Abstract:
In 2010, the overwhelmed Pollution Control Board in the Indian state of Gujarat faced a difficult path ahead. The agency charged with monitoring and enforcing pollution regulations in the heavily industrialized state had a problematic environment audit system on its hands. For more than a decade, industrial plants were required to submit an annual environmental audit, which was conducted by a third-party auditor, and paid for by the plant. But from the pollution control board’s point of view, many of the audit reports were perfunctory, without useful recommendations, and gave officials little basis for enforcement action.
Yet, many plant owners found the annual audits to be a bureaucratic waste of time and money. In 2005, a group of industrialists filed suit to end the audit program. They complained that the program was useless, especially since the GPCB had never done anything with the reports. But in 2010, the Gujarat High Court ruled against the manufacturers. The audit program would stay, and the pollution board was required to take "all necessary follow up steps on the basis of the audit reports to control environmental pollution.” The agency had to ensure that "data collected through [audit] reports does not collect dust in the archives of the office but is put to meaningful use."
Could the pollution control board find a way to turn the environmental audit program around? And could the agency use the evidence to craft more effective environmental policy?
Learning Objective
This case examines the conflict of interest that arises when auditors are hired and paid by the organizations whose operations depend on positive audit reports. Participants will explore the role of accurate information in good policy. By closely analyzing the competing incentives at play for regulators, firms, and auditors, students will gain a deeper understanding of how regulations in a wide range of sectors, including the environment and finance, can be made more effective.
Teaching plan and "B" case coming soon.
