Improving Third-Party Audits and Regulatory Compliance in India

Last registered on August 19, 2016

Pre-Trial

Trial Information

General Information

Title
Improving Third-Party Audits and Regulatory Compliance in India
RCT ID
AEARCTR-0001355
Initial registration date
August 19, 2016

Initial registration date is when the trial was registered.

It corresponds to when the registration was submitted to the Registry to be reviewed for publication.

First published
August 19, 2016, 10:42 AM EDT

First published corresponds to when the trial was first made public on the Registry after being reviewed.

Locations

Region

Primary Investigator

Affiliation
University of Chicago

Other Primary Investigator(s)

PI Affiliation
Yale University
PI Affiliation
Harvard University
PI Affiliation
Massachusetts Institute of Technology (MIT)

Additional Trial Information

Status
Completed
Start date
2008-01-01
End date
2011-12-31
Secondary IDs
Abstract
In many regulated markets, private, third-party auditors are chosen and
paid by the firms that they audit, potentially creating a conflict of interest. This
article reports on a two-year field experiment in the Indian state of Gujarat
that sought to curb such a conflict by altering the market structure for environmental
audits of industrial plants to incentivize accurate reporting. There
are three main results. First, the status quo system was largely corrupted, with
auditors systematically reporting plant emissions just below the standard, although
true emissions were typically higher. Second, the treatment caused
auditors to report more truthfully and very significantly lowered the fraction
of plants that were falsely reported as compliant with pollution standards.
Third, treatment plants, in turn, reduced their pollution emissions. The results
suggest reformed incentives for third-party auditors can improve their reporting
and make regulation more effective.
External Link(s)

Registration Citation

Citation
, et al. 2016. "Improving Third-Party Audits and Regulatory Compliance in India." AEA RCT Registry. August 19. https://doi.org/10.1257/rct.1355
Former Citation
, et al. 2016. "Improving Third-Party Audits and Regulatory Compliance in India." AEA RCT Registry. August 19. https://www.socialscienceregistry.org/trials/1355/history/10253
Sponsors & Partners

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Experimental Details

Interventions

Intervention(s)
Intervention Start Date
2008-01-01
Intervention End Date
2011-12-31

Primary Outcomes

Primary Outcomes (end points)
Audits Submitted

Narrow Compliance in Audits Relative to Backchecks (dummy for pollutant between 75% and 100% of regulatory standard): (All Pollutants/Water Pollutants/Air Pollutants) (Control Group)

Compliance in Audits Relative to Backchecks (dummy for pollutant at or below regulatory standard): (All Pollutants/Water Pollutants/Air Pollutants) (Control Group)

Narrow Compliance in Audits Relative to Backchecks (dummy for pollutant between 75% and 100% of regulatory standard): (All Pollutants/Water Pollutants/Air Pollutants) (Treatment Group)

Compliance in Audits Relative to Backchecks (dummy for pollutant at or below regulatory standard): (All Pollutants/Water Pollutants/Air Pollutants) (Control Group) (Treatment Group)

Audit Treatment Effects on Auditor Reporting: Compliance (dummy for pollutant in audit report at or below regulatory standard)

Audit Treatment Effects on Auditor Reporting: Level of pollutant in audit report (standard deviations relative to backcheck mean)

Audit Treatment Effects on Auditor Reporting: Level of pollutant in audit report minus level of pollution in backcheck (standard deviations)

Endline Pollution Concentrations on Treatment Status: Level of pollutant in endline survey, all pollutants (standard deviations relative to backcheck mean)

Endline Pollution Concentrations on Treatment Status: Dependent variable: Compliance (dummy for pollutant in endline
survey at or below regulatory standard)










Primary Outcomes (explanation)

Secondary Outcomes

Secondary Outcomes (end points)
Secondary Outcomes (explanation)

Experimental Design

Experimental Design
This experiment sought to curb a conflict of interest in the enforcement of industrial emissions standards by altering the market structure for environmental audits of industrial plants to incentivize accurate reporting. It was conducted in collaboration with the environmental regulatory body in Gujarat, India. Ordinarily, auditors are chosen by, paid by, and report to the audited firm. Beginning with two populations of industrial plants from two regions of Gujarat, half of the industrial plants in each region were randomized into a treatment with four parts. First, treatment plants were randomly assigned an auditor they were required to use. Second, auditors were paid from a central pool, rather than by the plant. Third, a random sample of each auditor's pollution readings were verified with follow-up visits (backchecks) to the audited plants by an independent technical agency. Fourth, at the start of the second year, treatment auditors were informed that their pay would be linked to their reporting accuracy, as measured by these backchecks. Data were collected from audit reports filed with the regulator, and from the agencies conducting backcheck readings.

Experimental Design Details
Randomization Method
In each of the two regions, half the plants were randomized into the treatment
Randomization Unit
industrial plants
Was the treatment clustered?
No

Experiment Characteristics

Sample size: planned number of clusters
no clusters
Sample size: planned number of observations
633 industrial plants in provisional sample
Sample size (or number of clusters) by treatment arms
233 industrial plants treatment

240 industrial plants control
Minimum detectable effect size for main outcomes (accounting for sample design and clustering)
IRB

Institutional Review Boards (IRBs)

IRB Name
IRB Approval Date
IRB Approval Number

Post-Trial

Post Trial Information

Study Withdrawal

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Intervention

Is the intervention completed?
Yes
Intervention Completion Date
December 31, 2011, 12:00 +00:00
Data Collection Complete
Yes
Data Collection Completion Date
December 31, 2011, 12:00 +00:00
Final Sample Size: Number of Clusters (Unit of Randomization)
no clusters
Was attrition correlated with treatment status?
No
Final Sample Size: Total Number of Observations
473 industrial plants
Final Sample Size (or Number of Clusters) by Treatment Arms
233 industrial plants treatment 240 industrial plants control
Data Publication

Data Publication

Is public data available?
No

Program Files

Program Files
No
Reports, Papers & Other Materials

Relevant Paper(s)

Abstract
In many regulated markets, private, third-party auditors are chosen and
paid by the firms that they audit, potentially creating a conflict of interest. This
article reports on a two-year field experiment in the Indian state of Gujarat
that sought to curb such a conflict by altering the market structure for environmental
audits of industrial plants to incentivize accurate reporting. There
are three main results. First, the status quo system was largely corrupted, with
auditors systematically reporting plant emissions just below the standard, although
true emissions were typically higher. Second, the treatment caused
auditors to report more truthfully and very significantly lowered the fraction
of plants that were falsely reported as compliant with pollution standards.
Third, treatment plants, in turn, reduced their pollution emissions. The results
suggest reformed incentives for third-party auditors can improve their reporting
and make regulation more effective.
Citation
Duflo, Esther, Michael Greenstone, Rohini Pande, and Nicholas Ryan. 2013. "Truth-Telling by Third-Party Auditors and the Response of Polluting Firms: Experimental Evidence from India." The Quarterly Journal of Economics 128(4): 1499-1545.

Reports & Other Materials