Harvard/Georgetown University Study on EPA Self-Audit Policy

One of our readers made the comment that a recent Harvard/Georgetown University study on EPA’s Self-audit Policy shows that it may not be good for all companies. 

Below is a brief summary of the Harvard/Georgetown findings from the reader’s website:

Our results … demonstrate that Audit Policy participants with clean past compliance records improved their environmental performance by reducing their accidental releases of toxic chemicals to the environment.  We also find that regulators rewarded these effective self-policers with an inspection holiday.  By contrast, bad apple self-disclosers did not improve their performance compared with similar non-disclosing firms.  We find no evidence that regulators altered their scrutiny over these ineffective self-policers.

… it turns out that regulators are quite adept at … sorting the good apples from the bad.  We found that regulators had accurately parsed these two groups of self-disclosers, rewarding the former but not the latter with inspection holidays.

… self-disclosing firms on average reduce the number of abnormal events resulting in toxic chemicals being released to the environment.”


My comments on this study are as follows:

The study is flawed in its basic premise. It presupposes that a company undertakes the self audit because it expects an “inspection holiday” AND improved performance. Quite the contrary – the MAIN focus and reason for a company to go the self-audit route with EPA is to secure substantial penalty waiver and avert possible criminal sanction in the face of uncovered environmental violations. The subsequent improvement in environmental performance is a natural byproduct and bonus as a result of the remedial action following the self  disclosure.

The study also finds out that “self disclosing firms on average reduce the number of abnormal events”. Well – the reason is very simple. They have few is because they perform audits! They discover small problems before they become major abnormal events. Nothing new here. That’s why people do environmental audits.

As to the “inspection holiday” – you do not need a Harvard study to discover that a regulatory agency carries out more inspections on the bad apples. It is common sense and it happens in the real world. Agencies generally do not waste their limited resources on good apples. Why would they?  They can get a much larger return by going after the dirty companies. Again, nothing new here.



6 responses to “Harvard/Georgetown University Study on EPA Self-Audit Policy

  1. I agree with you completely. We have saved clients thousands of dollars by encouraging them to self disclose when things were discovered during audits.

  2. Than you Katherine, It is often difficult for a client to embrace the self disclosure concept at first. But they usually come around after they have done the math.

  3. Norman – I think you should spend time reading the report itself because you missed key points. I didn’t summarize all the details about the report background, methodology and goals, some of which are relevant to your comments.

    First, the authors did not presuppose that an inspection holiday was the prime motivation for companies to consider self disclosure. Rather, the authors conducted an empirical analysis of whether regulators trusted the self-disclosing companies enough to either leave them alone or go after them further. The study showed that the regulators’ actions in that regard are based less on the technical content of the specific disclosed information, and more on the regulators’ perception of whether the disclosing company is a “good apple” or a “bad apple”. That is interesting information – especially in the context of M&A and EPA’s “new owner” policy. Should a new owner self disclose as part of the transaction? It would seem that the answer depends on whether the buyer/target are viewed as good apples or bad apples.

    Second, the study provides statistical analysis correlating audits with occurrences of “unplanned releases” – not just administrative non-compliance. Most EHS auditors who have been around awhile have most likely been faced with the question “Why didn’t the audit find that?”, which begs the question of whether audits in general – with all their inherent limitations – are actually effective in preventing major events. This study provides positive empirical correlation between audit activities and the actual reduction of unplanned releases.

    So I do think that the study – when read in its entirety – does indeed provide new perspectives on environmental auditing. Some environmental professionals may continue to argue that point. But they would have a difficult time arguing that this study provide highly credible views that would resonate with senior management.

    And that may be the most important news of all.

  4. Thanks for your comments. I think there are a few key words missing in your sentence: “But they would have a difficult time arguing that this study provide highly credible views that would resonate with senior management.”

    First of all, my earlier comments were on your summary of the study. So I didn’t comment on anything that you left out. As for the business of good apple vs bad apple, surely it cannot be a big surprise or revelation to the Harvard team that an agency would have more trust in a company with good compliance history and reputation. Trust and reputation are the most valuable assets a company has when dealing with regulators. What that means is that a bad apple will have to work extra hard on the self audit policy’s condition 9 (cooperate with EPA).

    How will you counsel your client if it is a bad apple and new owner? Do you tell them to ignore the self-audit policy because EPA does not trust them? Do you tell them to hide the violations and hope EPA will not find out? That’s not really a good strategy because your bad apple client is probably already on EPA’s radar screen. No inspection holiday there. What are the choices for your bad apple client?

    Your comment about the positive correlation between audits and the reduction in unplanned releases proves my earlier point. The more audits (properly done ones) you do, the less unplanned releases you are likely to have.

    The best kind of audits are management audits. They will uncover weaknesses in management. Correction of these weaknesses will reduce unplanned releases. Compliance audit is just a report card. It only tells you what has gone wrong.

  5. In the end, I think we will simply agree to disagree on this. But I do believe it would have been worthwhile to read the original report rather than drawing sweeping conclusions only from my limited excerpts. And the pedigree of the authors lend significant credibility to their work.

    As far as the accusations that I might counsel a client to do something inappropriate or possibly illegal, I think that is a rather extreme remark given that I am simply voicing a viewpoint different than yours. I have never – nor would I ever – suggest a client do anything of the sort. I have on many occasions recommended self disclosure.

    But my role is not make decisions for my clients. Rather, I attempt to provide them will as much information as I can about the audit, the findings, the context of the findings and choices facing the client. I can advise and attempt to persuade my clients, but not control them.

    Companies tend to have a lot of moving parts; the audit may be only a single part of larger issues, priorities or activities facing the client. The client has to take these all into consideration when making their decisions. Like it or not, there may be valid internal reasons for companies to choose a path other than self-disclosure.

  6. I never accused you of giving your client bad advice. It was a question posed to everyone. Think you are a tad sensitive.

    Again, I simply commented on YOUR limited excerpts. I had assumed you had provided a concise and precise summary of the Harvard report.

    I agree with you totally that there are many internal reasons for companies to choose a path other than self-disclosure. It is always a management and legal decision. Whatever decision they make, they reap the consequences – whatever they are.

    I am glad to hear you don’t control your clients.

    As to your implied admiration or acceptance of some institution’s finding because of its pedigree, I would part company with you there. That’s a sure way to cloud one’s judgment and a sure way to get into “group think”.

    Pedigree works for dogs. 🙂

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