As the likelihood of mandatory auditor rotation in the United States fades, the results of a two-year field experiment in India suggest audits are far more effective when auditors are paid by someone other than the party they are auditing.
A group of academics out of MIT and Harvard have published the results of a two-year study on environmental audits for industrial plants in India after regulators there decided to change the way auditors are engaged and compensated to check a plant’s compliance with environmental and pollution standards. The India state of Gujarat wanted to end the conflict of interest inherent when a company hires and pays its own external auditor. The study looked at audit results for companies that continued to retain their audit firms and compared them to outcomes where auditors were assigned randomly to plants and paid fixed amounts out of a common pool.
