces future enforcement activity. Using data on U.S. hazardous waste enforcement and disclosures, I find that facilities that selfpolice are rewarded with a lower probability of inspection in the future, although facilities with good compliance records receive a smaller benefit than facilities with poor records. Additionally, facilities that are inspected frequently are more likely to disclose than facilities that face a low probability of inspection. The results suggest that facilities may be able to strategically disclose in order to decrease future enforcement.
Better regulatory compliance through environmental auditing: A reform whose time has passed
Journal of Policy Analysis and Management, 2007
However, under certain conditions, business access costs are higher than residential costs, so that a higher charge is justified on the basis of economic efficiency and equity. B m E R REGULATORY Despite all of the attention devoted to the relative merits of com-COMPLIANCE peting policy instruments for controlling pollution (effluent THROUGH charges, emission offsets, auction schemes, and so on), from a prac-ENVIRONMENTAL tical standpoint, enforcement remains the crucial issue regardless AUDITING: A REFORM of the regulatory regime adopted. Without compliance, even the WHOSE TIME HAS cleverest of control schemes will fail. Unfortunately, government PASSED compliance efforts typically fall into an unproductive mindset about criminal sanctions. Maintaining a "criminal enforcement Stephen H. Under presence" is thought to deter unlawful pollution just as it deters any other legally proscribed conduct. Given this mindset, the seriousness of enforcement is measured more by the magnitude of the sanction and the tone of the rhetoric, than by the likelihood of detection. Threats and disproportionate sanctions are accompanied by hostility and confrontational tactics, creating a climate of regulatory unreasonableness which undermines control objectives. This approach has been both costly and counterproductive.' Ironically, proposals to reform this system adhere to the same logic but merely restrict the scope of its application: Sure, there are criminals out there, the thinking goes, but there are good citizens too. Accordingly, enforcement efforts can be scaled down by giving the good citizens responsibility for their own compliance. Environmental auditing is one such proposal currently being considered by the federal government and promoted for reducing the costs of both enforcement and compliance.* Although reforms aimed at promoting compliance are badly needed, this reform, like the enforcement approach it builds upon, is premised on a fundamental misconception of the compliance decision. Potential polluters do not apply the same logic as turnpike drivers who come to an empty toll station. Conscience and the other internal constraints on individual behavior cannot be the principal values in a competitive firm's decision calculus. And while economic motivations may overlap with moral ones, they are seldom the same. Thus, reforms premised on notions of individual guilt and fear of potential criminal sanctions represent an unproductive investment of resources better devoted to raising the likelihood of detection.
Greenwash: Corporate Environmental Disclosure under Threat of Audit
Journal of Economics & Management Strategy, 2011
We develop an economic model of "greenwash," in which a firm strategically discloses environmental information and a non-governmental organization (NGO) may audit and penalize the firm for failing to fully disclose its environmental impacts. We identify conditions under which NGO punishment of greenwash backfires, inducing the firm to become less rather than more forthcoming about its environmental performance. We show that complementarities with NGO auditing may justify public policies encouraging firms to adopt environmental management systems. Mandatory disclosure rules offer the potential for better performance than NGO auditing, but the necessary penalties may be so large as to be politically unpalatable. If so, a mix of mandatory disclosure rules, NGO auditing and environmental management systems may be needed to induce full environmental disclosure.