DRAFT BEYOND THE BATTLEGROUND: A (NON) REGULATORY PERSPECTIVE ON ENVIRONMENTAL AUDITING* BY KAREN BLUMENFELD AND MARK HADDAD REGULATORY REFORM STAFF U.S. ENVIRONMENTAL PROTECTION AGENCY March 1, 1983 * This paper was prepared for publication in the Environmental Auditing Handbook. New York: McGraw-Hill Book Company. Lee Harrison, Editor. Expected publication date is summer 1983. DRAFT ------- BEYOND THE BATTLEGROUND: A (NON) REGULATORY PERSPECTIVE ON ENVIRONMENTAL AUDITING* BY KAREN BLUMENFELD AND MARK HADDAD** INTRODUCTION Environmental auditing is a private sector initiative that has potential benefits not only for incJjstry but for the environment and government as well. This paper describes the efforts of a federal regulatory body — the Environmental Protection Agency (EPA) — to stimulate environmental auditing and enhance its public . benefits without bridling its effectiveness or private benefits. The phrase "environmental auditing" refers here to a set of methodological procedures used by a firm to verify its facilities' compliance with iegal requirements and corporate policies, and to correct problems that are found. Two things need to be said at the outset about the development of EPA's response to environmental auditing. First, it is an iterative process. Even as this chapter is written, the Agency's response is evolving to meet emerging concerns. Second, the process is unlike the traditional "regulatory" pro- cess. It is characterized by three attributes: (1) it involves no rulemaking and has no preconceived regulatory assumptions; (2) it encourages collabora- tion and is deliberately open to industry, environ- mental groups, and any other interested parties; and * This paper reflects only tho views of the authors and not those of the U.S. Environmental Protection Agency or any other government agency. ** The authors are current and former Environ- mental Auditing Project Managers, respectively, for the Regulatory Reform Staff, U.S. Environmental Pro- tection Agency. The Regulatory Reform Staff, of EPA's Office of Policy & Resource Management, was created to identify, analyze, advocate and help im- plement creative solutions to regulatory problems. It has responsibilities for substantive, system-wide reforms, such as the bubble policy and air emissions trading, and it also functions more broadly, as an in-house consultant and catalyst for change. ------- 2 (3) it builds on corporate expertise and acknowledges "real world" operating experiences. While it is not yet clear what EPA's ultimate response to environmen- tal auditing will be, a process is in place to develop and share information about auditing with industry and the public and to lay the groundwork for cooperation and innovative approaches to ccnpliance. The following sections cover the period from August 1981 to January 1983. Section I explains why the government has a potential stake in the continued growth and spread of environmental auditing. Section II discusses several "responses" to environ- mental auditing which the Agency has considered and attempted, in varying degrees, to iirplement. Section III summarizes sane of the conclusions that can be drawn fran this experience that are potentially relevant not only to environmental auditing but to the development of regulatory alternatives in general. I. WHY EPA IS INTERESTED IN ENVIRONMENTAL AUDITING EPA is interested in environmental auditing be- cause it seems to represent an unusual convergence of private and public interest. While environmental auditing is developing in large part for good business reasons — e.g., to assure corporate management that its facilities are in compliance with legal and com- pany requirements; to assist facility managers in understanding and complying with those requirements; to avoid tort liability; to identify financial savings; and/or to irrprove the ccnpany's public image — it clearly can serve the public interest as well. State and federal regulatory agencies face in- creasing strains which threaten to impair their ability to oversee compliance with environmental requirernents. Budgets are being cut severely, and at the sane time new regulatory programs for toxic substances control, hazardous waste and Superfund create additional responsibilities. In the maturing air and water pollution control programs, enforcement is becoming more complex as the focus shifts fran assuring initial installation of pollution control equipment to assuring compliance on an ongoing basis. Regulatory agencies are looking for novel approaches to fulfill their public mandates under the strain of fewer resources accompanied by more diverse and complex ------- 3 responsibilities. One such approach would involve government stim- ulation of private sector environmental auditing programs. While auditing programs do not obviate the need for government oversight, they can substan- tially enhance firms' environmental ccmpliance and potentially supplement government enforcement. There are four reasons in particular why EPA believes it is important to encourage the spread of auditing. Enhancement of Corporate Responsibility First, EPA is interested in strengthening the internal systems that firms devise to insure compli- ance with environmental regulations when the government is not around. Environmental auditing affirms a company's responsiveness to the existence of environ- mental regulations. By starting an .auditing program, a firm takes a significant step away frcri a purely defensive, reactive posture toward regulation. It is a step that can enhance corporate environmental re- sponsibility in two significant ways. First, the existence of an audit program signals to the firm's staff that senior management is committed to complying with environmental regulations. Staff know that the company's general counsel ordinarily would not permit a team to poke around ccmpany facil- ities looking for problems unless management were clearly committed to responding. In practice, this means that the identification of environmental prob- lems may be encouraged rather than danpened by management. Second, an audit program strengthens the cadre of professionals within the organization who have a stake in the firm's environmental status and whose professional rewards are based on environmental performance rather than on production or financial outcomes alone. This is significant because people — and the inherent limits of human wisdom and skills — may be as important to a firm's environmen- tal performance as technology. Auditing does not guarantee that a ccmpany will respond to every compliance problem identified.• Even if a firm is aware of a problem, it may choose not to respond because it has other priorities, because the problem creates a low environmental risk, or because ------- 4 the risk of being caught or penalized appears snail. But because auditing builds on internal systems, it can achieve what externally-imposed regulation and enforcement cannot: it can institutionalize cor- porate responsibility by strengthening the internal procedures and incentives that pranote carpiiance as part of normal business activity. Day-to-Day Carpiiance The second reason for EPA's interest in auditing is that it offers one potential way to address a long-term problem now facing EPA and state agencies: how to achieve and monitor day-to-day compliance with regulations* with a lean budget, a small number of inspectors, and a desire to minimize the paperwork burden on industry. In the 1970's, environmental enforcement was concerned primarily with assuring the initial instal- lation of pollution control equipment as mandated by the Clean Air and Water Acts. Initial compliance is no longer a sufficient measure of whether a company is meeting the goals of the Air and Water Acts, how- ever. New that the nejority of mandated equipment is installed, federal and state agencies are growing increasingly concerned about the daily operation and maintenance of this equipment. Since day-to-day compliance relies heavily on daily work practices and management procedures — which are difficult to verify through periodic conventional inspections — federal and/or state agencies may eventually need to develop new standards and inspection techniques to address the problems of day-to-day compliance. * A 1981 study conducted by EPA and the Council on Environmental Quality highlighted the problem of assuring day-to-day compliance. It indicated that of 180 major air sources studied, 70% believed to be in compliance actually experienced substantial intermittent excursions above allowable emission levels. The study found that for the average source, actual emissions exceeded allowable emissions by an average of 25%. The study concluded that roughly one-third of those excess emissions could have bean avoided with proper operation and maintenance procedures. ------- 5 One alternative or supplement to mandatory operating standards and permit programs could be to build on the existing in-house procedures that firms devise to assure corporate management that adequate compliance and risk management procedures are being observed at operating facilities. Such an approach could capitalize on and reinforce operating expertise, rather than impose controls generated entirely by regulators. If firms with sound audit prograns prove more apt to be in compliance over the long run than comparable firms lacking such prograns, then firms' voluntary in-house management prograns might be recogniz-ed as a legitimate alternative or supplement to emerging mandatory state or federal operating require- ments. Enforcement Targetting The third reason for EPA's interest in environment- al auditing grows out of the second. If the government were able to recognize auditing programs as a legiti- mate means of assuring compliance, substantial improve- ments could be made in enforcement targetting. The exist- ence of sound audit prograns could be used by regulators to differentiate more precisely and reliably than they now do between likely "ccmpliers" and "nonccmpliers." Regulators could thus target scarce enforcement resources where they are needed most with seme assurance that non- target companies had adequate procedures in place to assure ongoing compliance. Confrontation to Cooperation With Responsible Firms A strategy that acknowledges responsible firms' envi- ronmental performance has long-term potential for improving government/industry relations. Reducing unnecessary public/ private confrontation is the fourth reason for EPA's interest in envirorsnental auditing. ------- 6 Traditional adversarial relations are not neces- sarily conducive to the achievement of regulatory objectives. In the regulation development process, for example, adversarial "stand-offs" may produce rigid requirements that encourage segments of indus- try to ccmply with the letter rather than the spirit of the law, and to delay compliance until the last possible moment.* Likewise, in the enforcement process, tradi- tional adversarial relations can be damaging. In- dustry is not a monolith: some companies are clearly more environmentally responsible than others. An enforcement regime that punishes violations of the law, but fails to acknowledge active corporate efforts to assure compliance, may discourage seme companies frcm undertaking environmental auditing for fear that information developed as part of an audit routinely may be used against them. One way to counteract this effect would be for the government to provide mechanisms that acknow- ledge the extra compliance efforts made by responsi- ble firms. Such an approach could serve to reduce existing disincentives for firms to establish auditing programs, publicly acknowledge firms who voluntarily develop audit programs to assure compliance when the government is not around, and produce a more balanced Agency posture in which enforcement "success" were defined not only as litigation and victory over recalcitrant nonccnpliers, but also as acknowledgement and encouragement of affirmative environmental manage- ment. Any approach involving cooperation with members of the regulated ccmmunity, even with responsible firms, could be construed as EPA "capture" by industry. Capture is not the only alternative to purely adver- sarial relations, however. In concert with an effec- tive program of regulatory development, oversight and enforcement, there seems to be ample room for greater public/private cooperation in addressing * For a description of the way past adversarial relations can perpetuate and expand future ones in the regulatory process, see Robert B. Reich, "Regula- tion by Confrontation or Negotiation," Harvard Busi- ness Review (May - June 1981). ------- 7 problems with non-regulatory as well as regulatory ablutions. The development of private sector environmental auditing presents goverrment and industry with an unusual opportunity to work together to solve com- pliance problems of mutual interest. Tvro caveats should be noted here. First, this collaboration does not mean exclusion of the public and environmen- tal community. To the contrary, any collaboration between goverrment and industry must include the public if it is to be viable and credible. Second, collaboration does not mean that a vigorous goverrment enforcement progran will become unnecessary. Indeed, EPA's aggressive enforcement of regulations in the 1970s probably contributed to the development of environmental auditing. A strong continued enforce- ment presence can insure not only that pressure is maintained on likely nonccnpliers, but that responsible firms continue to be motivated to maintain rigorous internal audit programs, II. EPA'S RESPONSES TO ENVIRONMENTAL AUDITING Environmental auditing as a corporate initiative plainly has much to reccnmerri it. As described in Section I, there are a number of compelling reasons why EPA would want to promote it. However, when the Agency first began to explore environmental auditing it was not iirmediately apparent what, if any, response the Agency should develop. EPA could have chosen to do nothing. By late 1981, however, the Agency decided to act. Several factors contributed to this decision. First, as a response to regulation, environmental auditing represented a valuable tool for assuring orgoing compliance. The Agency acknowledged that even an army of .inspectors could not accomplish as much as a comprehensive internal compliance program regularly checked, or audited, by company personnel. Another reason not to ignore private auditing was that its future was not necessarily assured. As the transition to the Reagan Administration took place, considerable doubt was expressed in the business press and elsewhere about EPA's intentions to develop and enforce environmental regulations. Industry's ------- 8 desire to retain or establish audit programs might decline if it perceived little inmediate threat of government regulation or enforcement. A faltering econcny added another reason for concern: as profits diminished, programs such as auditing, which may not contribute directly to production, were likely to receive more hostile corporate scrutiny. EPA support of environmental auditing might help bolster the position of audit managers within corporations, and strengthen industry's perceptions about the long- range potential of environmental auditing to improve environmental management and compliance with legal requirements. The Decision Not to Mandate Auditing Given that seme response seemed desirable, EPA initially considered a traditional regulatory path — requiring auditing. There was some precedent for this. The Nuclear Regulatory Canmission requires nuclear pewer plants to meet a set of management and organization guidelines in order to obtain an operat- ing license. Environmental auditing was stressed by the Securities and Exchange Commission in settlements with Occidental Petroleum Corporation, United States Steel Corporation, and Allied Corporation. EPA needed at least to consider this regulatory or "mandatory" approach, thought it rejected mandatory environmental auditing for several reasons described below. Limits of caimand-and-control. First, tradition- al canmand-and-control regulation is not always the most appropriate response to a given problem. The inherent limits of such regulation — its inflexibil- ity with regard to specific firms and industries, the difficulty of developing uniform standards and regulations, and the need to back such regulations with credible enforcement procedures — were partic- ularly constraining in the case of auditing, which focuses on management procedures rather than end-of- pipe compliance. Moreover, firms that did not have the management commitment to develop environmental audit procedures voluntarily seemed unlikely to establish meaningful, effective programs under .compul- sion. Diversity. Second, the brief five or six years of private sector auditing activity has spawned a wide ------- 9 variety of programs which would be difficult to regu- late in a uniform way. The goals of these programs vary significantly. Sane are designed specifically to reduce the risk of expensive and potentially embarrassing "incidents,M such as major oil spills, hazardous waste leaching, or visible and prolonged emissions violations. Others focus on ongoing regulatory carpiiance as well. Still others stress paperwork, using audits to verify the accuracy of all reports made to local, state, and federal officials. The audit process varies, too. Sone firms em- ploy a central team of auditors, others staff the audit teams with a variety of ccnpany personnel. Fre- quency of plant visits vary, as do internal reporting procedures. Firms with more centralized philosophies usually give corporate management greater direct con- trol over the audit than do firms with decentralized structures. There is one attribute that "is cannon to all programs: each serves the interest of the ccnpany that has established it. Auditors and the corporate managers to whom they report appear zealously ccmmit- ted to their own programs. "This is the way we do it," said one audit manager. "It might not suit anybody else, but it suits us, and we don't want to change it." Enforceability and legal questions. Any audit regulations would have to accommodate not only the inevitable diversity of corporate structures and man- agement styles, but also the need for enforceable requirements. It is one thing to require a company to perform a host of oversight activities; it is another to create a credible government system to monitor such oversight and detect and enforce "viola- tions" of audit procedures. For companies to treat new audit requirements seriously, EPA would need to train regional and state inspectors in ways of "audit- ing the auditors." Designing audit regulations that were conducive to EPA oversight — which did not require exten- sive examination of ccnpany files, prolonged visits to conpany headquarters and plants, and additional ccnpany paperwork — would be difficult. Moreover, given the shortage of state and federal inspectors, a new inspection/enforcement program might exacerbate the very manpower problems auditing was supposed to ------- 10 help solve. In addition to these challenges, it was not clear to what extent EPA had authority to regulate managenent practices under the enforcement provisions of its statutes. The Voluntary "Incentives" Approach Instead of proposing to mandate auditing, EPA decided to explore whether there were incentives which EPA and states could offer industry to en- courage the establishment and upgrading of internal environmental auditing programs. These incentives could be offered within a structured federal/state program, initially in one or two interested pilot states, on a voluntary basis. They could be available to interested firms with good compliance records who ccmmitted to establish and/or maintain reliable audit programs. No company would be required to establish an audit program, but those who chose to participate, and who met specified standards, could qualify for certain incentives from EPA and participat- ing states. Through an incentives program, EPA and states could recognize formally and publicly that environ- mental auditing programs were environmentally and socially responsible, could begin developing a com- pliance policy that used scarce enforcement resources more efficiently, and could encourage companies to take affirmative steps to assure compliance instead of focusing exclusively on penalizing those found to be out of compliance. This proposed incentives program was dubbed the "voluntary approach." It was based on EPA's recogni- tion that: (a) auditing has much to recommend it to industry even apart frcm any "incentives" EPA or states might offer; and (b) a voluntary program which provided modest acknowledgement for starting or upgrading audit programs could accelerate the spread of auditing, and increase environmental bene- fits accordingly, at relatively little cost to EPA and participating industry. The proposed incentives which EPA and interested states might provide included: less frequent inspec- tions, reduced reporting or recordkeeping require- ments, accelerated permit review and renewal, and waiver or suspension of penalties for reportable vio- ------- 11 lations which the company had discovered and promptly reported and corrected. With these particular incen- tives would come general recognition (perhaps formal- ized with a certificate) that the ccnpany was an exemplary environmental actor. This could be valuable in demonstrating to senior management, the board, stockholders and the general public, and possibly to the courts, the good-faith effort the ccnparty was making to canply with environmental requirements. In return, the company would agree to establish and/or maintain an audit program which demonstrated the following: top management support; an audit manager or team independent of production respon- sibilities; a structured, program with written audit procedures; a system for reporting audit findings to senior management; and a corrective action program. The acceptability of these elements would be judged by flexible evaluation criteria to be developed fcy the Agency and states with comment from industry and the public. Implementation. In the proposed incentives pro- gram, EPA and one or two states interested in piloting the program, together with industry and environmeir- tal groups in those states, would draw up criteria for a company's eligibility and continued participa- tion in the program. They would also agree on the incentives to be provided by the state and EPA to participating companies. Once the guidelines were established, a pilot program of one to three years would begin. To participate in the program, a firm (in a pilot state) would indicate its interest by contact- ing the state environmental department. The state would review the company's ccmp]iance history and audit program. If the state approved, it would acknowledge the approval formally, and adjust inspec- tions, reporting requirements, and enforcement priorities accordingly. The firm's Chief Executive Officer would be responsible for certifying annually the continued existence of the audit program, and for certifying significant changes to the state. The state would reserve its right to inspect the company's facilities, and to take action, such as disqualification from the program or levying ------- 12 fines, if the results of an inspection so warranted. Advantages. Ihe chief advantage of the proposed incentives approach was that it would remove one of the major disincentives many companies saw to insti- tuting an audit program. A significant number of firms are reluctant to establish audit programs for fear of discovering and documenting compliance pro- blems that were previously unidentified by EPA or the state. The goverrment's policy toward firms which uncover evidence of their own noncompliance is unstated, but many fear it would be negative. The potentially perverse result is that the government's enforcement program could, serve to discourage firms frcm doing the very housecleaning that would lead to improved environmental performance. A progran of incentives, in which firms that audited their facil- ities ordinarily would not be penalized for the problems they uncovered as long as those problems were promptly reported (if required) and corrected, could help redress this. The proposed program would also allow EPA and states to shift scarce inspection and enforcement resources away from those plants and companies less apt to be in violation, while providing seme assurance that as goverrment surveillance decreased there were ongoing auditing procedures in place responsibly to oversee compliance. Meanwhile, those resources could be used to inspect target facili- ties more frequently and more thoroughly. Such an incentives program might also accelerate the spread of auditing to companies which might otherwise not adopt or take longer to adopt auditing programs. It would bring to companies' attention an attainable standard of responsible compliance manage- ment, together with incentives to achieve it (and the prospect of perhaps greater surveillance if they did not). Finally, by choosing to develop an internal audit program, a company could take advantage of a less intrusive and adversarial relationship with the government, and lay the groundwork for a solution to the problem of assuring day-to-day compliance which did not involve the development of new regulations or the hiring of new inspectors. ------- 13 Results. The voluntary approach was discussed and debated at numerous informal sessions as well as in a variety of formal settings such as regula- tory conferences; industry, trade association, Chamber of Commerce and environmental group meetings; with EPA program and regional staffs; and with state environmental officials. The incentives approach elicited both enthusiasm and concern. It stimulated increased state and indus- try interest in auditing even as it became clear that the incentives approach itself was too ambitious to implement in the near-term. States to whan the idea was presented initially reacted with some caution. Already strapped by con- stricting budgets and overextended staff, they were reluctant to pursue any new initiative which was outside the traditional regulatory framework. One state simply did not have the resources to commit to a non-regulatory initiative. Another was experiment- ing with a program in which "operating permits" would be written for individual plants, stipulating procedures which the permit holder had to follow to properly operate its plants' air pollution control equipment. In effect, the state was planning to require procedures at the plant level that would achieve day-to-day compliance, although it would leave unaddressed the issue of hew compliance with those procedures would be achieved or enforced. Several states were interested in pursuing with EPA the possibilities of an incentives approach. They wanted to study further the types of auditing programs that had been developed in the private sector, the relationship of auditing practices to ultimate compli- ance performance, and the advisability of offering incentives to industry to pursue auditing versus simply publicizing and encouraging the practice of auditing. EPA agreed to work with these states, at their request, as described in more detail later. Environmental groups were primarily concerned with declining government attention to traditional enforcement. They did not object to EPA or states encouraging the practice of environmental auditing, but did not want to endorse a program which could lead to any reduction in enforcement strength. They felt that before EPA or the states should devote ------- 14 attention to a program such as environmental auditing, existing enforcement had to be buttressed. Industry reaction was mixed. Many firms were willing to share information about their programs and to comment in detail on various informal Agency proposals. Same applauded the initiative and volun- teered to become "pilot firms" should a trial program materialize. But irany were troubled by seme or all of the following issues. Those with well-established audit programs in place were invariably proud of and satisfied with their programs. They stressed repeatedly their belief that a company's audit program is inevitably tailored to fit that particular company. Participat- ing In a federal/state auditing program might require adjusting their own procedures, which many firms were reluctant to do. Much of the debate, therefore, revolved around whether criteria for evaluating the acceptability of a firm's audit program could be made general enough to admit firms with highly effective though structurally diverse audit programs, yet specific enough to exclude companies whose pro- grams were unlikely to be effective. Scare firms were skeptical about the very process of developing any criteria, no matter how general, for any government program, even if it were to be volun- tary. These firms saw the development of criteria as the first step down a slippery slope that would ultimately lead to regulations mandating detailed in- dustry management practices. To these firms, it was just a matter of time before the program became mandatory, rigid, and intrusive. Some firms saw the incentives approach as a legitimate alternative to more traditional regulatory solutions to emerging compliance assurance problems, but were unenthusiastic about, the incentives EPA proposed. For example, several argued that neither the public nor the government would find credible an enforcement program which waived inspections at certain facilities. Moreover, since inspections are already infrequent at most facilities, a reduc- tion in frequency would have little meaning.. Thus, elimination of inspections was not a desirable in- centive, and reduction of inspections was not a meaningful one. Other proposed incentives designed ------- 15 to reduce bureaucratic delay and red tape were not without interest to ccnpanies, but seemed insufficient to galvanize active industry support. A final concern which industry frequently ex- pressed surrounded the confidentiality of in-house audit reports. Environmental auditing can create a paper trail documenting a firm's awareness of its compliance problems. While such a paper trail may help a firm demonstrate to a judge "due diligence" in correcting these problems, it may also identify problems which would likely go undetected by the government and the public. Firms with audit programs were concerned that if the government or environmental groups chose to publicize and act on the audit find- ings, ccnpanies who had brought their own problems to light would be compromised while their competi- tors who had not performed audits would escape adverse publicity. EPA's proposed program never intended to require submission of companies' audit reports. What the confidentiality concern underscored, hcwever, was the potentially perverse logic at the core of an enforcement regime that punishes violations of law but fails to acknowledge active corporate efforts to assure compliance. The Agency's enforcement posture — largely through its silence on the issue — seemed to discourage some firms from taking the kind of positive action that would improve compliance. In this sense, the proposed incentives program could have been at least a partial solution to the con- fidentiality problem. The incentives approach was abandoned by EPA partly as a response to the concerns expressed by states, environmental groups and industry. These concerns had underscored the importance of addressing certain fundamental issues before structuring any government response to environmental auditing. For example, more information needed to be developed concerning how auditing programs work in practice and how they ultirnately contribute to a firm's compli- ance performance. Beyond resolving these threshold policy and imple- mentation issues, EPA would have to identify better ways of expressing its ideas to industry and the public. To make a voluntary, structured approach ------- 16 attractive to industry, EPA and states would noed to provide more information and more certainty about their intentions regarding the voluntary and flexible nature of the program. At the same time, to make the approach credible to both environmental groups and industry, a stronger concomitant enforcement program was a prerequisite. The more modest the threat of enforcement, the less credible a cooperative government/industry program would be to the public, and the less likely industry would be to perceive a need to initiate an audit program, or to ask that an existing program be officially recognized by the government. Current Thinking Notwithstanding the problems associated with the incentives approach, the original reasons for explor- ing environmental auditing — to encourage companies to internalize affirmative environmental management; to secure better compliance over time; to obtain maximum use of scarce government resources; and to reduce needless public/private confrontation — remain valid. But it appears that environmental auditing is too ne*/, too fluid and too diverse to support a structured, programmatic approach. The challenge is to stimulate environmental auditing in less formal and perhaps more productive ways. Various approaches have been proposed, discussed and modified. Any approach that the government adopts must be both responsive to industry and responsible to the public. It should encourage companies to begin auditing programs without threatening those who already have programs in place; and it should enable federal and state agencies to get a better understanding of auditing practices and their poten- tial benefits. EPA's current thinking, which will undoubtedly continue to evolve after this paper is published, calls for three interrelated initiatives: endorsement, analysis and assistance. In this node, EPA is acting as catalyst, rather than as the lead, for joint public/private approaches. Endorsement. Endorsement refers to EPA's public support for environmental auditing. High-level en- dorsement is reinforced by visible Agency activities ------- 17 such as: acting as a clearinghouse on auditing prac- tices to help companies learn fran each other; con- ducting workshops on auditing; showcasing individual audit programs that could serve as models; and con- tinuing to develop networks of stakeholders, inclu- ding businesses, environmental groups, state agencies, professional and trade associations, academics, and others. This public recognition through endorse- ment of environmental auditing should help accelerate private initiatives. Analysis. At the same time, EPA is developing an analytic base on which to build future activities. This involves surveys and evaluations of audit pro- grams, exploration of the benefits of environmental auditing, research into alternative government strat- egies for stimulating private initiatives and other analyses. Since lack of sufficient data and infor- mation contributed to the Agency's change of course, such analysis is particularly important for reducing uncertainties about the possibilities and limita- tions of joint public/private auditing approaches. Assistance. In the meantime, the analyses des- cribed above will feed into EPA's assistance to states and companies interested in exploring joint public/private auditing approaches. The Agency is providing support to various developing initiatives in a number of states. EPA assistance should stimu- late states to develop approaches that suit local needs and that can serve as experiments to demon- strate different strategies for public/private inter- action. At the crux of the current approach is the belief that without structuring a formal program, EPA can advance the same long-run goals without the immediate downside risks of a formal program. Using this three-pronged approach, the Agency can continue to encourage and accelerate private auditing; develop a longer time frame to permit problems to be resolved incrementally; collaborate with interested firms, environmental groups and others to address policy issues of mutual concern; develop a better empirical understanding of private sector auditing; support states seeking to use auditing to solve specific, rather than global, regulatory problems; observe and evaluate different auditing strategies in those states; and develop recommendations that are based ------- 18 on experience. The chief advantages of this approach are that it allows time for the affected parties to vork through problems and reduce uncertainties gradually as data and experience are developed, and it facilitates a coopera- tive learning environment in which decisions can be integrated with operating experiences and disparate groups can work together collaboratively. EPA's current environmental auditing approach potentially could represent a second generation of EPA decision- making in which traditional rulemaking and public notice-and-canment are supplemented by procedures de- signed to harness public, government and industry cooperation to resolve environmental problems of nutual concern.* III. CONCLUSIONS What conclusions can be drawn about EPA's efforts to stimulate a private sector initiative and enhance its public benefits without bridling its effectiveness or private benefits? Public Benefits To analyze whether EPA has helped enhance the public benefits of environmental auditing, it is useful to distinguish between public benefits in a broad sense, i.e. benefits to the public at large, and public benefits more narrcwly defined, i.e. direct benefits to the public sector (government). The Agency's environmental auditing activities during the early 1980s probably contributed more to the former than to the latter. Although it should * A growing body of literature suggests that if environmental regulation is to be effective in the ccming decades, it will have to conform to a new generation of rulemaking styles and procedures. The new process would involve corporations, government agencies and the public in cooperative planning designed to prcmote mutual learning and understanding about environmental consequences. See, for example, Gregory Daneke, "Planning vs. Regulation: An Alterna- tive Future for Environmental Protection," in The Environmental Professional, Vol. 4, #3, 1982, pp. 213 - 218. ------- 19 be noted that any assessment of benefits in this context is largely qualitative, nonetheless it seems fair to scy that by establishing a framework for long range dialogue, research, development of alternative approaches, and clarification of common objectives and interests, EPA helped lay the ground- work for the spread of environmental auditing, regard- less of how the Agency ultimately responds. In general, the spread of auditing should serve the broad public interest by increasing corporate re- sponsibility for compliance. This, in turn, could be expected to contribute to three publicly beneficial outcomes: increased likelihood that environmental problans will be identified in a timely way through comprehensive, periodic in-house audits of a firm's facilities; increased likelihood that identified environmental problems will be resolved cwing to the formal reporting and follow-up procedures that charac- terize most sound audit programs;" and, potentially, increased likelihood that the remedial actions taken will be effective if audit programs continue to be driven by top management support: which fosters effective problem identification and resolution. In terms of achieving specific objectives for the government, the Agency's early goals are only partially met as of this writing. There is no struc- tured, centralized government program in place that would enable regulators formally to use environmental auditing to better target scarce enforcement resources. States may develop related approaches, but probably will not do so in the immediate future. In the meantime, the process of debate and dialogue has, in our estimation, served to improve relations between EPA and responsible firms, and to foster con- structive dialogue without casting formal solutions in concrete. The process has served both to help EPA and states learn frcm industry's operating experiences, and to enable EPA and state personnel to convey to industry their ideas and concerns vis-a-vis environmental manage- ment. Effectiveness and Private Benefits Whether EPA has thwarted, enhanced, or had no impact on the effectiveness of corporate audit programs is unkncwn at this time. The Agency's clearly expressed ------- 20 interest in environmental auditing has probably impelled a number of corporate managers to examine their audit programs to make sure they are adequately operating, and to explore ways of upgrading their programs. On the other hand, one could imagine a scenario in which a handful of companies might, in response to EPA's activity, have decreased their firms' written audit trails or made their records so secretive as to reduce operating managers' access to information that could help improve compliance. On balance, however, EPA expects its continued efforts to contribute to an increase in the overall effective- ness of environmental auditing by promoting a better understanding of what environmental auditing is and how it seems to work best for different firms and industries. Substantial evidence also suggests that EPA has not thwarted the private benefits of environmental auditing. To the contrary, despite the expression of numerous industry concerns about EPA's involvement in environmental auditir*g, the evidence suggests that environmental auditing is here to stay. Five years ago, few published works on environmental auditir^ were available. Itoday, there is a growing body of knowledge being disseminated through public seminars, articles, issue papers and books. The marketplace is at work. Environmental auditing champions can be found in industry, state and federal agencies, trade associa- tions, professional and other associations. A broad constituency for environmental auditing is emerging. At the seme time, environmental auditing is beginning to take on the characteristics of a profession: there is a growing body of literature, underlying and competing theories, available training and a set of practitioners and tools. At least one professional association is contemplating certifying environmental auditors. If companies did not think environmental auditing continued to make good business sense, their interest — and hence the market in auditing — would drop off. Itiere seems to be no evidence of such a drop, however. ------- 21 On Developing Regulatory Alternatives In the course of EPA's efforts to stimulate environmental auditing, the Agency developed sane insights about how regulatory alternatives may be best advanced. Following is a brief summary of a few of them. Barriers to new ideas. First, there is probably more to hinder than facilitate the adoption of new ideas concerning regulatory alternatives. EPA encoun- tered substantial resistance to its ideas about how regulators might build on private auditing, even though a number of people both inside and outside the Agency agreed that the concepts made sense in principle. Few were comfortable constructing a progran from the ground up. A frustrated lawyer once lamented, "just give us a finished proposal; we can't respond to all these pie-in-the-sky ideas." The status quo seems to be a powerful competitor to new ideas; they are best pursued by taking small steps first. Second, a balance needs to be achieved between the early sharing of ideas, and sufficient development of those ideas in advance so that misunderstandings are minimized. Boldly putting forth new ideas for discussion was useful both because it stimulated immediate feedback and because it demonstrated the Agency's openness in debating these ideas. But because EPA's proposals seemed at the sane time both radical and incomplete, they were understandably threatening. Industry speculation about what EPA "really" intended was difficult to quell without a fully structured proposal. Agency skepticism and environmentalists' concerns about "another Agency give-away" were difficult to counter in the absence of hard data demonstrating environmental, economic and resource benefits. When ideas are too formative, it is easy to assume that they might develop contrary to one's interests. Finally, a regulatory alternative that builds on a newly developing private initiative faces arc added challenge. The diversity of firms' pragrans, and the diversity of needs that give rise to them, make extremely difficult the development of standard evaluation criteria. Companies have not yet developed consensus about how the technique should best be ------- 22 structured, and they have not yet reached agreement on how to posture themselves with respect to regula- tors. Government agencies can try to hasten the development of consistent practices in a newly devel- oping field, but if EPA's experience is any indica- tion, they are likely to encounter powerful resist- ance at the outset. Hurdling the barriers. Despite these barriers, several key factors seemed to help advance the Agency's proposals. The first factor was the existence of cham- pions. There are environmental auditors in numerous corporations who have a stake in advancing their pro- fession and who, having a few years of experience under their belts, are in a position to do so. Sane of these individuals have been champions for environ- mental auditing outside their firms as well as inside. These individuals have advanced environmental auditing concepts and techniques at conferences, in trade associations, and in professional organizations. They provide both legitimacy and inpetus for private auditing, as well as precedent for dialogue with the government and the public. A related factor that helped advance EPA's activities was the development of networks. Though EPA did not initiate these networks, its activities probably helped stimulate their development. Various groups of individuals generated both informal and formal networks to address emerging private sector auditing issues as well as issues related to EPA's activities. A number of major trade associations developed environmental auditing workgroups whose activities have spawned surveys, workshops, conferences, and issue papers. In 1982 an informal ad hoc group representing a number of diverse, and primarily industry, interests, formed to addresss environmental auditing. By early 1983 the group named itself the Environmental Auditing Roundtable and committed to meeting periodically to address topical issues in the field. These peer networks can serve several important purposes for advancing environmental auditing. They legitimize dialogue with regulators; they can advance the state-of-the-art by providing a forum for information exchange; they can help spread environ- mental auditing practices; and they offer support ------- 23 for environmental auditing champions who do not al- ways receive full support for their ideas within their cwn corporations. Beyond the Battlegroond It strikes us that environmental auditing repre- sents a true convergence of public and private inter- est. Though this convergence is not currently formal- ized, it will undoubtedly provide a basis for contin- ued exploration and debate. As two perceptive ob- servers* of the regulatory process have noted, "the social responsibility of the regulators, in the end, must be not simply to impose controls, but to activate and draw upon the conscience and talents of those they seek to regulate." Environmental auditing offers an opportunity to stimulate industry expertise rather than coerce it and to jointly harness private ingenuity for public benefit. In the context of the regulatory battleground,- environmental auditing offers a new, constructive role for government — one that involves neither confrontation nor capture. * Eugene Bardach and Robert A. Kagan, Going by the Book: The Problem of Regulatory Unreasonableness. Temple University Press: Philadelphia, 1982, d. 323. ------- iH 7 ,B^I I'M Ukssy Rejfe* !V US p^fec&a Agency ?&£ f, ....'. %* *t+t W^mI' v. '-«>".*•** i^w.- ii>V> AlJaaSa- DATE DUE ------- |