Energy & Environment Lab Gujarat Auditing Study
Typically, major companies pay auditors to examine their books under the so-called “third-party” audit system. What impact does this conflict of interest have on the actual performance of auditors?
Energy & Environment Lab Director Michael Greenstone and his colleagues worked with the Gujarat Pollution Control Board in Gujarat, India, to see if the auditors’ reports would be different under a new arrangement.
In a study of about 500 industrial plants, half of the auditors were hired and paid by the plants, the other half were randomly assigned, paid fixed fees, and received incentive payments for accurate reports. All told, across several different air- and water-pollution measures, inaccurate reports of plants complying with the law dropped by about 80 percent under the new arrangement. The state used this information to enforce its pollution laws, and within six months air and water pollution from the plants receiving the new form of audit were significantly lower than at plants assessed using the traditional method, reducing air pollution by 28 percent.
"Our partnership proves the success of innovative, evidence-based policymaking and is a model for how researchers and policymakers can make a big difference by working together."Hardik Shah Member Secretary, Gujarat Pollution Control Board
“The [Gujarat Pollution Control Board] led the way toward real change by working with us to pilot reforms and testing whether they work in a rigorous way. This partnership is a model for how researchers and policymakers can work together more effectively to address real-world problems, not only in India but around the world.”Michael Greenstone Faculty Director, Energy & Environment Lab
Environmental regulators in Gujarat, one of India’s fastest-growing industrial states, found themselves in an implausible situation a few years ago: Every single city breached national air quality standards. And yet environmental audits kept finding that factories met pollution limits.Eduardo Porter Columnist, New York Times