ENVIRONMENTAL AUDITING IN MANAGEMENT-SYSTEMS AND PUBLIC-POLICY

New international standards for environmental auditing are now being a ctively promoted by public authorities and adopted by private firms. O ne important feature of these standards is their emphasis on manageria l systems and incentives that support a wiser use of environmental res ources. This paper studies such a system, in which incentive compensat ion may be based in part on the results of an environmental audit. It is found that optimal wages after an environmental audit is performed should have a greater range than wages paid when no audit has occurred . It is also shown that the decision to conduct an environmental audit and the size of the expected wage in this case depend crucially on wh ether the agent's prudence (or precautionary motives) dominates his av ersion to risk. It is finally found that the insertion of environmenta l audits within current management systems would certainly induce a ma nager to care more about the environment; although this may come at th e expense of less concern for other activities, we find plausible circ umstances in which properly designed environmental audits overcome suc h a tradeoff and increase the manager's attention to both environmenta l and traditional tasks. Some implications of the analysis for environ mental public policy are also discussed briefly. (C) 1997 Academic Pre ss.