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

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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.

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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

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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

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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.

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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.

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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).

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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

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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

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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

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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-

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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

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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.

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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

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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

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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

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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

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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

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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.

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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

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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.

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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

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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

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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.

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