Energy & Environment Lab Gujarat Auditing Study

Typically, major companies pay auditors to examine their books under the so-called “third-party” audit system. What impact does this conflict of interest have on the actual performance of auditors?

Energy & Environment Lab Director Michael Greenstone and his colleagues worked with the Gujarat Pollution Control Board in Gujarat, India, to see if the auditors’ reports would be different under a new arrangement.

In a study of about 500 industrial plants, half of the auditors were hired and paid by the plants, the other half were randomly assigned, paid fixed fees, and received incentive payments for accurate reports. All told, across several different air- and water-pollution measures, inaccurate reports of plants complying with the law dropped by about 80 percent under the new arrangement. The state used this information to enforce its pollution laws, and within six months air and water pollution from the plants receiving the new form of audit were significantly lower than at plants assessed using the traditional method, reducing air pollution by 28 percent.

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