Effects of audit frequency, audit quality, and facility age on environmental compliance

Abstract

This study explores the effect of environmental self-audits (‘audits’), which represent an important type of environmental management system practice, on the extent of facilities’ compliance with wastewater discharge limits. Previous studies of environmental audits explore either the presence or frequency of audits only, while ignoring the quality of audits and heterogeneous effects across facility types. Our study contributes to the economic literature by examining the role of audit quality, as measured by the comprehensiveness of the audit protocol, and the influence of facility age on the effectiveness of more frequent auditing. These two features prove important especially in combination. Our study empirically examines the U.S. chemical manufacturing sector using survey and publicly available EPA data. Empirical results reveal that more frequent audits improve the extent of compliance but only for older facilities and only when these facilities conduct high quality audits. In contrast, for newer facilities, more frequent high quality audits fail to improve compliance; worse yet, more frequent low quality audits sadly undermine compliance. Both sets of results are consistent with our hypotheses.