Encouraging firms to police themselves: Strategic prescriptions to promote corporate self-auditing

Companies often face a difficult choice in determining the best way to maintain compliance with environmental regulations. Although internal environmental compliance audits can be an effective preemptive measure to prevent violations, disincentives such as criminal or civil liability may prevent many firms from implementing compliance audits for fear that their own documents may be used against them in court. One proposed solution to this problem is an environmental self-evaluative privilege, which would prevent audit materials from being used against the firm implementing the audit, thus removing the disincentive. In the following article, however, Professor Kesan presents a formal game theory model to argue that, although the self-evaluative privilege removes the disincentives, it does not create any positive incentives for companies to police themselves. Professor Kesan employs an equilibrium analysis to demonstrate that a multipronged approach, which permits regulatory access to audit materials, provides mitigated penalties for self-policing firms, and limits third-party use of audit materials, is the most effective legal regime to encourage firms to police themselves. Such a regime minimizes the fear of self-incrimination but maintains the positive incentives to self-police that regulatory access provides.