SELF-REGULATION AND THE PROTECTION OF THE PUBLIC INTEREST

Andrew Green Senior Research Fellow

Panel on the Role of Government

Roy Hrab Research Associate

Panel on the Role of Government

Paper Prepared for the Panel on the Role of Government

June 2003

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TABLE OF CONTENTS I INTRODUCTION............................................................................................................................... 3 II INSTITUTIONS AND TRANSACTION COSTS............................................................................ 5 III GOVERNMENT REGULATION: THE PROBLEMS OF INFORMATION AND MONITORING .......................................................................................................................................... 10

(A) INFORMATION COSTS AND THE PRINCIPAL-AGENT PROBLEM ..................................................... 10 (B) SETTING GOVERNMENT REGULATIONS ....................................................................................... 12 (C) ENFORCEMENT ............................................................................................................................ 14 (D) GOVERNMENT REGULATION AND ACCOUNTABILITY .................................................................. 15

IV VOLUNTARY CODES AND THE ENVIRONMENT ................................................................. 15 (A) EXTERNALITIES, THE PUBLIC INTEREST AND THE ENVIRONMENT ............................................... 15 (B) RESPONSIBLE CARE: BUILDING TRUST........................................................................................ 18 (C) SETTING RESPONSIBLE CARE “STANDARDS” .............................................................................. 20 (D) ENFORCING CARE ....................................................................................................................... 24 (E) THE IMPACT OF RESPONSIBLE CARE ........................................................................................... 30 (F) VOLUNTARY CODES AND THE PUBLIC INTEREST......................................................................... 36

V SROS: ACCOUNTANTS AND THE PUBLIC INTEREST......................................................... 39 (A) THE MARKET FOR FINANCIAL INFORMATION.............................................................................. 40 (B) THE ICAO AND QUALIFYING STANDARDS: THE MAKING OF A MONOPOLY ............................... 45 (C) THE ICAO AND THE RULES OF PROFESSIONAL CONDUCT........................................................... 54 (D) ENFORCEMENT THROUGH THE DISCIPLINARY PROCESS .............................................................. 59 (E) THE ICAO AND THE PUBLIC INTEREST........................................................................................ 63

VI DELEGATED ADMINISTRATIVE AUTHORITIES: THE MIDDLE GROUND? ................. 66 (A) THE MARKET FOR HEALTH AND SAFETY .................................................................................... 67 (B) THE TECHNICAL STANDARDS AND SAFETY AUTHORITY ............................................................. 67 (C) STANDARD-SETTING AND ACCOUNTABILITY .............................................................................. 69 (D) DELEGATED ENFORCEMENT AND SAFETY PERFORMANCE .......................................................... 78 (E) DELEGATING PUBLIC SAFETY ..................................................................................................... 80

VII CONCLUSIONS AND RECOMMENDATIONS ..................................................................... 81

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I INTRODUCTION

Regulation exists in almost all areas of human activity including the environment,

construction, hiring policy, health and safety standards, information disclosure, product pricing,

wage levels, and hours worked. For most of the 20th century, government designed,

administered and enforced formal rules, although private actors have typically played some role

in this process.1 However, direct state regulation has long been criticized as inflexible,

excessively expensive, inadequately designed, poorly enforced and vulnerable to special

interests. The past decade has witnessed numerous governments re-evaluate their regulatory

strategy.2

This paper examines one aspect of these efforts at regulatory reform - the increasing use

of various forms of self-regulation by industry. Self-regulation takes a variety of forms

including voluntary codes of conduct developed by industry, self-regulatory bodies whose

powers are granted by statute (such as for doctors, lawyers and accountants) and delegated

regulatory powers where regulations are administered by an industrial organization.3 Proponents

of self-regulation claim that it brings a range of advantages over traditional forms of regulation.

These advantages include leveraging the information and resources of industry, higher

1 J. Freeman, “The Contracting State” (2000) 28 F.S.U.L.R. 155 and L. Salamon, The Tools of Government: A Guide to the New Governance (Cambridge: Oxford University Press, 2002) (arguing that private actors have always had a role in government regulation, although their role has increased recently). 2 For example, in 1995, the government of Ontario established the Red Tape Commission (RTC) to eliminate burdensome regulations and prevent unnecessary rules and regulations from being developed. See Ontario, Red Tape Review Commission, Cutting the Red Tape Barriers to Jobs and Better Government, Final Report of the Red Tape Review Commission, (Toronto: Ontario Government Cabinet Office, 1997). Website: http://www.redtape.gov.on.ca. In response to concerns regarding the economic consequences of regulation, the U.S. government has undertaken a range of reforms from experiments with regulatory negotiation to increased emphasis on cost-benefit analysis. For example, the US Congress required the Office of Management and Budget (OMB) to provide annual estimates of the costs and benefits or all federal regulatory programs and individual regulations beginning in 1997. See Robert W. Hahn, “Policy Watch: Government Analysis of the Benefits and Costs of Regulation,” Journal of Economic Perspectives, 12(4), (1998), pp. 201-210; OMB, Draft Report to the Congress on the Costs and Benefits of Federal Regulations (Washington, DC: OMB, March 28, 2002). 3 See Margot Priest, “The Privatization of Regulation: Five Models of Self-Regulation” (1997-98) 29(2) Ottawa Law Review 235. Priest identifies two other forms of self-regulation – firm-defined regulation (where individual firms take regulatory responsibility) and supervised self-regulation (where regulatory powers are delegated to a self-regulatory organization which is supervised by a government agency). This paper focuses on voluntary codes, self-regulatory organizations and delegated administration but the other other two forms raise similar issues relating to the role of government and the public. See also N. Gunningham and J. Rees, “Industry Self-Regulation: An Institutional Perspective” (1997) 19(4) Law and Policy 363 (identifying three types of self-regulation: voluntary self-regulation, mandated full self-regulation and mandated partial self-regulation).

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compliance levels and lower monitoring costs (because of “buy-in” by industry), greater

flexibility (because the rules are less formal and easier to change) and lower costs to industry.

The critics of self-regulation focus on one large concern – self-interested behaviour by industry

which benefits the industry (or certain segments of the industry) at the public expense.4

The paper argues that these advantages and disadvantages are context-specific, depending

on the institutional, economic and social framework within which the particular example of self-

regulation exists. Self-regulation requires a check on self-interested action by the self-regulating

industry. Government does not necessarily have to provide this check. However, a

comprehensive analysis of the other potential constraints on industry action (and in particular by

the public) is required to assess the likely success or failure of the self-regulatory regime.

Increasing accountability by self-regulating industries to the public and government in the setting

and enforcing of public goals raises administrative costs (potentially above the costs of direct

government regulation). It can also reduce the “efficiency” and effectiveness of regulatory

instruments. However, without these accountability mechanisms in some form, self-regulation is

an invitation to self-interested rule-making by the “regulated” parties. The central question about

self-regulatory regimes is whether the public interest can be effectively protected by private

sector actors without accountability mechanisms that negate any real benefit from such regimes.

This paper argues that the answer to this question is heavily dependant on the particular

regulatory context.

To aid in assessing the context of self-regulation and the proper role for government, Part

II of this paper discusses institutions and transactions costs and how they govern the actions of

both public and private sector actors. Part III briefly analyzes the arguments concerning the

values and risks of government regulation. The paper then examines three examples of self-

regulation. Part IV examines voluntary codes of conduct using the example of the Canadian

Chemical Producers Association’s Responsible Care program. Part V discusses self-regulatory

organizations using the Institute of Chartered Accountants of Ontario as the example. Part VI

discusses the delegation of the regulatory function to a private regulator of mixed industry and

public interest representatives, using the Ontario’s Technical Standards and Safety Authority as

4 For good discussions of the claimed advantages and disadvantages of self-regulation, see Priest (1997-98), Gunningham and Rees (1997) and A. Ogus, “Rethinking Self-Regulation” (1995) 15(1) Oxford J. Legal Studies 97.

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the example. Part VII draws together the analysis and sets out some lessons about the role of the

public and government in self-regulation.

II INSTITUTIONS AND TRANSACTION COSTS The key to understanding the appropriate role for self-regulation is recognizing the

impact of institutions (as opposed to organizations) on human behaviour. Douglass North

describes institutions as “the rules of the game in a society; more formally, they are the humanly

devised constraints that shape human interaction.”5 Institutions consist of the formal rules of a

society including constitutions, statutes, regulations, common law rules and contracts. They

also, however, include all the informal constraints on individuals including norms of behaviour,

conventions and codes of conduct.6 On a very general level, the principal institutions are

government, markets, families and associations.

According to North, institutions are important because they set the incentives that

structure the choices of individuals. For example, through setting incentives, institutions help

determine the level of industry costs and benefits. Industry bears certain costs or obtains

particular benefits from the standards which arise under each institution. In the environmental

area, industry costs include the costs of implementing abatement equipment or of using a

particular process or substance. 7 Correspondingly in the area of financial accounting, these costs

would include the cost to the accountant or his or her client of following a particular principle in

undertaking an audit (for example, greater review of individual transactions as opposed to more

generalized sampling of transactions). Further, these costs include the potential liability from

failing to meet the required standard. Conversely, industry may benefit from institutional choice

such as through the ability to restrict competition or the opportunity to benefit from an improved

reputation. 5 D. North, “Transaction Costs, Institutions and Economic Performance” (Occasional Paper No. 30, International Center for Economic Growth, San Francisco, CA, 1992). 6 North (1992) and D. North, Institutions, Institutional Change and Economic Performance (Cambridge: Cambridge University Press, 1990). 7 D. Cole and P. Grossman, “When is Command and Control Efficient? Institutions, Technology and the Comparative Efficiency of Alternative Regulatory Regimes for Environmental Protection” (1999) Wisconsin L.R. 887. See also C. Rose, “Rethinking Environmental Controls: Management Strategies for Common Resources” (1991) Duke L.J. 1 (Rose terms these “user costs”).

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In addition, institutions also impact the costs or benefits facing the public generally.8 For

example, as we will see below, the level of environmental externalities (costs imposed on third

parties or on the environment) will vary depending on the institution chosen.9 In the case of

accounting standards, institutional choice will influence the accuracy of the information provided

to investors. The public costs and benefits, however, are also related to the industry costs or

benefits. To the extent that higher industry costs lead to increased layoffs or even plant closures,

these impacts need to be considered.

The central determinant of the impact of institutions is the level of transaction costs that

they create for specifying and enforcing these rules. These transaction costs, also called the

administration costs of the institution to distinguish them from the industry and public costs and

benefits discussed above, include the cost of obtaining, disseminating and processing the relevant

information, the cost of organizing interested parties to take action on a particular issue, the cost

of monitoring compliance and the cost of taking enforcement action (such as litigation). These

costs are incurred to a greater or lesser extent by government as well as other interested parties

(such as industry, environmental groups or the public). As discussed below, the level of these

costs will factor into the overall cost-effectiveness of the policy instrument as well as the

effectiveness of the accountability mechanism (by impacting the willingness of each party to

participate in the policy process).10

Different institutional structures raise or lower these transaction costs and therefore help

shape the actions of individuals.11 These costs are important because of two related concerns.

8 The costs and benefits, either for or between the public and industry, are not all commensurable. See C. Sunstein and R. Hahn, “A New Executive Order for Improving Federal Regulation? Deeper and Wider Cost-Benefit Analysis” (John M. Olin Law and Economics Working Paper No. 150, The Law School, University of Chicago, 2001) and J. Fraiberg and M. Trebilcock, “Risk Regulation: Technocratic and Democratic Tools for Regulatory Reform” (1998) 43 McGill L.J. 835 on cost-benefit analysis and incommensurability. 9 Rose (1991) assumes that society has been able to determine an appropriate level of environmental protection and discusses the ability of the policy instrument to meet this level. She terms the inability to meet this level “failure costs”. This paper will generally use the term “externality costs” to focus on the harm to the environment or health from the externality. 10 Cole and Grossman (1999) and Rose (1991) both discuss administrative costs. However, they focus on these costs at an aggregate level rather than across parties. 11 North argues that individuals do not only consider the pecuniary costs and benefits alone, but may also take or refrain from taking certain actions because of ideology – that is, a belief that a certain action is right regardless of the economic benefits or costs. Ideology helps reduce information and enforcement costs to the extent it makes individuals less likely to lie or not fulfill commitments. For example, individuals may vote because they believe it is

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First, information is costly. For example, it is costly, often impossible, for any individual or

group to obtain complete information on the impacts of a particular type of pollution or the cost

of controlling that pollution. If information was not costly, all individuals could act on complete

information, as could any government regulator. However, because information is costly and

distributed unevenly, individuals and firms must take decisions and actions based on incomplete

information. Institutional rules determine whose information is taken into account in setting

formal and informal rules. Moreover, even if there was complete information, many decisions

on rules are heavily value-laden, involving such issues as the appropriate trade-off between

economic growth and environmental protection, the distribution of particular types of risk or the

allocations of costs across different groups. Individuals or groups who are involved in setting

and enforcing the rules influence the trade-offs that are made.

A second, and related, concern is the principal-agent problem in the setting and enforcing

of rules. It is costly for individuals (principals) to monitor the behaviour of those acting for them

or ostensibly in their interests – that is, their agents. These monitoring problems provide scope

for the agents to act in their own interest. The institutional structure can increase or decrease the

costs of monitoring agents and therefore the ability of principals to control the actions of agents.

North argues that “[i]nstitutions are not necessarily or even usually created to be socially

efficient; rather, they, or at least formal rules, are created to serve the interests of those with the

bargaining power to devise new rules.”12

This paper will focus principally on these two concerns: information and the principal-

agent problem. Because of their effect on these concerns, each institution’s administrative costs

are central to the setting and enforcing of the rules and therefore to the level of public and

industry costs and benefits. However, there is one other factor that should be mentioned.

Institutions also influence, and are influenced by, the limited ability of individuals to process

large amounts of information.13 Individuals use subjective mental models to analyze information

and, in particular, the probability of events occurring. The subjective nature of these mental

the right thing to do and not because they believe they will receive gains greater than the costs of voting. See North (1990). 12 North (1990), p. 16. 13 North (1990 and North (1992) (discussing the limits on individuals’ ability to process information as well as the role of ideology in aiding in the processing of large amounts of complex information).

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constructs may lead individuals to overestimate or underestimate the costs, benefits or

probability of particular events.14 Individuals may therefore bear significant costs to overcome

risks that appear to them to be large but are in fact quite small. Further, these perceptions will

influence the development of formal or informal rules to the extent they encourage or discourage

individuals from participating in bargaining over such rules.15 As a result, it is necessary to

examine the entire range of costs and benefits, both actual and perceived, to determine which

institution will be the most effective and least cost in a particular context.16

Because of these differential impacts of administrative costs and individual perceptions,

institutions do not necessarily create socially optimal solutions. Many formal rules are created

through the political process which, as discussed in Part III, may provide opportunities for

certain parties to shape the rules for their own gain. Informal rules develop over time but do not

necessarily converge on “optimal” or efficient rules because of informational uncertainty and the

inability of individuals to process information. Further, institutional change is constrained by

prior institutional choices (i.e., path dependency). These prior choices typically make radical

institutional reform quite difficult. At any given time institutions will provide a mix of

14 For example, the principal heuristic for the purposes of environmental policy is availability. People tend to over-estimate the probability of an event when a similar event comes readily to their minds (for example, if an individual has just seen a car accident, he or she is more likely to overestimate the probability of another car accident occurring). Factors affecting availability include the observed frequency of the hazard (that is, the more recently the individual experienced the event, the more likely he or she is to estimate it will occur) and the salience of the event (that is, the more salient (memorable, tragic, dreaded) is the event, the more likely it is to be available). Salience can be increased by the degree of media attention to the event. Christine Jolls, Cass R. Substein and Richard Thaler, “A Behavioral Approach to Law and Economics” in Cass R. Sunstein, ed., Behavioral Law and Economics (Cambridge, MA: Cambridge University Press, 2000). 15 For example, Jolls, Sunstein and Thaler (2001) argue that contamination at Love Canal, New York led to public demand for legislation in the U.S. governing hazardous waste disposal). See also S. Breyer, Breaking the Vicious Circle: Toward Effective Risk Regulation (Cambridge: Harvard University Press, 1993) and J. Fraiberg and M. Trebilcock, “Risk Regulation: Technocratic and Democratic Tools for Regulatory Reform” (1998) 43 McGill L.J. 835. 16 Cole and Grossman (1999) (discussing the range of studies of the efficiency of market-based instruments and command and control regulation and finding that these studies either ignored administrative costs or find that when such costs (including information costs) are taken into account the relative efficiency of market-based instruments is not clear in many cases). Some recent studies have, for example, argued that when all costs are considered traditional forms of regulation may be more “efficient” in certain circumstances. See, for example, W. Wagner, “The Triumph of Technology-Based Standards” (2000) U. Ill.. L.R. 83; Cole and Grossman (1999). For an earlier defense of command and control regulation, see H. Latin, “Ideal Versus Real Regulatory Efficiency: Implementation of Uniform Standards and ‘Fine-Tuning’ Regulatory Reforms” (1985) 37 Stanford L.R. 1267.

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incentives, some encouraging efficient or socially optimal outcomes and some inducing

opportunistic behaviour.17

The prime sources for change in institutional rules are changes in relative prices,

production or enforcement technology or individual preferences.18 For example, if the cost from

an externality increases significantly (or a previously unknown externality cost becomes

recognized such as through a highly salient environmental accident), the impacted parties may

pressure government to move from market determination of the level of the externality to

government regulation. If the costs to industry from government regulations increase, industry

may pressure government for self-regulation or more market-oriented regulatory instruments. If

the costs of monitoring compliance with standards decrease, it may make certain formerly costly

instruments feasible. 19

This paper focuses on the impact of institutional and instrument choice on administrative

costs to examine the relative effectiveness and cost advantage of various forms of self-regulation.

These administrative costs can themselves make the costs of the policy instrument outweigh its

potential benefits. Moreover, these costs will have an effect on both the public and industry

costs and benefits and their distribution. As a result, this paper examines how the markets, civil

liability and government regulation impacts these costs and the extent to which various forms of

self-regulation can be used to overcome, or take advantage of, the deficiencies in each of these

institutions.

17 North (1990). 18 North (1990) and Mercuro and Medema (1997). 19 Rose (1991) argues that as externality costs, administrative costs or user costs change over time, policy instruments that are more effective but were formerly too expensive may become feasible. Rose focuses on the pressure in the U.S. for a change in air emission control instruments from command and control regulation to market-based instruments. She argues that this pressure occurred because of the increasing costs of determining the appropriate technology to impose under command and control regulation and, more importantly, the rising user costs of implementing these technologies. Cole and Grossman (1999) take a similar approach to explaining the change in policy instruments for control of air emissions. They argue that command and control air emission regulations were more effective and least cost in the U.S. in the 1970s because monitoring costs for market-based approaches were so high. Once these costs fell with the advent of new monitoring technology, it became feasible to introduce market-based instruments as the U.S. did in the 1990 Clean Air Act Amendment.

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III GOVERNMENT REGULATION: THE PROBLEMS OF INFORMATION AND MONITORING

(a) Information Costs and the Principal-Agent Problem A recurrent criticism of government action over the past few decades has been that

government regulation is ineffective and excessively costly. The critics of government

regulation claim a range of causes for these concerns from excessive legalization to too much

discretion. However, at the core of the criticisms are the two concerns raised above: information

costs and the principal-agent problem.

In terms of informational problems, governments have limits funds to obtain and analyze

information. It is too costly, and in fact impossible, for government to obtain complete

information on all of the matters it seeks to regulate.20 Regulators also need information on the

trade-offs to be made in setting and enforcing rules. Their decisions depend in part therefore on

where they get their information. Regulated parties tend to have more information and expertise

on certain issues than either government or the public and, as a result, regulators often rely on

regulated parties for a considerable amount of information.21 Regulators may also consult with

other parties (such as public interest groups and impacted parties) to obtain information on the

potential impacts of regulation or non-regulation. The extent and nature of the consultation by

regulators may affect the resulting regulatory decisions by providing regulators with information

from different sources.

Government regulation also gives rise to significant principal-agent problems. The root

of these problems lies in the inability of citizens to monitor government operations. Citizens are

required to pay (through taxes or fees) for and abide by state regulation regardless of whether

they agree with or benefit from the regulation. However, citizens have only a limited ability to

assess the actions of public officials because of the cost of obtaining information on the causes

and results of government action, of the costs imposed by rules limiting the monitoring of

government action by the public and of organization costs (for example, collective action

20 F. A. Hayek argued that a key problem in determining social rules is that knowledge of circumstances is not and cannot be known to one person or planner but instead is dispersed across all individuals. Hayek concluded that the market (and the price system) was much better than government in utilizing such information. F.A. Hayek, “The Use of Knowledge in Society” (1945) 35 American Economic Review 519. 21 J. Freeman, “The Private Role in Public Governance” (2000) 75 N.Y.U.L.R. 543. For example, governments in Canada relied heavily on information from regulated parties in the early years of environmental regulation (A. Green, “Incentives, Public Goals and Environmental Contracts” (Research Paper, Panel on the Role of Government, November 13, 2002)).

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problems).22 Therefore, politicians have only weak incentives to evaluate the efficiency and

effectiveness of regulations and regulatory agencies. Further, even if legislators had the correct

incentives to undertake evaluation, they have difficulty monitoring the action of regulatory

authorities. Some interest groups have difficulty ensuring that legislators and regulatory

authorities are legitimately considering their views. Regulators and others have difficulty

monitoring compliance by private actors with laws and regulations. Each of these monitoring

problems creates “slack” within which certain parties can act in their own interest, and contrary

to the public interest, in the course of government regulation.23

The importance of these information and principal-agent concerns depends on how

regulations are developed and enforced. The most pessimistic view of government regulation is

public choice theory. It argues that legislators and/or bureaucrats essentially sell their votes or

influence to the highest bidder. The highest bidder, according to this theory, tends to be small,

concentrated interests such as industry groups which can more easily mobilize support and have

sufficient incentive to overcome the costs of organizing and influencing the regulatory process.24

For example, Stigler argued that “every industry or occupation that has enough political power to

utilize the state will seek to control entry.”25 Behavior channeled towards requesting privileges

from government has alternatively been termed “rent-seeking” and “directly unproductive, profit

seeking (DUP) activities.”26 Public choice theorists claim that the result is that the setting and

enforcing of laws and regulations is distorted away from public interested outcomes by the

dominance of “rent-seeking” behaviour by concentrated interests.27

22 Michael J. Trebilcock, The Prospects for Reinventing Government, (C.D. Howe Institute: 1994), p. 11. See also North (1990). 23 S. Croley, “Theories of Regulation: Incorporating the Administrative Process” (1998) Columbia L.R. 1. 24 The dominance of smaller groups arises because the costs or benefits of regulation tend to be larger and more concentrated and the difficulties of organizing (such as the free rider problem) tend to be smaller. See Croley (1998) for a description and critique of collective action theory and public choice. See also N. Keohane, R. Revesz and R. Stavins, “The Choice of Regulatory Instruments in Environmental Policy” (1998) 22 Harvard Envtl L.R. 313. 25 George Stigler, “The Theory of Economic Regulation” (1971) 2(1) The Bell Journal of Economics and Management Science 3. 26 See Gordon Tullock, “The Welfare Costs of Tariffs, Monopolies and Theft” (1967) 5 Western Economic Journal 224; Jagdish N. Bhagwati, “Directly Unproductive, Profit Seeking (DUP) Activities,” (1982) 90(5) The Journal of Political Economy 988. 27 Croley (1998), D. Hartle, M. Trebilcock, J.R.S. Pritchard and D. Dewees, The Choice of Governing Instrument (Ottawa: Economic Council of Canada, 1982) and Keohane, Revesz and Stavins (1998).

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On the other hand, the most optimistic view of government regulation is civic

republicanism. Proponents of this theory argue that regulatory policy can and should be the

outcome of public deliberation by all interested parties. They believe such deliberation leads to

policy decisions which may be more than the sum of individuals’ self-interest.28 Civic

republicans tend to argue for process reforms to foster inclusive participation and deliberation.

Both the most pessimistic and optimistic views of government regulation hinge on who

participates in the process of setting and enforcing rules. The degree and nature of participation

by various parties determines who has the ability to either pursue or monitor rent-seeking

behaviour in the setting and enforcing of laws and regulations. It also determines who is

involved in providing information and deliberating on their content and enforcement. This

participation will in turn depend on the administrative costs imposed by government regulation

on the various parties in the process of setting and enforcing laws and regulations.

(b) Setting Government Regulations The principal mechanisms for setting government laws and regulations are found in

administrative law. Administrative law determines if, and how, particular groups can participate

in or challenge government policy decisions. It does so through influencing the costs of

participation. An individual or group will decide whether to participate in or challenge a policy

decision based on the costs and benefits of such participation. The benefits of action for the

public will include the potential to reduce a public harm (such as pollution) or create a public

benefit (such as more accurate financial information for investors). The benefits of action for

industry will include the potential to reduce the costs of complying with laws or regulations or to

create a benefit (such as a barrier to entry to competitors). These benefits will be distributed

differently in different policy contexts. They may be small and spread widely over a large

number of individuals (such as in the case of some environmental harms) or, at the opposite

extreme, may be large and concentrated on a few parties (such as arguably in many cases for

industry).

28 See Croley (1998) and Freeman (2000) for a more complete description of these theories as well as the intermediate theories such as pluralism (arguing that regulators take account of the interests of all interested parties) and public interest theory (arguing that if there are sufficient controls, regulators will act in the public interest).

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The costs of participating in the regulatory process include the costs of organizing a

group and taking action. These costs are influenced by administrative law. For example, formal

and informal administrative law requirements impact the costs of organizing (such as providing

notice of pending issues), the costs of obtaining information about the issue (such as by

compelling information disclosure by regulated parties to the public), the costs of participating in

the process (such as through instituting a simple administrative process or a more formal hearing

mechanism) and the costs of challenging any regulatory decision (such as through providing

simple administrative routes of appeal or requiring application to the courts).

Individuals and groups will assess these benefits and costs and determine whether or not

to participate in government policy decisions. However, this assessment is influenced by the

individuals’ or groups’ perception of the costs and benefits. As noted in Part II, individuals have

limits on their capacity to assess costs and benefits, arising, for example, from the difficulties

individuals have in assessing risks. They may over-or under-estimate the costs and benefits of

participating in or challenging regulatory action because of these limitations. The more salient

the issue to the public (such as because of a recent event such as an environmental accident or a

financial scandal (such as in the case of Enron)), the greater the demand by the public for action

and the likelihood of participation in the policy process. Other less salient issues may not be on

the public’s agenda even where they create greater risks to the public.29

A key argument against government setting rules has been that the information costs are

too high regardless of the administrative rules. However, as administrative laws and rules

determine the costs of action by different parties, they influence the extent to which these parties

will participate in the process of setting laws and regulations. By lowering these costs,

government rules can foster participation by a broader range of parties and therefore increase the

information to and monitoring of government regulators. Yet there is a trade-off. Without wide

participation, government lacks information on preferences and impacts on the public and the

process of rules setting is more open to rent-seeking. However, as participation increases, the

process of setting standards becomes more costly and it is harder (more expensive) to tailor rules

to individual circumstances (such as plant specific costs and benefits). These factors may mean

29 The literature on this issue is large and growing. See, for example, Sunstein (2002) and S. Breyer, Breaking the Vicious Circle (Cambridge, MA: Harvard University Press, 1993).

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that while broader participation may lead to better information on benefits and better monitoring,

there is an increase in the cost and a potential decrease in the effectiveness of regulation.

(c) Enforcement Enforcement of government regulations raises similar issues to the setting of standards.

The government lacks information on the compliance by companies or individuals with laws and

regulations. It tries to overcome this lack of information through monitoring of industry by

government officials and, to a lesser extent, monitoring by third parties such as the public or non-

governmental organizations and required disclosure by regulated parties. However, the lack of

information on compliance is a key concern with enforcement.

In addition, the government enforcement process tends to be fairly closed to the public.

The government in general has a broad discretion as to who to investigate, who to prosecute, any

settlement negotiations and what range of penalties it will seek on conviction. This discretion

tends to be higher in the case of prosecutions for non-compliance but also exists for

administrative orders seeking compliance. This lack of input from the public and the public’s

limited ability to challenge the government’s enforcement discretion raise issues of lack of

information by regulators on the effects of, and trade-offs involved in, non-compliance. It also

creates the potential for capture of regulators by regulated parties.

One method of overcoming the lack of government interest in or resources for

enforcement is enforcement by members of the public. However, in Canada, the public only has

a very limited ability to take action to enforce government laws. Members of the public can

commence private prosecutions but the costs are high and the Attorney General has discretion to

take over and end any such prosecution. Only a few statutes provide the public with the power

to directly enforce government laws. As a result, private enforcement of public laws has not had

as great an impact in Canada as it has had in the U.S.30

30 See, for example, K. Roach and M. Trebilcock, “Private Enforcement of Competition Laws” (1996) 34(3) Osgoode Hall L.J. 461 (discussing private enforcement of public laws in Canada and the U.S.) and S. Elgie, “Environmental Groups and the Courts: 1970-1992” in G. Thompson, M. McConnell and L. Heustis, eds.., Environmental Law and Business In Canada (Aurora, ON: Canada Law Book, 1993).

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(d) Government Regulation and Accountability As a result of the information and principal-agent problems, critics of government

regulation claim it is ineffective and overly costly. For Canada, it has been estimated that total

administrative expenditures by governments (federal, provincial and local) on regulation was

approximately $5.2 billion for the fiscal year 1997-98.31 The private cost (i.e. the burden on

businesses and consumers) of implementing, monitoring and demonstrating regulatory

compliance with federal and provincial regulation was estimated to be $103 billion for the fiscal

year 1997-98.32 On the other hand, government does not regulate some risks or issues even

though they impose large risks or costs on certain parties.33

These arguments concerning costs and irrationalities of government regulation have lead

to the push for alternatives. The alternatives have included deregulation (moving back to market

ordering), increased use of the public in controlling regulated parties and increased self-

regulation by regulated parties. It is the latter that is the subject of this paper, although the study

of self-regulation includes the impact of market discipline and enforcement by the public. The

next sections of the paper examine how well three forms of self-regulation (voluntary codes,

self-regulated organizations and third party regulators) address the concerns with government

regulation and the protection of the public interest.

IV VOLUNTARY CODES AND THE ENVIRONMENT

(a) Externalities, the Public Interest and the Environment Before discussing voluntary codes and self-regulation in the area of the environment, it is

important to consider the arguments in favour of any regulation in this area. The market

“failure” in the cases of environmental risks is well known. Suppose a firm is emitting smoke

31 Laura Jones and Stephen Graf, Canada’s Regulatory Burden, (The Fraser Institute: 2001), p. 24. 32 Ibid. The Jones and Graf (2001) estimates used a multiplier derived by a study in the United States that estimated that the private sector spent $20 for every dollar of public spending on regulatory administration; See Christopher Douglas, Michael Orlando and Melinda Warren, Regulatory Changes and Trends: An Analysis of the 1998 Budget of the US Government, Policy Brief 182, (St Louis, MO: Center for the Study of American Business, 1997). A study surveying 500 Ontario businesses commissioned by Ontario’s RTC found that regulatory compliance amounted to seven percent of a company’s operating costs. Carr-Gordon Ltd and Erin Research Inc., Responsive and Responsible Regulation for Ontario. A Report to the Red Tape Review Commission, (May 1996). 33 See Sunstein (2002) for a discussion of the range of regulatory costs and benefits in the area of risk regulation.

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from its plant and impacting the health of a number of people downwind of the plant. If there are

no transaction costs (that is, if costs of obtaining and processing information, organizing,

bargaining and enforcing any agreement were zero), the impacted people would recognize the

impact of the smoke and could organize and bargain with the firm to a mutually acceptable

solution (such as a payment to the firm to stop operating or a payment by the firm for emitting

smoke).34

However, transaction costs are not zero. The largest cost relates to information. It may

be costly for individuals to determine where the smoke originates and its impact on their health

(particularly if the effects do not arise for some time). Further, the parties creating the risk have

an incentive not to disclose accurate information (such as on the cost of controlling the smoke) in

an attempt to obtain an advantage. In many cases, the costs imposed by the smoke may not be

sufficiently high for any one individual to become informed about the causes (although the

impact across all individuals may be large) and therefore the individuals may remain “rationally

ignorant”. Finally, information generally is a “public good” – to the extent the party producing

the information bears the costs but does not reap all of the benefits, there will be too little

information on environmental risks.

Even if the information was known, the impacted individuals face organizational costs

that increase as the number of impacted individuals increase.35 These organizational costs can

include the costs of holding meetings, obtaining legal advice and participating in formal and

informal negotiation or legal processes. Further, individuals may not take action because of free-

riding – where each individual attempts to benefit from the actions of others without sharing the

costs of action with the result that no action is taken.

These transactions costs can impede bargaining between companies and individuals

impacted by pollution. They also severely limit civil actions by individuals seeking damages

from polluters as an effective means of controlling environmental harm.

These transaction costs therefore result in externalities – that is, the ability of one party to impose

costs of its activity on another. For example, if the impacted individuals do not or cannot take

action to deal with the smoke because of the high transaction costs, the company can impose the

34 The classic discussion of this transaction cost approach to externalities is R. Coase, “The Problem of Social Cost” (1960) J. Law and Econ. 1. 35 See Croley (1998) for a discussion of the collective action problem.

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costs from the smoke on the individuals and not face the full costs of its operation. They will

create too much of the product and too much pollution.

Apart from this transaction cost view of environmental concerns under which individuals

face information and coordination problems, other concerns have been raised over market

ordering of environmental risks. Even if fully informed, individuals may be incapable of making

rational decisions about environmental risks because, for example, they use mental heuristics

which cause them to over or under-estimate the risk.36 Further, there may be “fairness” concerns

and other collective aspirations that would not be addressed by the market – such as the fairness

of the distribution of the resulting environmental risk.37 In addition, market ordering raises

issues of endogenous preferences – that is, of individuals coming to accept certain situations

(such as the distribution of environmental risk) because they do not know or see an alternative.

Such endogenous preferences would limit the ability of the market to make adjustments. Sen

and others have pointed to the need to take account of such endogenous preferences in choosing

institutions and policy instruments.38

This discussion of difficulties with the market in dealing with environmental risk is not

intended to suggest there is an automatic role for government. In fact, there are significant

concerns with government regulation of environmental risk in terms of both the information and

the principal-agent problems discussed above. However, it is intended to highlight the concerns

with market ordering and the need to consider other institutional arrangements. It is against a

backdrop of public concerns over market failure and over whether governments were taking

sufficient action to regulate environmental risk that the Canadian Chemical Producers’

Association (“CCPA”) developed the Responsible Care program.

36 Sunstein (2002). See the discussion of heuristics in Part II. 37 C. Sunstein, After the Rights Revolution (Cambridge, MA: Harvard University Press, 1990). There is a debate in the environmental literature over the issue of the distribution of environmental risk. “Environmental justice” proponents claim that a disproportionate amount of environmental risk is imposed on lower income groups and certain races. However, such proponents point to flaws in both the market and the current system of government regulation as sources of such injustice. 38 A. Sen, Development as Freedom (New York: Anchor Books, 1999) and Sunstein (1990). While addressing preferences may raise concerns of parternalism (see M. Trebilcock, The Limits of Contract [cite]), others have argued that “paternalism” in this sense and freedom of choice are not incompatible (see C. Sunstein and R. Thaler, “Libertarian Paternalism is not an Oxymoron” (John M. Olin Law and Economics Working Paper No. 185, The University of Chicago Law School, May 2003)).

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(b) Responsible Care: Building Trust The CCPA is an industry association currently composed of approximately 66 members

and seven “partners”. The CCPA began formulating the Responsible Care codes of conduct in

the 1980s. These Codes govern a range of actions by Responsible Care members from how to

respond to the public to how to manage hazardous waste. It has been very successful within the

chemical industry internationally. Chemical industry associations in 43 countries and covering

approximately 86 percent of the world’s chemical production have adopted the program in some

form.39

The Responsible Care program was the CCPA’s response to changing expected costs of

environmental issues. The CCPA was motivated by a number of highly publicized

environmental issues and, in particular, the tragedy in Bhopal, India in November 1984 caused

by a chemical leak at a Union Carbide plant.40 The widespread publicity associated with these

events created significant government and citizen concern regarding the safety of chemical

production. Polls in both the U.S. and Canada in the 1980s showed significant distrust of the

chemical industry by the public.41 Responsible Care was at least in part a response to the threat

to the chemical industry of government-imposed regulations or public action in the form of tort

or consumer action in the event of industry inaction.42

There are two potential opposing views of the Responsible Care program.43 The

optimistic view is that Responsible Care is an attempt by the chemical industry to move beyond

39 Harrison (2001). 40 CCPA, “Responsible Care in Your Neighbourhood” (“Bhopal kicked the Responsible Care initiative into high gear. The chemical industry realized it had a problem – public faith was shattered.” (quoting a chemical industry verifier, p. 1); King and Lenox (2000). 41 King and Lenox (2000) (discussing polls in the U.S.) and Earnscliffe Research and Communications, Results of Key Audience Research Conducted for the Canadian Chemical Producers’ Association (September 20, 1999) (“In the post-Bhopal environment in which the CCPA’s 1986 benchmark study was conducted, the chemical industry suffered from a poor reputation with the Canadian public, who feared that their health and safety as well as that of the environment were in jeopardy. They surmised that the chemical industry was unwilling or unable to protect them from risks of chemical exposure and were inclined to look for more and tougher oversight from different levels of government to help address this insecurity.” (at p. 12)). 42 See CCPA history document; K. Harrison, “Voluntarism and Environmental Governance” in E. Parson, ed., Governing the Environment: Persistent Challenges, Uncertain Innovations (Toronto: University of Toronto Press, 2001). 43 See King and Lenox (2000) for a discussion of the two conflicting view points on Responsible Care. See also Harrison (2001), Webb (2003), and N. Gunningham and P. Graborsky, Smart Regulation: Designing Environmental Policy (Oxford: Clarendon Press, 1998).

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compliance and simultaneously improve both its environmental performance and its reputation.

The CCPA views Responsible Care not so much as a program but as a “state of mind”,

attempting to transform both how chemical companies view environmental, health and safety

issues and how the public views the chemical industry.44 Proponents claim that such voluntary

codes can lead to potential benefits in the form of enhanced environmental protection, reduced

costs for government and industry and increased innovation through taking advantage of the

information available to industry. It is also argued to lead to increased trust between industry

and the government and public. This trust would address the principal-agent concern by

increasing the willingness of the public and the government to allow industry to act as their agent

in the public interest.

The other view of Responsible Care is more pessimistic. Responsible Care could be seen

as a move by the chemical industry to avoid government regulation and stave off public criticism

or action. The chemical industry could be using the program as a public relations ploy to

improve its reputation without altering performance or only altering performance sufficiently to

reduce the threat of regulation. For example, King and Lenox have described the possibility of

industry using self-regulation as a form of insurance against claims of negligence to the extent

outsiders cannot verify compliance with the program.45 It could, under this argument, exacerbate

both the information problem (by limiting the information from and distorting the information

available to the public) and the principal-agent problem (by imposing itself as the agent for the

public interest with little monitoring).

The next sections will examine the standard-setting and enforcement processes under

Responsible Care to determine whether they provide any indication of which of these views is

more likely accurate. A key factor in this analysis will be the role of trust. The CCPA intended

Responsible Care to overcome the distrust by the public and government aimed not at a

particular company but at an entire industry.46 However, this concern about trust does not in

itself point to either the optimistic or pessimistic view of Responsible Care. Trust reduces the

information and organization costs in interacting with other parties. However, relying on trust 44 CCPA, Responsible Care in Your Neighbourhood (www.ccpa.ca, accessed April 2003), at p. 5. 45 King and Lenox (2000). They note that this is a form of the “lemons” problem. 46 King and Lenox (2000) and Gunningham and Rees (1998).

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may provide opportunities for opportunistic behaviour by a party where, for example, it is too

expensive or difficult to verify compliance by a company with the principles of Responsible

Care.

(c) Setting Responsible Care “Standards” The potential for bias in setting standards is a key concern with the formulation of the

standards under the Responsible Care program. To the extent that only the CCPA is involved in

the standard setting process, there is a potential for the standards to reflect its interests rather than

the public interest. Two principal groups were and are involved in the development of

Responsible Care principles and standards. First, the CCPA itself has played and continues to

play the primary role in setting the standards. However, the CCPA does not include all members

of the chemical industry. King and Lenox found that in the U.S. the companies which were more

likely to be members of the Responsible Care program were those which were more likely to be

influenced by the industry’s reputation. Those companies involved in the program were more

likely to be larger, more focused on chemical production (as opposed to being engaged in other

production areas as well) and more publicly recognizable as being part of the chemical industry.

Further, they tended to be from sectors of the chemical industry which had higher levels of

emissions and may have higher emissions than others even within their particular sector of the

chemical industry.47

Based on a review of the federal National Pollutant Release Inventory data48, members of

Responsible Care appear to be on average larger than non-members in the chemical industry.

For example, in 1994 Responsible Care members averaged 192 employees while non-members

averaged 98 employees. This difference is due to the larger number of small non-members than

members. The number of medium and large members and non-members is similar.49 In

47 A. King and M. Lenox, “Industry Self-Regulation without Sanctions: The Chemical Industry’s Responsible Care Program” (2000) 43(4) Academy of Management J. 698 and A. King and M. Lenox, “Does Membership have its Privileges? Analyzing Who Benefits from Industry Self-Regulation” (Manuscript, Draft January 23, 2001). King and Lenox (2000) found that those in the program tended to have higher emissions than those not in the program while King and Lenox (2001) found that this relationship was the same but not statistically significant. 48 As discussed below, the National Pollutant Release Inventory is a data base compiled by the federal government on the releases and transfers of pollutants by all firms (provided they meet certain threshold requirements). The database includes other information on firms such as number of employees. 49 For example in 1994 there were 35 members and 155 non-members with 0 to 100 employees, 16 members and 28 non-members with 101 to 250 employees and 14 members and 15 non-members with greater than 250 employees. As discussed below, in general the data in this paper comparing members and non-members refers to companies that

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addition, in 1994, members tended to have higher average emissions than did non-members in

the case of small and medium-sized companies, but for large companies, non-members had

higher emissions than members.50 Companies which are larger and have higher pollution levels

arguably have more to lose from a poor reputation for the chemical industry and from

government regulation (given the greater amount of pollution they would have control). They

therefore may be more willing to set stringent standards under the Responsible Care program.

Alternatively, however, they may also benefit most from standards which have the appearance of

stringency but which merely forestall regulations or consumer/public action. It is therefore

difficult to know in theory how the membership structure will impact the setting of Responsible

Care standards.

Second, the CCPA states that the Responsible Care program attempts to formulate

environmental objectives in an open and accountable manner. The industry was concerned that

the public would view the new codes of conduct as nothing more than an empty public relations

exercise.51 The public would therefore rely on government to impose formal rules on chemical

producers. To achieve some measure of accountability, the CCPA created the National Advisory

Panel (NAP) to conduct an annual performance review of the Responsible Care program. The

NAP is composed of 16 non-industry employed individuals who are knowledgeable in the

environmental, health and safety issues of the chemical industry and includes “activists”.52

According to the CCPA, the NAP played a role in the initial development of the Responsible

Care code. It also provides an annual review of the performance of the Responsible Care

program and issues challenges for improvement of the program. While its role appears to be

largely ex post (responding to proposals by the CCPA), the NAP does play some role as a check

on the actions of the CCPA in formulating standards and codes.

reported to the NPRI throughout the period 1994-1999 (that is, it does not include companies which left or joined Responsible Care or began or stopped reporting to the NPRI during this period). 50 In 1994, the average emissions for small companies (0-100 employees) were 12 tonnes for members and 7 tonnes for non-members, for medium-sized companies (101-250 employees) were 416 tonnes for members and 326 tonnes for non-members and for large companies (over 250 employees) were 747 tonnes for members and 802 tonnes for non-members. 51 CCPA, Responsible Care in Your Neighbourood (www.ccpa.ca, accessed March 2003), p. 6. 52 CCPA, Responsible Care in Your Neighbourhood; CCPA, Through Our Critics’ Eyes: Responsible Care Annual Performance Report 2000 (CCPA: Ottawa, ON, 2000).

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The NAP has raised a few issues relating to accountability or public participation in the

actions of the CCPA. For example, it recently raised the issue of the “congruency” between the

CCPA’s positions with government on legislative issues and Responsible Care principles. The

NAP criticized the CCPA’s position expressed in its position paper to the government on the

precautionary principle as being potentially inconsistent with the Responsible Care ethic. The

NAP is concerned that they do not know how the chemical industry is negotiating with the

government “behind closed doors”.53 The NAP suggested that on major and controversial issues,

the CCPA should consult in a timely fashion with stakeholders and the NAP and provide notice

to the media.54

Further, the NAP has expressed concerns about the self-verification process by the CCPA

of its Responsible Care program. The NAP argued that neither the CCPA nor the NAP itself (as

part of the Responsible Care program) can assess Responsible Care. Some members of the NAP

have suggested an independent auditor should undertake any such assessment. The CCPA,

however, has stated that it is unsure how such assessment could be conducted but that it will

consider the issue.55

The CCPA more recently has taken steps which may broaden scrutiny and input into its

program. It entered into a draft non-binding Memorandum of Understanding (“MOU”) with the

federal, Ontario and Alberta governments. Under the MOU, the CCPA commits to using its

“best efforts” to provide the governments with the opportunity to be involved, through

information and opportunity to participate in the development, implementation and review, of

any specific commitments under Responsible Care. The MOU provides for the establishment of

a steering committee including representatives of the CCPA, the governments, the NAP and

public interest groups (initially including Pollution Probe). The Steering Committee is to review

the CCPA’s aggregate release reduction targets for all chemicals and for all substances listed as

toxic under CEPA or identified by the steering committee. The Steering Committee can also

53 CCPA (2000), p. 11. 54 CCPA (2000). . 55 CCPA (2000).

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request that individual members review site specific emissions and targets.56 Such a role of

government and public interest groups can aid in a monitoring function and lessen the

opportunity for opportunistic changes to the program.

It is difficult to get a sense of the strength or laxity of the program from the codes

themselves. The exact content of the Responsible Care program varies by country. The CCPA’s

Responsible Care program currently contains an “ethic” and six guiding principles. The “ethic”

is the statement that “We are committed to do the right thing, and be seen to do the right thing”.

The ethic (and accompanying principles) are made more concrete through the following six

codes of practice: (1) community awareness and emergency response; (2) research and

development; (3) manufacturing; (4) transportation; (5) distribution; and (6) hazardous waste

management. Each code contains the following four components: (1) the code’s purpose

statement; (2) the code’s guiding principles; (3) the actual codes of practice; and (4)

implementation milestones.57 According to the CCPA, “[a]ll the codes have as their underlying

theme the protection of people and the environment through the responsible management of

chemicals, chemical products, processes and operations.”58

The Responsible Care codes have been criticized as being focused only on process issues

and not on performance standards. For example, the codes only provide that members should set

up an environmental management system and do not provide substantive objectives such as

targets for emissions of particular substances or issues.59 This lack of substantive requirements

ties into the enforcement process to the extent that audits only review compliance with the

system rather than with legal requirements.60 On the other hand, the code has as its guiding

principle that members should know the relevant legal requirements and meet or exceed them in

letter and spirit. This principle may aid in strengthening a norm of compliance and

56 Memorandum of Understanding For Environmental Protection Through Action under CCPA Responsible Care between CCPA, Government of Canada, Government of Ontario and Government of Alberta dated[February 2, 2001]. 57 CCPA, Responsible Care in Your Neighbourhood. 58 CCPA, The Ethics and Codes of Practice of Responsible Care, (Ottawa: CCPA, November 2000), p. 8. 59 Harrison (2001). 60 Harrison (2001).

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environmental improvement, although it obviously requires environmental legislation to provide

the content.

The CCPA therefore appears to have a process which takes some account of input from

broader interests in setting standards. This input provides information to the CCPA on

community impacts and preferences and aids in monitoring changes to the program. While it is

clear that the Responsible Care program relies heavily on environmental laws and regulations for

substantive requirements, it at least helps members develop programs for addressing

environmental issues. However, the standards themselves are difficult to analyze, and are open

to some criticism since they are mainly process-related rather than focused on environmental

performance. Determining the value of Responsible Care program on environmental outcomes

will require examining how it is enforced and its actual impact on the environmental

performance of members.

(d) Enforcing Care How Responsible Care is enforced is central to whether Responsible Care is a positive

motivator for action or merely a ploy by industry to stave off regulation and criticism. The

CCPA required that all members of the CCPA (excluding new members) implement the

Responsible Care codes by 1992. A company must formally sign an agreement to abide by the

Responsible Care codes in order to gain membership into the CCPA. In addition to the chemical

producers, there are four transportation industry partners that agreed to abide by the Responsible

Care codes.61

Unlike in the U.S., Canadian members are required to undergo “re-verification” audits of

their implementation of the program every three years. These audits are conducted by an

external verification team comprised of two industry and two non-industry members (one from

the local community).62 The audit focuses on whether the particular facility is complying with

the requirements of the Responsible Care program. However, as noted above, one of the aims of

Responsible Care is compliance with government regulations but regulatory compliance is not 61 The partners include Canadian Pacific Rail, Canada National Rail, and two trucking firms, Harmac and Trimac. 62 CCPA, Responsible Care in Your Neighbourhood; Harrison (2001); A. King and M. Lenox, “Industry Self-Regulation without Sanctions: The Chemical Industry’s Responsible Care Program” (2000) 43(4) Academy of Management J. 698.

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how companies are evaluated under the Responsible Care program. The companies instead are

evaluated based on whether they have the appropriate systems in place (that is, on the inputs) not

on compliance or environmental protection (that is, the outputs).63

Responsible Care can be enforced in a number of ways including:

Expulsion

The Responsible Care audits have the potential to lead to direct sanctions by the CCPA.

The CCPA can expel members from the association for non-compliance with the Responsible

Care program.64 However, only one member has ever been expelled for non-compliance with

Responsible Care.65 This absence of expulsion either means that companies are very diligent

about complying with the program or that the CCPA is unwilling to enforce its requirements

(that is, that the probability of sanctions is low). The strength of this incentive also depends on

the benefit the company obtains from being part of the CCPA. Not all chemical companies are

members indicating that the benefits of membership are not universally high. Some companies

may free-ride off the CCPA while others may view the annual costs, including the costs of

complying with Responsible Care, not worth the benefits. The sanction of expulsion therefore

may not be a strong deterrent for some companies, either because of low probability of expulsion

or low level of sanction relative to the cost of compliance with the standards.66

Peer Pressure

The second manner in which the Responsible Care program could be enforced is through

“peer pressure” from other members. As noted above, one of the reasons the industry created

Responsible Care was for the reputational externality. A high profile incident would lead to the

entire industry being viewed in a negative light and harm the profitability of the industry either

because of reduced consumer use of products or increased costs from lawsuits and government

63 Harrison (2001). 64 CCPA, Responsible Care in Your Neighbourhood. 65 CCPA, Responsible Care in Your Neighbourhood. 66 Harrison (2001). King and Lenox (2000) note that some large firms may gain sufficiently large (reputational) benefits from the program that they are willing to incur the costs of free riders.

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regulation. This externality effect creates incentives for peer pressure within the industry to

ensure that members effectively implement the code.67 The strength of this peer pressure will

depend on desire of the industry members to actually improve compliance with the program and

on the extent to which companies care about the approval of other members. As with the issue

of expulsion, it is not clear whether such pressure would be sufficiently constraining where costs

of compliance are high.

Public Pressure

A third manner in which Responsible Care could be enforced is by public pressure or

action. The results of the re-verification audits are made public. The local community and/or

broader environmental groups may be able to use these audit results to pressure the facility to

act. This information could aid in monitoring the actions of the CCPA and its members. It also

can aid in overcoming the information problems of private ordering (the markets and civil

action) and of government. The public could use this information as a signal for when to

institute civil actions68 or undertake “green consumerism” (boycotting a company’s products for

environmental reasons). Further, the public could use the information as a basis for pressuring

the government to increase regulations, thereby providing information to regulators on

preferences. The information from the audit therefore aids in reducing the information

deficiencies of both government regulation and tort law.

However, there are a number of caveats. First, the value of the information depends on

what information is provided. If the information is sanitized or does not deal with actual

environmental risk, it is less useful.69 The Responsible Care audits may be subject to this

deficiency to the extent they only deal with process concerns rather than environmental

performance. Second, the value of the information to the public depends on the public’s ability

67 King and Lenox (2000) and CCPA, Responsible Care in Your Neighbourhood (“More importantly, the [senior executive] groups use peer pressure to ensure members practice the ethic of Responsible Care” (at p. 17)). 68 In addition, a court could use non-compliance with the Responsible Care codes as evidence that the facility was negligent. See K. Webb, Law and Voluntary Action [cite], discussing the incorporation of such systems as industry norms and therefore as the basis for a civil action. 69 There is some evidence that firms will be less willing to adopt management standards as the risk that the information will be used against them increases (that is, as the threat of litigation increases) (M. Delmas, “In Search of ISO: An Institutional Perspective on the Adoption of International Management Standards” (Manuscript, SSRN, 2003).

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to use the information. If the information is too complex for the public to understand, it will not

benefit them.70 There is some evidence from the U.S. that the reductions in pollution due to the

use of information is tied to the education and income level of the community, although

preliminary estimations find the effect of income to be insignificant in Canada.71 There is some

evidence that this is a concern for the information provided under the Responsible Care program.

The NAP has recommended that the chemical industry act to improve the ability of local

communities to understand issues relating to their nearby facilities as well as make a broader

commitment to improving scientific literacy through the education system.72 Third, the cost of

public action may be too high given that the responsibility for monitoring facilities is spread

among each community.73 Each community must bear the cost of understanding the chemical

industry issues which may exceed the perceived benefits (if, for example, the community either

does not view the chemical industry as a risk (because of the low probability nature or small size

of the neighbouring company) or because they do not view the industry as truly responding to

public demands). Finally, the impact of consumer behaviour will depend on the degree to which

consumers can identify and have an effect on the sales of the products made by the facility.

Consumers will have greater difficulty in using such pressures where the company produces

intermediate inputs, produces products for export or is a subsidiary of a larger company.74

There are few empirical studies of the influence consumers or public on the emissions of

companies in Canada. One study by Antweiler and Harrison examined national data on facility-

level emissions and transfers of pollutants from the federal National Pollutant Release Inventory

70 As noted above, there is a growing literature on the barriers to individuals understanding and using information on small probability risks. See Sunstein (2002). 71 W. Antweiler and K. Harrison, “Toxic Release Inventories and Green Consumerism: Empirical Evidence from Canada” (Forthcoming, Canadian J. Economics) and K. Harrison and W. Antweiler, “Incentives for Pollution Abatement: Regulation: Regulatory Threats and Non-Governmental Pressures” (Forthcoming 2003, J. Policy Analysis and Management). 72 CCPA (2000). 73 Green (2002). 74 Harrison and Antweiler (Forthcoming) (assuming that consumers target companies rather than facilities as it is difficult in many cases for consumers to determine the products made at particular facilities and arguing for a “spill over” or externality impact within companies between more and less pollution-intensive facilities).

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(“NPRI”) to determine the impact of “Green Consumerism”.75 They focused principally on the

ability of consumers to use information to pressure companies to change emission levels. They

found that “Green Consumerism” had an impact on the emissions of companies which were

exposed to consumer markets and were “environmentally leveraged”.76 Such companies in

particular decreased their releases to air and transfers off-site, though in some cases they also

increased their underground disposal. However, they also found that while “Green

Consumerism” does have an impact, the impact is small and they conclude that “in light of this

result it is doubtful that green consumerism can act as a substitute for other emission-reducing

incentive systems such as green taxes, emission permit trading, or direct regulatory

intervention”.77 Responsible Care emphasizes greater direct communication with neighbouring

communities than the NPRI which increases the possibility of Green Consumerism. However,

unlike the NPRI, Responsible Care does not provide facility specific emissions data. The weak

impact of information provision under the NPRI may therefore also translate into a weak impact

from Responsible Care.

Regulatory Action

A fourth, less direct, manner in which the Responsible Care program could be enforced is

through regulatory prosecutions. The Responsible Care codes could become the industry

standard for the purposes of prosecutions. In Canada, a company cannot be convicted of a

regulatory offence if it has exercised due diligence or, in other words, took all reasonable care to

avoid the offence. A court may find that the company was not duly diligent if it failed to follow

the Responsible Care program when it had agreed to do so. However, the issue is a little more

complicated than may first appear. Due diligence relates to an accused’s actions with respect to

the particular issue, not the degree of general care it has taken. Therefore a court may not find a

company had exercised due diligence simply by following Responsible Care (because the

75 Antweiler and Harrison (Forthcoming). They use data from 1993 to 1999 from the federal National Pollutant Release Inventory. 76 Antweiler and Harrison use “environmental leverage” to refer to the extent to which a company faces consumers who cannot distinguish between the products of different facilities of the company and therefore faces pressure to reduce the emissions levels of an above-average pollution intensive unit to preserve the revenue of its other units. 77 Antweiler and Harrison (forthcoming), at p. 20.

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company did not address the particular issue) or that it did not exercise due diligence by not

following Responsible Care (because the company took reasonable steps with respect to the issue

even though it did not comply with Responsible Care).78 The actual impact of Responsible Care

in the prosecution process may therefore be quite small.

In addition, the government could not only threaten prosecution under existing

regulations but also threaten the enactment and enforcement of more stringent regulations. As

noted above, avoiding more stringent regulation was a key concern in the CCPA implementing

Responsible Care. However, recent empirical work has found little evidence that the threat of

more stringent regulation actually has an impact on emissions levels of companies.79 There is

some evidence that direct regulation has had the greatest impact on the level of emissions from

all industrial sectors (including chemical).80

Norms and Diffusion

Apart from direct sanctions, there may be other ways in which Responsible Care has an

impact on the actions of both members and non-members. The Responsible Care program can

establish a set of norms which company managers internalize. Such norms may increase the

reluctance of company managers not to comply with the program, regardless of the sanction.

Further, Responsible Care may have an impact through the diffusion of information and

technology on environmental issues throughout the industry and in particular from larger

companies to smaller companies.81 Both through these effects on norms and information as well

78 A further method in which voluntary codes could become enforceable or gain legal background is through a court ordering an accused to comply with the code as a sanction following conviction. A few courts in Canada have made such orders with respect to compliance with ISO 14000. R. v. Prospec Chemicals Ltd (1996) 19 C.E.L.R. (N.S.) 178 (Alta. Prov. Ct.). 79 Harrision and Antweiler (Forthcoming 2003) (examining emissions and transfer data for 1993-99 and concluding that the majority of emission reductions in the 1990s were due to direct government regulation with a much weaker impact of threats of regulation). See also W. Antweiler, “How Effective is Green Regulatory Threat? Empirical Evidence from Canadian Plant-Level Data” (Manuscript, January 1, 2003) (using emissions and transfer data from 1993-99 and concluding that the threat of regulation has a statistically significant but very small impact on environmental performance). See however Delmas (2003) (firms are more likely to adopt environmental management systems where the government more credibly threatens regulation). 80 Harrison and Antweiler (Forthcoming 2003) (finding that larger, more pollution intensive facilities reduce releases more quickly if faced with regulatory requirements, although these facilities may be merely shifting the releases off-site). 81 For a description of these indirect methods, see King and Lenox (2000).

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as on the content of legal concepts such as negligence and due diligence, Responsible Care could

have a positive effect on the industry as a whole and not merely members of the program.82

The enforcement process of the Responsible Care program has the potential to aid in

overcoming some of the information and monitoring concerns of the market and government

regulation. However, the effectiveness of the enforcement process depends on the strength of a

range of factors that are difficult to measure directly such as the commitment of the CCPA to

undertake enforcement and the importance of peer pressure, consumer reaction, norms and

information diffusion. It is necessary therefore to examine the actual environmental performance

of Responsible Care members to assess the impact of Responsible Care.

(e) The Impact of Responsible Care Has Responsible Care had any impact in Canada? The answer to this question is

important because the chemical industry claims large benefits from the program in terms of

environmental protection and governments may be willing to modify or delay regulatory

programs based on such claims. If Responsible Care can harness industry incentives to improve

environmental performance beyond what would be the case without the program (as the CCPA

claims), it may not be as important that the program forestalls government regulation (as its

critics claim).

The impact of Responsible Care can be measured in a number of ways. This paper will

examine “ultimate objectives” in the form of the reduction of environmental emissions and

transfers, rather than “intermediate or instrumental objectives, such as fostering innovation and

improving business-government relationships”.83 As will be discussed, the difficulty lies in

82 King and Lenox (2000). 83 K. Harrison, “Challenges in Evaluating Voluntary Environmental Programs” (manuscript, 2002), at p. 264. An alternative objective may be to provide the same level of protection at a lower cost. Harrison (2001) notes that the CCPA claims a range of direct financial benefits from Responsible Care including through costs savings related to energy use, raw materials use, insurance rates, lending rates, legal liability and less burdensome regulations. However, King and Lenox (2001), analyzing the Responsible Care program in the U.S., found that while the financial valuation of the industry as a whole improved after the introduction of the Responsible Care program, participation in the program had a negative impact on the financial valuation of members. They found that non-members of the Responsible Care program in the chemical industry would have been worse off in terms of financial valuation if they had joined the program and members of the program would have been better off had they not joined the program. However, given that the financial valuation of the industry as a whole improved with the program, King and Lenox argue that either members were very risk averse or individual members bore the cost of

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deciding how to determine whether any reductions in emissions were due to the Responsible

Care program or would have happened with or without the programs because of regulatory

changes, market pressures, cost-saving initiatives or other factors.

As noted above, the CCPA began to require its members to comply with Responsible

Care by 1992. According to the CCPA, total emissions of substances (other than carbon dioxide)

by members decreased by 66 percent between 1992 and 2001 even as production increased by 32

percent. These reductions include a 99.8 percent reduction in emissions to water and an overall

reduction in air emissions (excluding carbon dioxide) of 35 percent. However, air emissions of

some air contaminants increased by 11 percent between 2000 and 2001 and emissions of

nitrogen oxides, carbon monoxide and sulphur oxides increased by six percent since 1992.84

Unfortunately while these reductions are encouraging, these data on its own does not indicate

whether the Responsible Care program is responsible for the reductions in whole or even in part.

However, since 1993, the federal government has required companies (exceeding a

certain threshold) to provide information on their annual emissions and transfers off-site of

certain substances.85 It has compiled this information into the National Pollutant Release

Inventory (“NPRI”). This paper analyzes the NPRI data for 1994 through 1999 to assess the

impact of the Responsible Care program. The list of NPRI substances does not include all

pollutants and, in particular, is narrower than the list of releases produced by the CCPA. For

example, the NPRI list during the period 1994 to 1999 does not include pesticides, most ozone-

depleting substances, particulate matter and some toxic substances such as dioxins and furans.86

the program (including the costs of free-riders) to obtain the overall benefit to the industry. Unfortunately, no similar work has been done in Canada. 84 CCPA, Reducing Emissions Report 2001 (Ottawa: Canadian Chemical Producers’ Association, 2001) (available www.ccpa.ca, accessed March 2003). 85 During this period, companies with 10 or more employees that manufacture, process or use more than 10 tonnes of one or more listed substance (or one of the substances in a concentration of greater than one percent) must report on the annual emissions of the substances to the air, water, land or underground and on the transfers of the substances off-site. In 1994, there were 230 listed NPRI substances (Olewiler and Dawson (1998)). This paper uses data starting in 1994 rather than 1993 as the Environment Canada believes that the transfer data was likely mistaken for 1993 (Harrison and Antweiler (2002)). Environment Canada added 73 new substances to the list in 1999. Following Harrison and Antweiler (2002), this paper excludes these new substances to allow for comparison over the whole period. Further, following Harrison and Antweiler (2002), this paper excludes a mistaken report of a land disposal by Safety Kleen and transfer by Phillip Mill Services of zinc and lead in 1999. This paper does not make some of the other minor adjustments made by Harrison and Antweiler (2002) (see footnote 7) and, unlike Harrison and Antweiler (2002) does include pulp and paper which may explain some differences in values. 86 Harrison and Antweiler (2002).

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The Chemical Industry v. All Other Industries

One method of determining the effectiveness of Responsible Care is to examine how the

chemical industry’s emissions record compares to that of other industries. Responsible Care may

be providing benefits to the whole chemical industry through information exchange or through

the creation of norms, peer pressure and possibly public pressure. Conversely, Responsible Care

may provide no environmental benefits to the industry and may in fact be used as a tool to foster

some other objective such as a barrier to entry or protection against more stringent regulation.87

Over the period 1994 to 1999, the chemical industry as a whole reduced total emissions

by 17 percent while the total emissions of all other industry increased by 8 percent.88 Figure 1

illustrates these changes in total emissions.89 The chemical industry reduced water emission

much faster than industry as a whole. It also decreased its emissions to air while other industries

as a whole increased emissions to air over the period. However, at the same time, the chemical

industry increased its emissions to land and underground at a much faster rate than all other

industries.90

One interesting question is whether the chemical industry as a whole managed to reduce

its emissions through greater reductions in non-toxic substances than other industries. The

impact of emissions and transfers of substances will depend on a variety of factors including the

87 See King and Lenox (2000) for a discussion of the mechanisms which can induce conformity with industry norms in absence of sanctions and of the possibility of opportunism. 88 The full NPRI data set contains a significant outlier - a large reduction in emissions to water by Kronos Canada Inc. in Quebec. Kronos reduced its emissions in response to regulatory action by the federal and provincial governments in the 1990s (Harrison and Antweiler (2002)). As Kronos is part of the chemical industry and these reductions were clearly not due to the Responsible Care program, this paper excludes the Kronos data. Harrison and Antweiler also excluded Kronos but also excluded the pulp and paper industry (which is included in this paper). 89 The total emissions for all industry has a large dip in 1996. This change in emissions appears to have two sources. First, the reduction from 1995 to 1996 was largely due to decreases in emissions to water by the mining and pulp and paper industries. Second, the increase from 1996 to 1997 was mostly due to a large increase in releases by the “other utilities” sector (which includes electricity generating facilities). 90 Harrison and Antweiler (2002) reach the same conclusion concerning cross-media shifts in releases by all industries but does not break out the changes in releases by type of industry. Harrison and Antweiler examined both actual levels of emissions and emissions only from companies which reported continually throughout the period (that is, excluding the emissions of companies that stopped or started reporting to the NPRI after their start year (1993)). They found that the levels of emissions were lower for continuous reporters but the pattern of reductions was similar although slightly different.

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quantity of the substance, the health and environmental impact of the substance and the manner

of its release (for example, whether it is released to the air or water or is disposed of in a

landfill). Examining all industry, Harrison and Antweiler found that over the period 1993 to

1999, the quantity of emissions by all industry decreased by 27 percent but once toxicity was

taken into account the reduction was only 11 percent.91 Moreover, they found that the on-site

releases to land and underground not only were growing most in terms of quantity but once

toxicity was taken into account, these releases accounted for a greater proportion of releases and

were growing more toxic. Unfortunately, as yet there has been no research on changing toxicity

levels over time by different industries in Canada. In the U.S., King and Lenox found that total

toxicity-weighted emissions for the chemical industry as a whole decreased by nearly 50 percent

between 1990 and 1996.92

In addition, instead of eliminating pollution, facilities may be switching from releases to

transfers off-site. Such transfers could be for treatment, incineration or disposal (such as at a

landfill). Both the chemical industry and industry as a whole increased off-site transfers of

substances substantially over the period. However, the chemical industry increased its transfers

at a greater rate (109 percent) compared to all other industries combined (89 percent).93

One potential cause of differences in emissions and transfer levels over time could be

changes in production – that is, the chemical industry may only be reducing emissions because

its production levels are decreasing or, conversely, its emissions reductions are even greater than

they first appear as they are reducing their emissions at the same time as they are increasing their

production. The level of pollution relative to production is the industry’s “pollution intensity”.

For example, the CCPA’s 2001 Report on emissions states that emissions per unit of production

91 Harrison and Antweiler (2002) used the U.S. Environmental Protection Agency’s Chronic Human Health Indicator (CHHI) as the measure of the toxicity of each substance. It measures the chronic (but not acute) effects of exposure on health. They found that after removing Kronos and the pulp and paper industry (which had been subject to regulation) from the sample, total on-site releases increased by 4 percent over the period in terms of weight but decreased by 13 percent in terms of toxicity. 92 King and Lenox (2000). They use a different measure of toxicity than Harrison and Antweiler (2002). 93 See CCPA (2001) for a discussion of off-site transfers over time and the increase after this period. However, examining emissions by all industries, Harrison and Antweiler (2002) found that transfers increased by 127 percent once the toxicity of the transfers are taken into account.

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by CCPA members decreased 74 percent between 1992 and 2001 (with an approximately 50

percent drop occurring between 1992 and 1994).94

If the pollution intensity is measured by the level of emissions divided by number of

employees, the chemical industry was the third most pollution intensive industry in 1994 behind

Refined Petroleum and Coal and Mining.95 The chemical industry had a pollution intensity that

was approximately three times the Canadian average. By 1999, the pollution intensity of the

chemical industry had fallen by approximately 23 percent, slightly more than the Canadian

average for all sectors of 22 percent, leaving it still three times the Canadian average.

Members v. Non-Members

The chemical industry therefore appears to have performed well over the period

compared to other industries taken as a whole, although there has been some shift towards

releases to land. However, information on overall reductions in emissions and transfers does not

indicate whether the reductions are the result of the adoption of the Responsible Care program by

the chemical industry or due to regulatory changes, cost savings or customer pressure that would

have occurred even in absence of the Responsible Care program. Further, it does not indicate

whether the reductions are as large as they would have been if greater use had been made of

other regulatory instruments such as command and control regulation. As Harrison has noted,

these questions are difficult to answer given the data that is available.96

94 CCPA (2001) at p. 5. 95 This is consistent with Olewiler and Dawson who examined the relative pollution intensities of Canadian industry in 1994. They found that the chemical industry as a whole had the highest emissions intensity rating of any Canadian industrial sector as measured by either emissions (or emissions and transfers) relative to the value of output. N. Olewiler and K. Dawson, “Analysis of National Pollutant Release Inventory Data on Toxic Emissions by Industry” (Working Paper 97-16 prepared for the Technical Committee on Business Taxation, Department of Finance, Government of Canada, March 1998). Olewiler and Dawson examined both emissions and emissions and releases by sector using 1994 NPRI data and compared these figures to value added by sector and the value of industry shipments. Further, Olewiler and Dawson found that on each of these measures, the Canadian chemical industry had emissions per dollar of output that was more than 50 percent larger than the U.S. chemical industry. If emissions intensity is measured by emissions (or emissions and transfers) relative to employment in the sector, the chemical industry had the second highest emissions intensity (behind the refined petroleum and coal industry but more than twice the pollution intensity of the third most intense sector). They found that the Canadian chemical industry also had higher emission intensities than the U.S. on these measures. 96 Harrison (2002).

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King and Lenox have studied this issue in the U.S. The basic elements of the

Responsible Care program are the same in the U.S. and Canada. However, the U.S. Responsible

Care program in the 1990s did not have a comparable requirement to the mandatory periodic

third party audit of facilities in Canada. King and Lenox found that the environmental

performance of the U.S. chemical industry as a whole improved after the introduction of

Responsible Care. However, even controlling for the differences in characteristics between

members and non-members, the environmental performance of members of Responsible Care

improved more slowly than non-members.97 They concluded that this poorer performance by

members was evidence of opportunism in the U.S. Responsible Care program.

In this section, the data from the NPRI on the chemical industry in Canada is broken

down by membership status in the Responsible Care program. In order to remove the impacts on

pollution levels of companies that either join or leave Responsible Care after 1994 or begin or

stop reporting to the NPRI after 1994, this data includes only companies which were part of

Responsible Care and/or reported to the NPRI throughout the whole period. Figures 2 and 3

show that Responsible Care members as a whole perform better than non-members in terms of

pollution reduction.98 Figure 2 shows that members had a lower total level of pollution than non-

members (which is not surprising given that the number of non-members (198 in 1994) was

greater than members (65 in 1994). In addition, members reduced total emissions faster than

non-members (45 percent decrease for members and a 25 percent decrease for non-members).

Figure 3 illustrates the greater reduction by members in pollution intensity (total emissions per

employee). Members started the period with a higher pollution intensity level than non-

members. However, over the next six years, members decreased their pollution intensity to the

point that it was below the level of non-members by 1999.

While the members performed relatively well as a whole, breaking the evidence down by

size of company reveals some interesting patterns. In terms of small companies (less than 100

employees), members began the period with higher average emissions than non-members and

continued to have higher average emissions throughout most of the period (Figure 4). Non-

members, on the other hand, had lower emission intensity in 1994 and were able to reduce their 97 King and Lenox (2000). 98 Information on membership status in the Responsible Care program during this period was provided by the CCPA.

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pollution intensity over the period while members continued to have a higher pollution intensity

for most of the period (Figure 5).99

The picture is very different for medium-sized firms (101 to 250 employees). Both the

average emissions and pollution intensity for members began the period much higher than for

non-members (Figures 6 and 7). However, members were able to reduce their emissions much

more quickly than non-members and by the end of the period the emissions of members were

lower than that of non-members. The greater reduction in pollution intensity by members

indicates that the changes were not due to differences in production levels.

Finally, both members and non-members which were large (over 250 employees) had

very similar experiences over the period. They began the period with similar levels of average

emissions and pollution intensities (Figures 8 and 9). While there was some differences from

year to year, they appear to have experienced similar declines over the period in both indicators.

The members of Responsible Care as a whole therefore experienced a greater decline in

pollution and pollution intensity than non-members. However, the changes depended in the size

of the company with Responsible Care having the greatest impact on medium size companies,

little impact on large companies and a potentially negative impact on small companies.

(f) Voluntary Codes and the Public Interest Proponents of other voluntary codes programs claim they have large potential benefits.100

The example of Responsible Care points to the need to examine accountability and enforcement

mechanisms in particular policy contexts before adoption of voluntary codes. As with many

other voluntary codes, Responsible Care is in addition to environmental regulation by the

government. However, the existence of both government and self-regulation does not mean that

Responsible Care is benign. It could be supplanting further government regulation either directly

or indirectly where government exercises its enforcement discretion not to charge or issue orders

to companies complying with Responsible Care.101

99 There may be an impact for smaller firms from the reporting of zero emissions. The combination of a large number of small firms and estimated zero emissions may shift the non-members towards lower pollution levels. 100 Webb introductory article for Carleton book. 101 Freeman (2000).

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Yet this supplanting is not necessarily a concern as long as the public interest is being

protected. Empirical evidence in Canada and the U.S. points to the chemical industry as a whole

making significant strides in reducing pollution. However, it also points to the conclusion that

some of this improvement may be in spite of, rather than due to, the Responsible Care program

in Canada or the U.S.

The Responsible Care program makes some provision for public input in the standard-

setting area. However, it has only weak direct and indirect enforcement mechanisms. The re-

verification requirement adds to the information which is available to neighbours and consumers

to apply pressure but evidence is that such pressure tends to be weak in the environmental area.

Further, the CCPA appears to avoid direct sanctioning of members, relying instead on peer

pressure and norms. In addition, the indirect methods of changing legal norms have less effect to

the extent that compliance with the program is difficult to measure or to relate to individual

issues.102

These different accountability mechanisms appear to have different effects depending on

the size of the company. For large companies, the Responsible Care program has had little

impact on environmental performance. The lack of impact may be due to large companies,

which tend to have large emissions, facing stronger enforcement mechanisms regardless of

whether or not they are members of Responsible Care. The public is more likely to be concerned

about and pay attention to large chemical companies including through community action and

possibly through consumer action. Moreover, the government is more likely to take abatement

and enforcement action for larger companies (given the larger emissions) than for smaller

companies. The greater liability facing large companies means they are more likely to bear the

costs of having systems in place even without the program. This similarly strong set of

accountability mechanisms for members or non-members may explain the similar environmental

performance records. Further, in terms of compliance with Responsible Care, large companies

would likely face greater public relations damage from being expelled from the program. This

102 Interestingly, one of the keys to the whole process was touted to be increased trust by the pubic in the chemical industry as promoting the public interest. However, a survey conducted by the CCPA indicates that the industry’s reputation has in general not improved over time, with some indicators showing a worse reputation although some others showing improvement. Earnscliffe Research and Communications, Results of Key Audience Research Conducted for the Canadian Chemical Producers’ Association (September 20, 1999) (available at www. ccpa.ca, accessed March 2003).

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potential for damage increases the effectiveness of the sanctioning mechanisms such as peer

pressure and the threat of expulsion.

At the opposite end of the spectrum, small companies face much weaker enforcement or

accountability mechanisms. The public is less likely to obtain information about companies

whose risk seems smaller and may not be able to determine what products they produce in order

to engage in Green Consumerism. Further, smaller companies are less likely to be the subject of

government enforcement. In terms of the program’s sanctions, the smaller companies, being in

general less visible, would face less impact from expulsion from the CCPA and would continue

to benefit from any reputational impacts for the industry flowing from the program. Moreover,

peer pressure is less effective to the extent small companies face high costs of complying with

the program and low benefits (because of the relative inattention of the public and government).

As a result, the worse environmental record of members may indicate free riding of these small

companies. They face fewer accountability mechanisms inside or outside the program and may

be attempting to obtain the benefits of the program without complying with its standards.

The group for which Responsible Care program appears to have the greatest impact is

medium-sized firms. The program may lower the cost of the public obtaining any information

on this group and in fact the public may not obtain such information without the program.

However, the program provides some information on which the public can decide whether it is

concerned about its operations. Further, these medium-sized companies may benefit more from

the information, technology and norm creation that is provided through the program and have

enough resources to utilize it. On the other hand, large companies can and do generate the

information themselves and small companies are less likely to have the resources to put it into

place. In addition, the government is likely to be concerned about these medium-sized groups

but the information gained from the Responsible Care program may help them differentiate

between companies and provide an incentive for these firms to take action. Finally, in terms of

the enforcement process for Responsible Care itself, these companies may be sufficiently large

that peer pressure and some threat of expulsion has an impact. Medium-sized companies

therefore have the greatest potential to benefit from the program and have accountability

mechanisms in place to foster compliance.

King and Lenox concluded that the opportunism they found in the U.S. Responsible Care

program points to the need for oversight by outsiders who can administer sanctions. They note

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that the state could perform this function but this raises the issue of whether there is any

difference from direct regulation. They also point to the possibility that third party certifiers, the

press or non-governmental organizations could perform this function. However, they note that

any such overseer will require extensive information gathering ability to perform its role.103

The Canadian system of re-verification audits, including the publication of the results,

arguably provides this information along with a much more open and potentially accountable

program. However, the Canadian evidence also points to potential opportunism. More work is

needed to examine the limitations on the use of such information by third parties and how

programs can be designed to ensure that they can effectively monitor the functioning of

voluntary codes. The value of public involvement and information may vary depending on such

factors as the size of the company, the nature of the industry and the salience of the

environmental issues.

As King and Lenox note, further research needs to be done on why the chemical industry

was able to significantly reduce its emissions over the 1990s and the extent to which these

reductions were caused by Responsible Care.104 There are a number of other possible causes of

the chemical industry’s performance. For example, the emission and pollution intensity

reductions by non-members indicate that government regulation likely has had a significant

impact.105 The voluntary codes may have a limited role to play in environmental protection.

However, given the risk of opportunism in such codes, governments may have greater success

with other alternatives to command and control regulation such as the use of market

mechanisms, such as tradable emission permits.

V SROS: ACCOUNTANTS AND THE PUBLIC INTEREST

The most prevalent form of self-regulation is the self-regulating organization (“SRO”).

Statutory self-regulation occurs when an SRO is created by legislation and given the power to 103 King and Lenox (2000). 104 King and Lenox (2000). 105 Harrison and Antweiler (2002) examined NPRI data for 1993 to 1999 and concluded that reductions in emissions by all industries over this period was more likely due to the impact of command and control regulation than green consumerism.

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develop, monitor and enforce rules.106 Such regimes typically involve certifying or licensing

those who are part of the organization. Examples of statutory self-regulation in Ontario are the

Institute of Chartered Accountants of Ontario and the Law Society of Upper Canada.

This Part examines how the ICAO has used its statutory power of self-regulation to

control the auditing of financial information for companies. The regulation of financial markets

is currently under close scrutiny because of recent scandals involving dubious accounting

practices (e.g., Enron and Worldcom). These scandals have led to significant regulatory reform

initiatives of financial markets in the United States (i.e. the Sarbanes-Oxley Act). Similarly in

Ontario, regulators believe that substantial regulatory reform of financial markets is required to

prevent similar incidents from taking place. Indeed, the existing institutional framework has been

referred to as being “obsolete” by the Ontario Securities Commission (OSC).107

In order to assess the impact of self-regulation, this Part examines examples of the setting

of both input and output standards by the ICAO.108 Input standards establish the minimum

qualifications for individuals to undertake audits. Output standards attempt to control the

behaviour of accountants when they are undertaking audits. We examine the ICAO’s Rules of

Professional Conduct as an example of an output standard. We also examine how the ICAO

enforces its standards. We argue that because the power to devise accounting regulations (i.e.,

qualifying standards and codes of conduct) has historically rested almost exclusively with the

chartered accounting profession, the rules developed favour the interests of this particular subset

of accountants over the public interest. Even formal recognition of public interest objectives is a

relatively recent phenomenon. As a result, agency problems and the “lemons” problem in the

market for financial reporting remain significant.

(a) The Market for Financial Information As with environmental codes of conduct, we first discuss the arguments that have been

put forward in favour of regulation of accountants. This discussion provides a basis for the

discussion of the impacts of self-regulation. At the centre of the recent financial controversies is 106 See Margot Priest, “The Privatization of Regulation: Five Models of Self-Regulation,” Ottawa Law Review, 29(2), (1997-98), pp. 235-302. 107 See Fair Dealing framework on OSC website: http://www.osc.gov.on.ca/ 108 M. Trebilcock, C. Tuohy and A. Wolfson, Professional Regulation: A Staff Study of Accountancy, Architecture, Engineering and Law in Ontario (Toronto: Ministry of the Attorney General, 1979).

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the disclosure (or, more appropriately, the lack of disclosure) of accurate information concerning

companies. Timely and accurate information dissemination by firms to investors is a critical

requirement for efficient capital allocation. Investors require detailed information on the past,

present and expected profitability of firms in order to make informed investment choices (i.e.,

decisions that correctly reflect an investor’s preferences with respect to return on investment,

risk, time horizon, etc.). To finance their operations through capital markets, companies must

disclose information on the financial conditions to potential investors.

However, providing information raises costs for both the company and for investors.

There are two costs of information: search costs and processing costs (i.e. organization and

interpretation). For investors, search costs involve the resources necessary to locate and collect

information on firms requiring investment. In the absence of a centralized information exchange

or facilitating intermediaries, the costs facing investors will be considerable. In addition,

multiple investors could separately expend resources uncovering the same information. Such

duplication is wasteful.109 For firms, search costs involve gathering data on their operations and

locating and relaying this data to potential investors. The costs of gathering internal data for

dissemination will be low to the firm, but the identification of investors in the absence of

intermediaries will be costly. Market forces overcame this information search problem by

developing stock and bond exchanges.

For investors and firms, information processing involves the ability of investors and

managers to synthesize the information collected and presented by firms in order to develop

expectations regarding the future performance of the firm. Due the specialized nature of

financial, organizational and industry information, the ability of individual investors and

managers to interpret information varies significantly and processing costs tend to be high. More

importantly, while information received refers to a particular interval of time in the past the

information is being used to form expectations regarding the present and future. The uncertainty

associated with expectations regarding future firm performance implies that expectations are to a

large extent speculative regardless of the quality of the information and the processing

capabilities of the investor or manager. Investors and managers must use subjective mental

models to predict potential future outcomes.

109 Frank H. Easterbrook and Daniel R. Fischel, “Mandatory Disclosure and the Protection of Investors,” Virginia Law Review, 70(4), (May 1984), p. 681.

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These information costs create two significant problems in the operational efficiency of

capital markets in the absence of intermediaries. First, the information costs may be sufficiently

large to discourage investors from participating in the market. Second, and more importantly,

investors may be unable to distinguish between high quality and low quality investments.

Investors need accurate information to make optimal investment decisions – that is, so that high

quality ventures obtain sufficient financing and low quality ventures do not attract too much

investment. A problem arises if investors cannot fully verify the information provided by

companies on the quality of their securities (for example, because the cost of verification are too

high). In such cases, companies can present low quality/high risk investments as high

quality/low risk investments and companies with true high quality/low risk investments will be

unable to credibly distinguish themselves. Investors may be discouraged from market

participation by the possibility for fraud and misleading information disclosure, leading to a

decrease in the funds available for investment and a corresponding rise in the cost of capital.

Companies with high quality/low risk investments will exit the market because the rise in capital

costs makes it expensive to provide high quality. The result is the classic “lemons” problem110

where low quality/high risk investments come to dominate the market.

Many mechanisms have arisen to deal with these information quality and processing

problems. For example, countries have laws prohibiting fraud. In addition, companies and

investors turn to a variety of financial intermediaries such as auditors, investment bankers and

investment analysts.111 These occupations “are reputational intermediaries who provide

verification and certification services to investors.”112 These “gatekeepers” in theory reduce the

transactions costs associated with capital investment by lowering information search and

processing costs. The focus in this paper is on accountants who audit financial information on

110 G. Akerloff, “The market for lemons: quality uncertainty and the market mechanism,” Quarterly Journal of Economics, vol. LXXXIV, (August 1970). See F. Easterbrook and D. Fischel, The Economic Structure of Corporate Law (Cambridge, MA: Harvard University Press, 1991) for a more complete discussion of the disclosure of financial information through the market and the use of financial intermediaries to overcome the “lemons” problem. 111 Easterbrook and Fischel (1991) discuss other means by which the investor may identify high quality investments including companies signaling quality through stock options or issuing debt and uninformed investors mimicking informed investors. 112 J. C. Coffee, Jr., Understanding Enron: It’s About the Gatekeepers, Stupid, (Columbia Law School, The Center for Law and Economic Studies: Working Paper No. 207, 2002), p. 5.

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firms. In the presence of auditors, investors should not have to incur as high search and

verification costs in determining the quality of investments.

However, financial intermediaries on their own may not result in the efficient operation

of capital markets. There are three basic concerns. First, the market for financial intermediaries

is subject to its own “lemons” problem. Ideally, competition between auditing firms should

create incentives for auditors to maintain their reputations as suppliers of accurate and reliable

advice (i.e. the development of the informal constraint of trust) and expose competitors and firms

that provide inaccurate or misleading information. This competition should lead to incompetent

and deceitful auditors and managers being driven out of the market, leaving only high quality

auditors and managers. However, it is difficult and costly for investors to verify the accuracy of

the information provided by auditors and the quality of an audit may not be detectable within a

reasonable period of time (e.g. a firm may go bankrupt before the quality of an audit can be

properly assessed). Further, auditors may be able to argue that poor performance of an

investment was not foreseeable, that an audit has little predictive value or that they were misled

by management. If investors (and in fraud cases, the courts) are unable to distinguish high

quality audits from low quality audits, the incentive to provide high quality auditing will be

diminished.

Auditors are in the business of selling audits to companies and the product they produce

will be tailored to meet the demands of their clients. Therefore, a problem exists in situations

where auditors are hired and paid by the managers of audited firms. Auditors will then have an

incentive to satisfy their client (i.e. the firm’s managers) by providing a favourable audit. This

incentive is exacerbated if there are other opportunities for profitable connections between the

auditor and the company (e.g. the auditor or auditing firm can provide non-audit services to the

audit client).113 The combination of the “lemons” problem and the alignment of incentives

between auditors and companies could mean that, absent other constraints, investors would be no

better off, and possibly worse off, with auditors than without them (e.g. investors incorrectly

113 See Coffee (2002).

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believing audits to be accurate may supply investment funds to low quality/high risk investments

that they would not have made in the absence of the issuance of audits).114

The second concern with the market for financial intermediaries is that the cost of

investing may still be excessive. Investors would likely benefit from a single standardized

format for disclosing audit results. However, auditing firms and companies may not be able to

agree on a standard in the absence of some third party coordination. As no single firm or

company could appropriate all of the benefits from developing such a standard, the standard may

not arise. The costs of information searching and processing would therefore be higher than

optimal which would hinder the efficiency of capital markets.115

Finally, the market may still provide insufficient information to investors. For example,

disclosure by firms (provided by auditors) on its own may underprovide information on the

industry as a whole. The company may wish such disclosure be made but would not obtain the

full benefit of incurring the costs of obtaining and disclosing this information as some benefit

would accrue to others in the industry. Each firm may only be willing to undertake such

disclosure (and order auditors to disclose such information) if all other companies do so. The

market in such a case would provide too little information even though there are intermediaries

such as auditors.116

These concerns with the use of financial intermediaries such as auditors may lead to an

under-provision of accurate financial information. They do not automatically lead to the

conclusion that government regulation or some alternative regulatory arrangement is preferable

to a market ordering. However, they do point out concerns that these other institutional

arrangements should address to have a relative advantage over unregulated market provision of

financial information.

114 Coffee (2002) makes this argument for gatekeepers in general. He discusses a recent study of “buy” and “sell” recommendations in the United States that found that the ratio of “buy” to “sell” recommendations by brokerage firm analysts rose from 6 to 1 in 1991 to 100 to 1 in 2000. 115 Easterbrook and Fischel (1991). This issue is connected to the “lemons” problem since auditors may develop their own standard but, as discussed below, it may favour companies over investors. 116 Easterbrook and Fischel (1991).

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(b) The ICAO and Qualifying Standards: The Making of a Monopoly The ICAO is a provincial self-regulatory body for public accountants. A public

accountant is defined in clause 1(c) of Ontario’s Public Accountancy Act (PAA) as “a person

who either alone or in partnership engages for reward in public practice” involving activities

such as the preparation of “any financial, accounting or related statement” (whether audited or

unaudited) but does not include bookkeeping or management accounting. The ICAO states that

“[p]ublic accounting services are assurance engagements provided to business, government,

other organizations, and individuals. The focus of assurance engagements is protection of the

interests of third parties. For that reason they must be regulated.”117 Assurance services most

commonly take the form of the audited annual financial statements of publicly traded

corporations. The Canadian Institute of Chartered Accountants (CICA) has defined an audit as

being “designed to provide reasonable assurance that the financial statements taken as a whole

are free from material misstatement, whether caused by fraud or error.”118

Public accounting in Ontario, and Canada, is self-regulated by the accounting profession

using a combination of input and output regulations. This section examines how the profession

set the qualifying (input) standards for being a public accountant. Briefly, by way of

background, the profession is currently governed by three organizations, two provincial (the

Public Accountants Council (“PAC”) and the ICAO) and one national (the CICA).119 All three

of these organizations are fully funded by the accounting profession. The ICAO is currently the

most significant body with respect to the regulation of public accounting in Ontario. The ICAO,

through the Chartered Accountants Act, has the authority to establish and administer

qualification criteria, codes of conduct (rules of professional conduct were harmonized across

Canada in 1990-91) and disciplinary and enforcement processes for the accounting profession in

the province. The Chartered Accountants Act gives the ICAO the exclusive authority to confer

the title of chartered accountant (“CA”) on individuals in the province. 117 ICAO, Modernizing Public Accounting Regulation in Ontario for the 21st Century (Presentation by The Institute of Chartered Accountants of Ontario to the Red Tape Commission of the Government of Ontario, (April 2001)), p. 2. 118 CICA, Risk Alert (Ottawa: CICA, March 2002). 119 A new regulatory body is currently being formed to oversee auditing – the Canadian Public Accountability Board (“CPAB”). The CPAB was formed through cooperation of the provincial and federal governments and the accounting profession. In part the main audit firms have entered into agreements to allow the CPAB to perform audits of their operations. For a more detailed discussion, see www.cpab-ccrc.ca.

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In general, an individual must be a CA in order to become a public accountant and

undertake audits. In 1950, the Ontario government created the PAC under the PAA to grant and

revoke public accounting licenses. The PAC is also entrusted with policing unlicensed public

accounting practitioners. However, from 1962 until 2002, the PAA designated the ICAO as the

sole qualifying body for public accounting licenses in Ontario.

The CICA, founded in 1902 as the Dominion Association of Chartered Accountants

(“DACA”), is responsible for developing national accounting and auditing standards. These

standards are referred to as Generally Accepted Accounting Principles (“GAAP”) and Generally

Accepted Auditing Standards (“GAAS”).120 The CICA is controlled by the provincial institutes.

All CAs in Canada are members of the CICA through their provincial institute memberships.

The ICAO and Public Accounting: 1879-1962121

One cannot assess the actions of the ICAO by focusing on its present institutional

framework and recent history.122 The need to examine the ICAO’s historical performance is

brought into focus by the ICAO’s post-Enron publicity campaign claiming a long standing

historical commitment to the public interest. In advertisements directed at assuring the public

that Ontario will not have its own “Enron,” the ICAO stated that “[p]rotecting the public interest

is the purpose of the Institute and has been since our inception in 1879.”123 An examination of

the Institute’s history challenges the accuracy of such an assertion.

The ICAO was founded in 1879. The ICAO spent the next two years lobbying the

government for a special act of incorporation, resulting in the Chartered Accountants Act [of

120 An interesting question related to the issues raised in this paper is how (or if) the public interest is protected in the setting of the GAAP and GAAS standards. GAAP and GAAS are developed by two CICA committees: the Accounting Standards Board and the Assurance Standards Board. New standards are developed through discussion within the committees and consultations with the Institute’s members. Unfortunately, the setting of these standards and the protection of the public interest is beyond the scope of this paper. 121 The following sections recounting the history of the ICAO (until the 1990s) are based on reviews by: Philip Creighton, A Sum of Yesterdays, (Institute of Chartered Accountants of Ontario: Toronto, 1984) and Dean Neu and Lubna Saleem, “The Institute of Chartered Accountants of Ontario (ICAO) and the Emergence of Ethical Codes” (1996) 23(2) The Accounting Historians Journal 36. 122 For example, Neu and Saleem (1996) have labeled such ahistorical analysis as suffering from “a myopia of the present,” citing the need to examine an institution’s evolution over time. 123 ICAO.

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1883].124 The Act gave the ICAO a number of powers, including the authority to establish a

membership process, confer the title of Fellow of the Chartered Accountants (“FCA") on

qualified members and discipline members. However, any practicing accountant could still use

the title of CA. Interestingly, following incorporation a number of accountants felt that because

there were no limitations on who could use CA title there was little to be gained from obtaining

the FCA title, leading many to leave the ICAO; membership dropped from over 200 to 69

between 1883 and 1896.125

The DACA (renamed the CICA in 1951) was incorporated in 1902 by former ICAO

members, including practicing and aspiring accountants who were dissatisfied with the ICAO’s

representation of the profession.126 Understandably, the ICAO viewed the DACA as a threat to

its control over the profession in Ontario. The Institute tried to block the incorporation of the

DACA and attempted to take over the new association at its first annual meeting.127 Both ICAO

initiatives were unsuccessful.

In this period, the ICAO tried to convince the Province to enact legislation to allow only

qualified members of the ICAO to use the CA title.128 However, the ICAO did not succeed in

obtaining the legislation it desired on its first attempt. In 1908 and 1910, the Ontario legislature

passed legislation essentially requiring CAs to be members of the ICAO; however, the DACA

successfully lobbied the federal government to disallow the legislation on both occasions.

However, in 1911, negotiations between the DACA, ICAO and other existing provincial

institutes led to the present configuration of the accounting profession (i.e., a national

organization composed of the members of the provincial institutes).129 As a result of the

negotiations, the DACA agreed to legislation that would grant the ICAO the exclusive right to

124 See Creighton (1984), pp. 11-13. 125 Ibid., pp. 38 and 72. 126 See Ibid., p. 49-53. 127 Ibid., pp. 52-3. 128 See Ibid., pp. 62-65. 129 Ibid.

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the CA title but allow existing DACA members to use the CA title. In 1911, the Province passed

these amendments to the Chartered Accountants Act.130

The difficulties encountered by the ICAO when attempting incorporation and obtaining

exclusive power to grant the title of CA indicates that the public benefits accruing from self-

regulation, or any regulation for that matter, of the accounting profession were not salient to law

makers, the public or business at the time. The accounting profession, instead of citizens,

industry or government, initiated the creation of legislation limiting the use of the CA title. The

impetus behind the profession’s pursuit of regulation has been suggested to be that of raising the

prestige of the profession to the level enjoyed by lawyers and medical doctors,131 as well as the

economic benefits of restricting entry into the profession. Additionally, the creation of the

DACA reveals that there was disagreement within the profession itself regarding what the proper

regulatory framework should be.

The appropriate training and qualifications necessary to practice accounting have long

been a matter of contention within the accounting profession.132 Despite the ICAO’s success in

limiting the use of the CA title, many practicing accountants and potential students disapproved

of the ICAO’s training program. Specifically, many perceived the examination process to be

excessively difficult. This dissatisfaction led to the formation of the Association of Accountants

and Auditors in Ontario (“AAAO”) in 1926.133 The AAAO was created by practicing and

aspiring accountants that did not see the need to complete the ICAO’s program, or felt that the

program was excessively difficult.134 The AAAO established its own training and qualification

program. As with the DACA, the ICAO (with the DACA) unsuccessfully lobbied the provincial

government to block the AAAO’s application for incorporation.135 However, lobbying by the

ICAO and the DACA did succeed in temporarily blocking the AAAO’s attempt to gain the right

to confer the title of certified public accountant (“CPA”) in 1931; instead, the AAAO the right to

130 Ibid. 131 Creighton (1984) and Neu and Saleem (1996). 132 See Creighton, pp. 119-161. 133 Ibid., pp. 119-129. 134 Ibid., p. 119. 135 Ibid., p. 126.

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grant the title of incorporated public accountant (“IPA”).136 The AAAO succeeded in acquiring

rights to the CPA title in 1936 and changed its name to the Certified Public Accountants’

Association of Ontario (“CPAAO”).137

In the mid-1940s, the ICAO and the CPAAO sought government legislation restricting

the practice of public accounting to CAs and CPAs.138 In 1949, an initial draft of the Public

Accountants Act (“PAA”) required that individuals seeking public accountant licenses pass the

final examination of either the ICAO or CPAAO (i.e. be a CA or CPA). However, lobbying by

rival accounting organizations, such as the Ontario Association of Certified General

Accountants, resulted in the legislature not bringing the PAA forward when it initially proposed

in 1949.

Ultimately, the PAA passed in 1950, allowing individuals who had successfully written

the intermediate ICAO or CPA exam to apply for a public accounting license (i.e. an individual

did not require the title of CA or CPA to practice public accounting).139 In addition, existing

public accountants were permitted to obtain a public accounting license without writing either

examination. Interestingly, in the first full year of the PAC’s operation in 1951 there were 613

CA licensees, 295 CPA licensees, and 814 others.140

However, the ICAO and the CPAAO merged in 1962.141 The newly expanded ICAO

successfully lobbied the Province for amendments to the PAA. In 1962, the Province amended

the PAA to make public accounting licenses effectively available exclusively to individuals that

had successfully completed the ICAO’s qualification program.142 While the augmented power of

the ICAO following the merger contributed to the amendments, a second contributing factor was

that the Certified General Accountants Association of Ontario dropped its opposition to the

amended PAA. The CGAs did not oppose the amendments once they obtained a grandfather 136 Ibid., p. 129. 137 Ibid., p. 147. 138 Ibid., pp. 195-204. 139 Ibid., p. 209. 140 Ibid., p. 214. 141 Ibid., pp. 235-246. 142 Ibid., pp. 315-6.

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clause allowing a number of CGAs practicing public accounting at the time to receive a

license.143

The process of closing the public accounting field lends much support to North’s

contention that formal rules are often created to serve the interests of those with the power to

devise new rules rather than the public at large. Much of the ICAO’s focus in this period was on

gaining control of who could undertake public accounting. With respect to qualifications, the

profession, in general, either displayed little consensus on what constituted adequate training for

the practice of public accounting or was willing to compromise on qualifications in order to close

the field of public accounting (e.g. absorbing individuals from rival accounting bodies in order to

obtain agreement on regulatory changes).

1962-2000: A Move Toward the Public Interest?

Even with the amended PAA of 1962, the debate over whether CAs are uniquely

qualified to offer public accounting services has never been settled. During the 1970s, the CGAs

lobbied the provincial government to revert to the 1950 version of the PAA.144 In 1980, the

provincial government’s Professional Organizations Committee (“POC”) studied the public

accounting profession and recommended that CAs, Registered Industrial Accountants and CGAs

be allowed to practice public accounting following completion of a common qualifying exam.145

The POC also recommended that the ICAO allow any non-CA public accounting licensee who

applied to become a full member of the ICAO (i.e. the licensee would become a CA without

having to complete any of the ICAO’s qualification requirements).146 The ICAO passed a bylaw

allowing this exemption in January 1981. However, this action of decreasing the number of non-

CA public accountant licensees allowed the ICAO to increase its power over the creation of

public accounting regulation.

143 The 1962 amendments allowed Certified General Accountants (CGAs) with 3 years experience to obtain a license. 144 Creighton (1984), p. 320. 145 Ontario, Ministry of Attorney General, The Report of the Professional Organizations Committee, (Toronto: Ministry of Attorney General, April 1980). 146 Creighton (1984), p. 321.

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There were also disputes within the ICAO at this time regarding qualification. As noted

above, in Ontario, except under special circumstances outlined in the PAA, only CAs may

practice public accounting.147 Possession of a university degree did not become a mandatory

component of the qualification process until the Institute membership voted in 1968 to require

it.148 For most of the 1900s prior to this change, a CA designation in Ontario could be obtained

with a high school diploma and successfully completing a correspondence program offered by

Queen’s University.149 This change in qualification standards did not pass without controversy.

Small accounting firms complained that the requirement of a university degree restricted the

labour pool of accountants, hindering them from being able to hire graduates.150 In fact,

following the change many small firms stopped training CA students and recruited CMAs and

CGAs.151 This shift in hiring augmented the dominance of large firms in public accounting as in

general only they possess the human resources necessary to audit large corporations. The

qualification process therefore reveals that self-regulation led to asymmetric benefits within the

accounting profession (i.e. self-regulation can be seen to benefit large firms at the expense of

smaller firms).

Currently to receive a CA designation an individual must: obtain a university degree (the

degree must include or be in addition to completing courses in subject areas specified by the

Institute); complete a 30-month period of training in a firm designated for the training of CA

students; complete an ICAO-approved staff training program within the first 12 months of

practical experience at the firm of training or attend an ICAO offered program; successfully

complete the ICAO’s School of Accountancy; and, successfully write the national Uniform Final

Examination.152 However, it should be noted that, in 1990, the ICAO waived the university

147 In 1962, the PAA was amended to allow existing certified general accountants (CGAs) apply for public accounting licenses. Other individuals may become public accountants when the PAA determines an individual meets the equivalent of the ICAO qualifications. See PAA section 14. 148 See Creighton (1984), pp. 281-92. 149 Ibid. 150 Ibid., p. 290. 151 Ibid. 152 See www.icao.on.ca.

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course and staff training requirements for applicants with a certified management accountant

(CMA) or CGA designation.

Public Accounting, Qualification Standards and the Public Interest

This discussion of the history of the ICAO raises two key points. First, the history of

public accounting in Ontario appears to be one of the ICAO seeking to control entry to the

practice. Second, the ICAO appeared willing to make concessions to the qualifications of public

accountants to gain this control.

The question is whether the public interest is being protected by these changes. As

discussed in Part II, the content of any rules is determined in large part by who is involved in

creating the rules. The Province over the course of the 20th Century provided the ICAO with the

power to control entry to the public accounting through its qualification standards. The ICAO is

governed by a 20 member council. While currently 16 members of council are elected CAs

(selected by members of the ICAO) and four are public representatives appointed by the

Lieutenant Governor in Council, public representation on the Governing Council did not occur

until 1995. Prior to 1995, the ICAO had no public representation that could act as a check on its

rules making powers.

The two other bodies which also may influence qualifications of accountants are also

controlled by accountants. The CICA sets the national qualification exam but it is a creature of

the provincial accounting associations. There is no public representation in the setting of the

national exam.153 The PAC grants and revokes public accounting licenses but does not set

qualifying standards. Further, the PAC is presently governed by a 15 member council with 12

members appointed by the ICAO and three elected by public accounting licensees who are not

chartered accountants. These bodies therefore do not appear to provide the public with a check

on the actions of the ICAO.

Ontario’s Red Tape Commission (“RTC,” now the Red Tape Secretariat) investigated the

public accounting framework in 2001. The Commission concluded that the current system

“unfairly restricts competition”.154 The recent decline in the number of public accounting

153 Email correspondence from CICA (June 3,2003). 154 RTC (2001).

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licensees strongly supports the RTC’s conclusion.155 As a result, the Commission recommended

that a new governing body be created to that would: set licensee fees; establish standards for

licensing public accountants, set and administer the public accounting qualifying exam; establish

practice standards; establish standards for licensees’ continuous education activities; monitor the

public accounting activities of licensees through reviews, inspections and disciplinary actions;

and, conduct hearings. This governing body would contain representatives from all three

accounting bodies (i.e. CAs, CMAs and CGAs) and the public. The field of public accounting

would be open to CAs, CMAs and CGAs. The RTC also recommended that once uniform

standards of education and experience are established that no accounting designation should be

required for one to write the qualifying examination. The purpose of these reforms is to increase

the supply of public accountants, increase the standards governing public accounting, and lower

the costs of assurance services.

The Ontario government amended the PAA in December 2002.156 The amendments

closely mirrored the recommendations of the RTC. An individual can obtain a licence to

practice public accounting if he or she is a member of the CGAAO, ICAO or the Society of

Management Accountants of Ontario and passes a qualifying exam. The amendments also

specify that the Lieutenant Governor in Council is to determine the size of the PAC and make

regulations for appointing its members. The PAC is to set the qualifying exam or specify an

equivalent that the applicant must pass to become a public accountant. The amendments also

provide for a greater role for the PAC in revoking licences of public accountants and for making

regulations subject to the approval of the Attorney General.

In October 2002, the Province appointed Professor Ron Daniels, Dean of the Faculty of

Law at the University of Toronto to conduct an independent review of the public accounting

licensing regime in Ontario. Dean Daniels submitted his final report to the provincial

government in April 2003.157 The Daniel’s report recommended that the new PAC be composed

155 As of February 28, 2002, there were 7933 (7890 CAs and 43 others) public accounting licensees. The present number of licensees represents a substantial decline in the number of licensees since 1993. In 1993 there were 9413 (9309 CAs and 104 others), a 15.7 percent decline in the total number of licensees between 1993 and 2002. Over the same time period the number of practicing CAs increased from 22,551 to 26,186 (a 16.1 percent increase) with the number of CAs employed in industry and commerce increasing by 41.8 percent. By 2002 only 35 percent of active CAs were in public practice. Data provided by ICAO. 156 Justice Statute Law Amendment Act, S.O. 2002, c. 24, Sch. C. 157 Ronald J. Daniels, Public Accounting Report, (April 2003).

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of two representatives from each of Ontario's three accounting bodies and seven lay members of

the public appointed by the Government of Ontario. The government has told the accounting

bodies that the amended PAA will not become law until the issue of standards creation is settled.

If the parties agree on implementing the apparent recommendations of the Daniels Report, public

representatives will form a majority of the standard setting body. This representation of broader

interests will be an important step towards incorporating the public interest into the accountancy

regime.

(c) The ICAO and Rules of Professional Conduct The ICAO formerly set Rules of Professional Conduct to govern the behaviour of its

members in providing accounting services (the rules are now harmonized across the country).

Neu and Saleem argue that these Rules have two purposes. First, the Rules help the ICAO

obtain and maintain its self-regulatory powers by providing comfort to the government and the

public that it is constraining the actions of its members. Second, the Rules may constrain and

harmonize the actions of accountants.158 This section examines how and why the ICAO has set

its Rules. It focuses on two periods – 1883 to 1993 and the more recent period including the

response to the Enron and related scandals in the U.S.

1883-1993: Toward the Public Interest?

Neu and Saleem have studied the growth of the Rules in the period 1883-1993. They

examined how the Rules changed and the possible causes for these changes. They found that

there were four key periods:

• 1883 and 1908: The ICAO during this period was attempting to obtain greater control

over entry to the profession. It did not, however, impose detailed rules on its members.

It relied primarily on a requirement of “good moral character” as a constraint on

members’ behaviour. It did not define what constituted such moral character.

• 1923 and 1934: During this period, the ICAO shifted to behavioural rules governing

member behaviour rather than the general requirement of good character. In 1923, the

158 Neu and Saleem (1996).

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ICAO attempted to define “objectionable behaviour” but the more significant expansion

of these Rules occurred in 1934. The majority of the Rules dealt with relations between

members (such as commenting on another accountant’s work) and certain behaviours

such as advertising (which was essentially prohibited). Neu and Saleem argue that this

expansion followed difficulties for the profession in the early 1930s including financial

scandals in the U.S. and Canada, concern by government of monopoly control by the

ICAO, challenges to the profession by the AAAO and an increasing geographically

dispersed membership. They view the new Rules as an attempt by the ICAO to maintain

the status quo while at the same time making changes that promote confidence in the

profession.

• 1959 and 1963: In 1959 the Rules first mentioned a duty of accountants to the public and

placed it ahead of a duty to clients. Before this time, the Rules focused on the duty to the

client and the profession. In addition, the ICAO moved to make the Rules include much

more detailed descriptions of acceptable conduct. Finally, the Rules were expanded

including for the first time a rule requiring public accountants to be “independent” when

working for a client. Neu and Saleem maintain that the ICAO made these changes to the

Rules in response to external criticisms of the profession and accounting practices in both

the U.S. and Canada. They argue the ICAO used the protection of the public interest

requirements as a means of reassuring the public and other parties following this

criticism.

• 1973 and 1979: In the late 1960s, Canada faced a major business scandal involving the

Atlantic Acceptance Corporation Limited (“Atlantic”).159 The firm was found to have

overstated its assets and earnings by making extreme under-allowances for doubtful

accounts.160 One of the auditors of Atlantic’s subsidiaries had a financial interest in firms

that borrowed from the subsidiaries.161 The ICAO expelled four of the auditors of

Atlantic’s subsidiaries. In addition, four of the nine corporate officers at Atlantic were

CAs. This scandal occurred only three years after the ICAO had gained control of public

159 See S. Hughes, Report of the Royal Commission on the Atlantic Acceptance Corporation, (Ontario: 1969). 160 Ibid. 161 Ibid.

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accounting. During the unfolding of the Atlantic Acceptance scandal, the ICAO

amended its Rules to prohibit a CA in public practice from investing in clients.162

Neu and Saleem argue that as a result of the Atlantic failure, the ICAO again

reformed its Rules but, as before, in a largely symbolic fashion. The ICAO rewrote the

Rules to emphasize its long history of protecting the public as an aspect of the profession.

It also changed the Rule regarding “independence” to arguably a weaker standard

requiring members to hold themselves “free of any influence, interest or relationship, in

respect of his client’s affairs, which impairs his professional judgment or objectivity or

which, in the view of a reasonable observer, has that effect.”163 The ICAO also

liberalized the rule relating to advertising, permitting advertising provided it was not false

or misleading or contravening of professional good taste.

Neu and Saleem’s study of the changes to the Rules prior to 1990 leads to a number of

observations. First, beginning in the 1930s, the ICAO made its changes to the Rules primarily in

response to crises in faith in the accounting profession. Neu and Saleem argue these changes

were largely symbolic and that the profession was still working to protect its position. While

Neu and Saleem did not discuss the late 1980s, the accounting profession also faced a crisis at

this time due to the failure of two Alberta banks (the Canadian Commercial Bank and the

Northland Bank) in 1985. The public criticism of the auditors for failing to warn authorities and

the public of the imminent failure of the banks led the CICA to create an independent

commission.164 The ICAO then added new Rules on maintenance of reputation and “objectivity”

in 1990 to 1993.165

Second, the ICAO Rules did not address the “public interest” until 1959. According to

Neu and Saleem, the ICAO then used this concept to steer attention away from accounting as a

business towards accounting as a profession interested in the public well-being. In revising the

162 Creighton (1984), p. 116. 163 Neu and Saleem (1996) at pp. 62-63. 164 Commission to Study the Public’s Expectations of Auditors. 165 Neu and Saleem (1996).

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Rules, the ICAO engaged in the “effacement of history” by promoting its historic public interest

focus.166

Third, the ICAO’s focus on the interests of the profession is illustrated by examining the

anti-competitive nature of many of the Rules. For example, from 1922 until 1979 the Rules

prohibited advertising by CAs for business. The revised rules in 1979 allowed factual

advertising. In addition, in 1973 the ICAO added a foreword to its Rules of Professional

Conduct that reveals an anti-competitive view public interest and the ICAO’s commitment to it:

[…] strictures against publicly claiming skills or attributes superior to those possessed by colleagues with equal qualifications, and against direct solicitation for entrusted engagements are readily understood by a member of a profession. A professional regards these acts, almost instinctively, as the very antithesis of professionalism -- a scrambling for clientele inappropriate to an essentially intellectual calling which emphasizes quality of service, the need for unbiased professional judgment, and absolute objectivity. The profession can validly assert that such strictures as exist provide a result which is in the public interest. It would not be in the public interest that a practitioner could, publicly, claim for himself or herself professional skills exceeding those of similarly qualified practitioners, in a purely subjective fashion and without hindrance or reasonable constraint; […] nor that individual members, by self-promotional advertising, seek to differentiate themselves from their peers.167 The statement is followed by a number of explicitly anticompetitive rules. In the area of

general advertising, section 217.1 of the Rules states that “[a] member or firm may advertise, but

shall not do so, directly or indirectly, in any manner […] (c) which makes unfavorable

reflections on the competence or integrity of the profession or any member or firm.”168 The

ICAO Council interpreted this rule to mean that “[s]ince any member or firm may be able to

offer services similar to those offered by others, it is not appropriate to claim superiority with

respect to other members or firms.”169 The ICAO Council Interpretation also states that

“[a]dvertising and publicity should contribute to public respect for the profession and thus to the

professional standing of all members,” and that advertising should designed so that it “informs

166 Neu and Saleem (1996) at p. 66. 167 ICAO, Rules of Professional Conduct, (November 2003), p. 9. 168 Ibid, pp. 35-6. 169 ICAO, Council Interpretations, (December 2002), p. 123

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rather than solicits.”170 Except for the brief statement in the foreword, the ICAO provides no

further explanation of the benefits accruing to the public as a result of these rules.

These rules hinder the ability of firms to compete for clients in terms of quality. By

diminishing the capacity of firms to attract competitor’s clients through exploiting differences in

service quality, the Rules reduce the incentives for CAs to monitor the quality of service

provided by rivals. It effectively constrains one element of market discipline over the activities

of chartered accountants.171

The ICAO’s difficulty, or reluctance, in reconciling the public interest with the

profession’s interest can also be seen in the rules governing auditor independence. These rules

are vague in comparison to those restricting competition. As noted above, in the 1970s the Rules

shifted from a focus on “independence” of auditors to “professional judgment and objectivity”.

Arguably, rules on objectivity are less strict than rules on “independence.”172 Significantly, this

change in language from “independence” to “objectivity” was made following shortly after a

Royal Commission issued its final report, in 1969, on the Atlantic scandal.

The granting of self-regulatory powers to the accountants therefore appears to have

resulted in benefits accruing to accounting firms engaging in public accounting through anti-

competitive rules. Such rules impose costs on the investing public through lowering incentives

for rivals to report professional misconduct which in turn decreases the incentive to provide high

quality audits. The overall effect of the ICAO’s conduct rules is to exacerbate the “lemons”

problem already existing in financial markets.

170 Ibid., pp. 120-1. 171 However, the constraint on advertising and publicity does not imply that firms do not compete. Profit maximizing firms will find ways to retain existing clients and attract clients away from competitors. It may be argued that competition has manifested itself in the range of services offered by accounting firms. Arguably, this appears to have occurred in the accounting industry as firms consolidated and offered an variety of consulting services, in addition to traditional accounting and audit services. The focus of competition away from quality and price and towards the quantity of services offered also favours the scale economies available from large firms. This outcome has been achieved with the industry being dominated by the “Big Four” (formerly the “Big Five,” (formerly the “Big Eight”)) firms. It has been widely argued that the conflicts of interest created by the offering of consulting services to audit clients that contributed to the accounting scandals that have plagued capital markets in the United States recently. Coffee (2002). This is turn has led to new regulations in the United States requiring accounting firms to divest a significant proportion of their consulting operations (i.e. Sabarnes-Oxley). 172 Neu and Saleem (1996), p. 63-4.

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Public Representation and the Public Interest

Interestingly for the purpose of this paper, the changes to the Rules up to 1993 were made

during a time in which there was no public interest representation on the Governing Council of

the ICAO. The ICAO did not include public representatives on the Council until 1995. In

theory, public representation should act as a check on the self-interested behaviour of the

profession. However, at first glance, public representation at the ICAO would appear to be a

weak constraint as only four of the 20 member Council are public representatives appointed by

the Cabinet.

Has this public representation had an effect on the setting of the Rules? It is difficult to

make a complete assessment as the change is relatively recent. However, it is interesting that the

late 1990s and early 2000s saw a series of scandals in Canada and the U.S. involving auditors.

For example, in Ontario, there was a financial scandal in 1998 involving Philip Services Corp.

The scandal involved the use of accounting techniques to conceal liabilities and overstate

earnings. Shareholders sued the auditors of the company. In the U.S. the financial system was

rocked by a series of accounting scandals, the most prominent of which involved Enron.

In the wake of the Canadian scandals and concerns in the U.S., the accounting bodies in

Canada have decided to reform their Rules. The CICA plays a role in harmonizing rules of

professional conduct across the country. The CICA’s Public Interest and Integrity Committee is

developing a proposal for a “conceptual framework” to “modernize” Canadian independence

requirements. The CICA intends the framework to provide guidance for settling independence

issues and a methodology for applying the standard. However, the CICA does not appear to

have completed its rules yet.173

(d) Enforcement through the Disciplinary Process As in the case of government regulation and voluntary codes, it is impossible to assess

the standards created by a body without examining how these standards are enforced. The ICAO

did not create separate committees to discipline members until 1965 – during the unfolding of

the Atlantic scandal. Prior to this date the discipline was handled by the ICAO’s Governing

173 www.cica.ca, accessed June 2003.

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Council and membership committee. In 1965 the ICAO created a Professional Conduct

Committee (“PCC”) and a disciplinary committee.

The PCC receives complaints about individual CAs or firms. It is currently composed of

25 members including 23 ICAO member volunteers and two public representatives. The PCC

only began including public representatives in 1995. The ICAO Council appoints the public

representatives. The PCC conducts investigations of complaints received by gathering

information from the complainant and the respondent. Beginning in 1997, if the PCC

determined that no profession misconduct has occurred, the complainant could apply for an

independent review of the PCC decision. The independent reviewer, who is not a CA, could refer

the matter back to the PCC. The decision of the independent reviewer was final.

Table 1 shows the activity of the PCC from 1990-2002.174 From 1990-1999 only 9.5

percent of complaints against CAs led to charges being laid. The low number of charges laid has

alternative interpretations including that an overwhelming majority of complaints do not warrant

disciplinary action; or that a high number of charges laid would reflect badly on the reputation of

the ICAO.175 The introduction of public representation on the PCC has not made a significant

difference to the number of charges laid. From 1990 to 1994, 8.6 percent of complaints resulted

in charges being laid. From 1995 to 2002, 9.1 percent of complaints resulted in charges.176 The

similarity of charge rates may result from the very low number of public representatives on the

PCC (two public representatives for a 25 member committee) and the fact that the ICAO

appoints the public representatives.

If the PCC determines that charges of professional misconduct are warranted, the ICAO’s

discipline committee holds a hearing. The discipline committee consists of 25 ICAO members

and five public representatives appointed by the ICAO Council. Public representation on the

committee began in 1988. The committee’s hearings are open to the public except in

174 The information in Table 1 was provided by the ICAO. 175 Quebec, which also has weak public representation in the charge process, has a comparable, though slightly higher charge rate of 10.7 percent. Jean Bedard, “The disciplinary process of the accounting profession: protecting the public or the profession? The Quebec experience,” (2001) 20 Journal of Accounting and Public Policy 399. 176 Charges may not be laid in the year that the complaint is brought. If the number of charges is lagged by one year, the difference in charges laid between the period of no public representation and public representation becomes even less (comparing complaints for 1990 to 1994 with charges for 1991 to 1995 yields a charge rate of 8.7 percent while comparing complaints for 1995 to 2001 with charges for 1996 to 2002 yields a charge rate of 8.9 percent).

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circumstances in which an application for an in camera hearing has been made and approved.

After considering the evidence the committee returns a decision of guilty or not guilty.

In the case of a guilty verdict, the discipline committee can impose penalties including

reprimands, fines and suspension or expulsion from the ICAO.177 The discipline and appeal

committees were permitted to order the publication of the names of expelled members in

newspapers in 1996. In addition, the ICAO was given the authority to discipline firms in 2000.

Table 2 shows that from 1990-2002, 66 percent of cases heard by the discipline committee

resulted in the member being suspended or expelled. This appears to support the ICAO’s

contention that only the most serious cases of misconduct give rise to charges being laid.178

The respondent or the PCC can appeal the discipline committee’s decisions to the

ICAO’s appeal committee. The appeal committee is composed of a majority of ICAO members

(18) and a low number of public representatives (three) appointed by the ICAO Council. The

appeal committee began to include public representatives in 1988. The appeal committee has the

same powers as the discipline committee and its decisions and orders are final and binding.

In 1998, two scandals involving financial statements emerged in Ontario: Livent and

Philip Services. These events raised concerns about the CA profession’s commitment to the

public interest. In 1999, the chairman of the Ontario Securities Commission stated that “An

extraordinary level of trusted is reposed in the auditor […] There are few external checks and

balances. If the [Ontario Securities Commission] is to continue with its current approach, it must

be satisfied the standards-setting process and the public accounting firms are acting in the public

interest. We have a growing concern that this may not be the case.”179

As a result of this criticism, the ICAO hired external consultants to review its disciplinary

system in 2000. The review was concluded in May 2002, in the aftermath of numerous

accounting scandals in the United States (e.g., Enron and WorldCom). The review found that

there was “no fundamental design flaws in the ICAO discipline process.”180 However, it should

177 Of the 41 discipline cases at the ICAO between 1987 and 1990, 32 resulted in reprimands (of which 14 were also suspended), one in an indefinite suspension, seven in expulsion and 21 in fines (median fine of $2,000 and mean fine of approximately $6,500. L. Brooks and V. Fortunato, “Discipline at the ICAO” (1991) CA Magazine 40. 178 See also Brooks and Fortunato (1991) (examining the 41 discipline cases in 1987 through 1990 and finding a 100 percent conviction rate). 179 “Accountants may not be playing by the rules,” National Post, (July 1, 1999), p. D4. 180 ICAO, Report on the Review of the ICAO Disciplinary Process, (May 2002), p. 1.

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be recognized that the review assessed the present disciplinary process only and not the historical

effectiveness of the process. Further, even though it concluded that there were no “fundamental

design flaws”, the review made recommendations focused on increasing the independence and

public oversight of the Institute’s disciplinary process.181 First, the review recommended the

establishment of a Board of Review to investigate requests by complainants in the event that the

PCC does not lay charges against a member. The Board of Review will have broader powers that

the current independent reviewer. The Board may order the PCC to either reinvestigate a

compliant or lay a charge against the member in question. The review recommends that the

Board be comprised by a majority of non-CAs. Second, the review recommends a Discipline

Oversight Board (“DOB”) be established. The DOB will also be comprised by a majority of non-

CA members. The chair of the DOB will be appointed by Ontario’s Attorney-General. The DOB

will oversee the ICAO’s entire disciplinary system.

This review of the ICAO’s disciplinary process accords with research on the accounting

discipline in Quebec.182 Bedard found that the likelihood of the process favouring the public

interest over the profession’s interest depended on the degree of government regulation and

public participation at the various stages of the discipline process.183 He argued that the presence

of government regulations and public participation can potentially curtail the pursuit of private

interest in the disciplinary process.184 Berard found that at the complaint and inquiry stage, there

was little government regulation or public participation and the private interests of the profession

played a predominant role. On the other hand, there was greater public representation and

regulation at the trial stage and the public interest appeared to predominate.

In the case of the ICAO, there has been no oversight of the disciplinary process by the

government and only minimal public representation. This system appears to have resulted in few

charges being laid as a result of complaints, with no appreciable difference following the

addition of public representation to the PCC. This low charge rate, combined with the very high

181 ICAO, The ICAO Discipline Process: an Internal Review Focusing on Timeliness, Transparency, Training and Other Matters, including the Exercise of Professional Judgment in the Application of GAAP, (May 2002). 182 Bedard (2001). 183 Bedard (2001). 184 Bedard (2001), p. 431.

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conviction rate, indicates that the ICAO is unwilling to send cases to hearing without very strong

evidence. This suggests that the ICAO is attempting to minimize the number of charges to

protect the public view of the profession while ensuring the credibility of the process through a

high conviction rate.185 While the changes recommended by the independent review in 2002

may increase some public oversight of the ICAO’s disciplinary process, the impact of the

reforms will depend on the system actually adopted by the ICAO including who selects the non-

CA members of the Board and the DOB and the function of the DOB. Further, the effectiveness

of the Board of Review depends on the desire of complainants to engage in a further complaint if

they have lost at the initial PCC level. Individuals faced with the costs (particularly the time for

undertaking the appeal process) with no monetary benefit from the complaints may be unwilling

to pursue further action. Greater public representation is required earlier in the process as well –

on the PCC, not only in the appeal stage.186

(e) The ICAO and the Public Interest The early history of accounting in Ontario is best characterized as a competition between

rival accounting bodies for the right to the use the CA title and the ability to offer public

accounting services. The ICAO appeared willing to trade-off qualification (input) standards in

order to gain this control. The ICAO only formally turned its attention to the public interest after

this period, when it had achieved almost exclusive control over entry into the field of public

accounting. Once it began developing accounting regulation protecting the public interest in

Ontario, the ICAO appeared to have been primarily motivated by external events (i.e. auditing

scandals) that threatened to tarnish the reputation of the profession rather than a substantive

commitment to proactively protect the public interest. Many of the conduct (output) rules it

created were weak or anti-competitive in effect. Finally, in enforcing its rules, the ICAO has low

charge rate arising from complaints, potentially indicating a conservative approach to

prosecutions.

This history supports the contention that socially optimal outcomes do not necessarily

result if a government formally allows an industry or profession to develop its own rules of

185 Bedard (2001). 186 As noted above, the CPAB was created to aid in the oversight of auditing. However, it only was created and its full form and impact is unknown.

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conduct and standards. It illustrates North’s observation that “[formal rules] are created to serve

the interests of those with the bargaining power to devise new rules.” With specific reference to

the ICAO, Neu and Saleem view the development and evolution of public accounting regulation

in Ontario as “responses to changing circumstances and that the ideological effect of these shifts

was to provide ‘compelling reasons’ for the maintenance of existing relations of professional

privilege.”187

An industry cannot be granted self-regulatory powers without some form of check or

control over self-interested behaviour. The check need not necessarily be the government. It

could also include public representation or market mechanisms. However, the history of the

ICAO illustrates that each context must be analyzed to ensure there is some form of control. In

the case of the ICAO, the government did not play a significant role following delegation of self-

regulatory powers. Interestingly, the current Chartered Accountants Act states that one of the

objects of the ICAO is “to promote and protect the welfare and interest of the Institute and the

accounting profession” (section 3(h)). There is no mention of obligations to the public. Further,

for most of the history of the ICAO, there was no public representation in developing and

enforcing the rules. The form of public representation that was added recently by the ICAO is

weak because of the low number of representatives and the fact that the ICAO chooses many of

the representatives on the committees. The proposed changes to the PAA and the structure of the

PAC may address some of these concerns.

As a result, the ICAO has at times used its powers and information asymmetries to hinder

market mechanisms that could act as a check on self-interested behaviour by accountants (for

example, the Rules limiting the ability of accountants to criticize other accountants). There

appear to be significant information asymmetries between auditors, retail investors and the

public at large. The CICA conducted two surveys, in 1986 and 2000, with respect to perceptions

and expectations of auditors. The results reveal a substantial rift between the public’s perception

of auditors’ roles and responsibilities and auditors’ actual responsibilities.188 This

misunderstanding by the public hinders their ability to distinguish between high quality and low 187 Neu and Saleem (1996), p. 37. 188 The 1986 survey was conducted by Decima. The 2000 survey was conducted by Kroll Associates (Kroll Associates, Protecting the Public Interest: The Role of the Chartered Accountancy Profession (Toronto: CICA, 2001)). For example, the CICA surveys revealed that a substantial proportion of the public believes that auditors take greater responsibility for detecting fraud then auditors currently provide.

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quality audit services – the basis for the lemons problem that gave rise to the argument in favour

of some form of regulation. Moreover, the CICA does not appear willing to educate the public

to help alleviate these concerns.189 Self-regulation therefore does not appear to have overcome,

and may in fact have exacerbated, the market failure at the core of the arguments for regulation

by the profession.

The number of accounting scandals that have occurred in Canada and Ontario over the

decades (e.g. Atlantic Acceptance, Canadian Commercial and Northland banks and Livent)

illustrate that, apart from magnitude, there is nothing particularly unique about the recent

accounting scandals dominating the current discussions regarding accounting reform. The self-

regulatory regime of accountants in Ontario needs to be revamped to provide increased checks

against self-interested actions by accountants. For example, one potential check would be to

increase the number of public representatives on the ICAO Council and on the committees such

as the PCC and the discipline committees. Further, these public representatives should not be

appointed by the ICAO. The 2002 review recommended a few changes along these lines but did

not go far enough to extend these changes to the control structure for accountants. In addition,

government action may be required to set enforcement and public participation requirements as

has been done in Quebec.190 With changes to the governance structure increasing the public

representation and government oversight (and possibly therefore the market controls), the

accountants may be able to continue to engage in some form of self-regulation without as large a

risk of self-interested behaviour. However, as will be discussed in the next section, at some

point the issue will arise whether the costs of the controls outweigh the benefits of self-

regulation.

189 The CICA Commission stated that “[m]any people urge that the profession should mount a campaign to educate the public as to remove these misconceptions. We are frankly skeptical that any such efforts would be effective in reaching users of financial information, let alone the public at large.” CICA, Report of the Commission to Study the Public’s Expectations of Audits, (1988), p. 63. 190 Berard (2001).

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VI DELEGATED ADMINISTRATIVE AUTHORITIES: THE MIDDLE GROUND?

The final regulatory option is the delegation by the government of administration of

regulatory powers to third parties, with some government oversight. The Progressive

Conservatives in Ontario have shifted towards such Delegated Administrative Authorities

(“DAAs”) in a number of areas ranging from funeral services to electrical safety.191 This shift

was part of the “New Public Management” movement of the 1990s.192 The Ontario government

was attempting to limit regulation through conventional Ministries to contexts where close

oversight was required.193 In other areas, they have moved towards Alternative Service Delivery

(“ASD”) with “government retaining overall accountability and control of legislation and

essential policy” and the DAAs assuming “financial and legal liability for day-to-day delivery

and regulatory administration”.194

These DAAs are not-for-profit corporations and are “largely self-regulatory” regimes for

the particular industries, although they are based on statutory authority and the government

retains some powers.195 Proponents claim that unlike government, DAAs provide more flexible,

effective and efficient service through dedicated resources focused on the particular industry,

increased sophistication in regulation, greater responsiveness in service delivery, increased

collaboration with industry to develop standards, a greater commercial orientation and a shift

away from enforcement towards the “root cause of incidents”.196

191 DAAs have been created to regulate in the areas of New Home Warranty Services, Funeral Services, Motor Vehicle Dealers and Salespersons, Technical Standards and Safety (covering a number of safety related concerns), Real Estate Salespersons and Brokers, Travel Retailers and Wholesalers and Electrical Safety. PTSG Consulting Inc., Draft MCBS Delegated Authority Evaluation Report (Toronto: Ministry of Consumer and Commercial Relations, May 17, 2001). 192 See PTSG Consulting Inc. (2001) and M. Winfield, D. Whorley and S. Kaufman, “Public Safety in Private Hands: A Study of Ontario’s Technical Standards and Safety Authority” (2002) 45(1) Canadian Public Administration 24 for a discussion of the roots of DAAs in the New Public Management reforms in the U.K., New Zealand and Alberta. 193 Winfield, Whorley and Kaufman (2002). 194 PSTG Consulting Inc. (2001) at p. i. 195 PSTG Consulting Inc. (2001) at p. I-10. 196 Winfield, Whorley and Kaufman (2002) and PSTG Consulting Inc. (2001) at p. iii.

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However, the members of the DAAs include industry and therefore there is a potential for

conflict between the interests of the members and the public interest (such as public safety). As

a result, the government has created elaborate accountability mechanisms to attempt to promote

the public interest, given the shift away from traditional forms of governmental accountability.197

This section examines the history and experience of one of Ontario’s DAAs – the Technical

Standards and Safety Authority (“TSSA”) – to evaluate the extent to which the public interest is

being protected and whether there is any advantage to the DAA model.

(a) The Market for Health and Safety As with the environment and accounting, it is important to briefly consider why any

regulation may be required before discussing alternative regulatory forms. The TSSA regulates

in the area of general public safety such as the safety of amusement parks, boilers and elevators.

The difficulties which arise over regulating environmental issues surface again for such public

safety issues. In particular, those who are at risk face high information and organization costs in

taking action to decrease the risk or obtain compensation for the risk or harm created. These

information and organization costs limit the effectiveness of market mechanisms for addressing

these risks (such as compensating costs for riskier devices). The public may not know the true

risks or not be able to adequately bargain with the creator of the risk and therefore will face a

higher than optimal level of risk. Further, in the event of an accident, the information and

organization costs (including legal costs) may make it difficult for the injured parties to take

legal action. In many cases regulation is seen as desirable to overcome the resulting

externalities.

(b) The Technical Standards and Safety Authority Prior to 1997, the Technical Standards Division (“TSD”) of the Ministry of Consumer

and Commercial Relations (now the Ministry of Consumer and Business Services (“MCBS”))

administered a range of Ontario’s public safety statutes related to such issues as amusement

devices, boilers and pressure vessels, elevating devices and fuels handling and safety. However,

197 Winfield, Whorley and Kaufman (2002) and PSTG Consulting Inc. (2001).

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the TSD experienced budget reductions and downsizing beginning the late 1980s. In addition,

the Provincial Auditor and others criticized the TSD’s performance in the early 1990s.198

In 1995 the Progressive Conservatives were elected in Ontario. They committed to

reducing the size and cost of government based on the proposition that government should

“steer” rather than “row” (that is, government should focus on policy making and standard

setting rather than administration and delivery).199 In 1996, the government enacted the Safety

and Consumer Statutes Administration Act (the “SCSAA”) which authorized the government to

delegate the administration of a series of provincial statutes to “designated administrative

authorities” including the TSSA.200 The SCSAA required the government to enter into an

administrative agreement with each designated administrative authority specifying its role,

responsibility and structure.

As the TSSA was a not-for-profit corporation, it obtained letters patent in 1996. After

negotiating an agreement (the “Administrative Agreement”) with the Ministry, the TSSA began

operations May 5, 1997.201 The TSSA administers seven public safety statutes relating to

amusement devices, boilers and pressure vessels, elevating devices and fuels handling and

safety.202 The Administrative Agreement gave the TSSA the authority to charge and collect fees

for its services. These fees are to serve as the sole source of funding for the TSSA (i.e., the

TSSA faces a “hard” budget constraint). When the TSSA began operation, virtually the entire

223 person staff of the TSD was transferred to the TSSA.203

198 For overviews of the origins of the TSSA, see Z. Lonti and A. Verma, “Industry Self-Management as a Strategy for Restructuring Government: The Case of the Ministry of Consumer and Commercial Relations (MCCR) and the Technical Standards and Safety Authority (TSSA) in Ontario” (Ottawa: Canadian Policy Research Networks Discussion Paper No. W/07, 1999) and Winfield, Whorley and Kaufman (2002). 199 Winfield, Whorley and Kaufman (2002). For a discussion of the “new public management” approach to government, see P. Aucion, The New Public Management: Canada in Comparative Perspective (Montreal: Institute for Research in Public Policy, 1995). 200 Safety and Consumer Statutes Administration Act, 1996, S.O. 1996, c. 19. 201 Winfield, Whorley and Kaufman (2002) and the Administrative Agreement between Her Majesty the Queen in Right of Ontario and the TSSA dated January 13, 1997. 202 In 1997 the TSSA began administering the Amusement Devices Act, Boilers and Pressure Vessels Act, Elevating Devices Act, Energy Act, Gasoline Handling Act, Operating Engineers Act and Upholstered and Stuffed Articles Act. These Acts were later consolidated into the Technical Standards and Safety Act, 2000, S.O. 2000, c. 16 (the “TSS Act”) and its regulations. 203 Winfield, Whorley and Kaufman (2002).

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The main powers and duties of the TSSA are found in the SCSAA and the Administrative

Agreement. However, in 2000, the government passed the Technical Standards and Safety

Act204 (the “TSS Act”). The TSS Act formalized the powers of the TSSA’s directors and

inspectors with respect to such issues as authorizations, orders, inspections and offences. It also

provided the Minister with certain order-making powers and the Lieutenant Governor in Council

with the authority to make regulations.

The TSSA is governed by a Board of Directors. In addition to overseeing the day-to-day

operations (e.g. developing by-laws and business plans) of the TSSA, the Board’s primary

responsibilities include reporting the activities and financial position of the TSSA to the Minister

and advising the MCBS on Acts, regulations and relevant safety matters.205 The TSSA consists

of three divisions responsible for enforcing the various safety regulations: Boilers and Pressure

Vessels Safety; Elevators and Amusement Devices Safety (also responsible for enforcing the

upholstered and stuffed articles program); and Fuel Safety. The separate safety divisions are

responsible for setting their own fee schedules. They are to rely on their sector specific fees to

fund operations as the TSSA seeks to avoid cross-subsidizing divisions.206 The TSSA also has a

Corporate Services Division which is responsible for strategic and business planning, risk

management, training and certification.

(c) Standard-Setting and Accountability Section 1 of the Technical Standards and Safety Act states that the purpose of the Act is

“to enhance public safety in Ontario by providing for the efficient and flexible administration of

technical standards.” The Administrative Agreement between the MCBS and the TSSA states

that the TSSA is to ensure a “fair, safe and informed marketplace that supports a competitive

economy.”207 This section examines the sources of influence on TSSA decision-making and

204 Technical Standards and Safety Act, 2000, S.O. 2000, c. 16, as amended. 205 Winfield et al. (2000), p. 21. 206 PSTG Consulting Inc. (2001). 207 Administrative Agreement, preamble.

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how they impact on these goals. It will discuss the influence of the government, the courts and

the various interested parties (including industry, consumers groups and the public).

Government and the TSSA

There are three principal ways in which the government retains some control over public

safety and the operations of the TSSA. First, the government retains the authority to make policy

and regulations pertaining to public safety.208 For example, the government developed

regulations under the TSS Act for fuel handling and safety. It therefore in theory sets regulatory

requirements in the same manner as before the creation of the TSSA and is subject to the same

advantages and concerns that were discussed in Part III.

However, when the TSSA was created in 1997, almost all of its experts in public safety

were transferred to the TSSA.209 Winfield, Whorley and Kaufman argue that the Ministry

thereby lost the expertise to make regulations. They argue that this lack of expertise will lead to

the TSSA effectively setting safety standards through its policy recommendations to the

Ministry.210 Ministry officials noted that the transfer of employees led to “some loss of corporate

memory at MCCR.”211 The risk is that the TSSA will be effectively setting regulations and

policy for the government without the traditional administrative and accountability mechanisms.

The second manner in which the government has control over the TSSA is through a

variety of oversight mechanisms. The SCSAA provides for the assessment of penalties against

the TSSA if it does not fulfill its obligations. For example, in the event that the TSSA

“knowingly” contravenes the SCSAA or the TSS Act or regulations, the TSSA is liable for a fine

of up to $100,000 per day.212 Furthermore, the Lieutenant-Governor in Council may revoke the

authority of the TSSA if an offence is not remedied in a time period deemed reasonable by the

208 The Lieutenant Governor in Council has the authority to make regulations under the TSS Act (s. 34). 209 Winfield, Whorley and Kaufman (2002). 210 Winfield, Whorley and Kaufman (2002). 211 Zsuzsanna Lonti and Anil Verma, “Industry Self-Management as a Strategy for Restructuring Government: The Case of the Ministry of Consumer and Commercial Relations (MCCR) and the Technical Standards and Safety Authority (TSSA) in Ontario” (Canadian Policy Research Networks Discussion Paper No. W/07, December 1999), p. 18. 212 SCSAA, s. 14(1).

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MCBS or, if it is considered that revoking the authority of the TSSA is in the public interest.213

In addition, the SCSAA provides for fines for a director or officer of the TSSA who knowingly

causes, authorizes, permits or participates, or who fails take reasonable care to prevent, the TSSA

from knowingly contravening the applicable statutes and regulations.214

One of the attractions of the TSSA was that it is to be self-funded and therefore avoid the

significant budget cuts being implemented by the Conservative government.215 Given self-

funding, the offence provisions under the SCSAA should provide incentives for both the

organization and the individuals within it to maintain appropriate safety standards in order to

avoid potentially significant economic costs arising from government imposed penalties.

However, the MCBS may bail-out the TSSA in the event that it faces a severe penalty that would

lead to bankruptcy. If this is the expectation of the TSSA, the incentives from the offence

provisions would be weakened.

The MCBS has a number of avenues to intervene in the operations of the TSSA to

maintain public safety standards. It retains the authority to unilaterally alter the Administrative

Agreement if the alteration relates to the administration of the designated legislation and the

change is in the public interest.216 Further, the Administrative Agreement states that TSSA must

submit for approval by the MCBS “all by-laws and amendments addressing the qualifications,

terms and conditions of registration or memberships and the conduct of persons required to be

registered under the Acts.” These provisions include the composition of the Board of

Directors.217 The Administrative Agreement also requires the Annual General Meetings of the

TSSA to be open public and that the TSSA make reasonable efforts to notify the public of the

213 SCSAA, s. 6. 214 SCSAA, s. 14. Section 14 also prohibits any director, officer, employee or agent of the TSSA from contravening the applicable legislation. The maximum fine for an individual under section 14 is $25,000 per day. 215 Winfield, Whorley and Kaufman (2002). 216 SCSAA, s. 4. 217 Winfield, Kaufman and Whorley (2000).

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meeting.218 Finally, the SCSAA requires the TSSA to submit annual activity reports, audited

financial statements and long-term business plans to the MCBS.219

While the Acts and Administrative Agreement include such oversight mechanisms,

Winfield, Whorley and Kaufman argue that transferring effectively all of the government’s

safety expertise to the TSSA seriously hinders the ability of the MCBS to effectively carry-out

its oversight responsibilities and make use of the various accountability safeguards.220 Further,

in 2002 the MCBS had only allocated six staff to oversee the TSSA, four other DAAs, the

Ontario Home Warranty Program and the Ontario Funeral Services Board. Winfield, Whorley

and Kaufman argue that this lack of resources commitment represents a significant obstacle to

adequate oversight.221

The final manner in which the government may influence the operations of the TSSA is

through its power to appoint three members of its Board. Initially the Board had 15 members

with three appointed by the MCBS, 10 members representing the regulated industries, one

member independent of the industries and the final member being the President and CEO of the

TSSA. However, the structure of the Board was altered in 2002 following criticisms that the

Board membership was weighted too heavily in favour of industry which could compromise the

ability of the TSSA to serve the public interest.222 As a result of this criticism, the Board was

expanded to 17 members in 2002. However, the Ministry still only appoints three of the

directors (the appointment of the other directors will be discussed below), leaving it with the

ability to monitor the Board but with relatively little influence.223

218 Administrative Agreement, section 6. 219 SCSAA., s. 13(1). 220 Winfield, Whorley and Kaufman (2002). 221 Winfield, Whorley and Kaufman (2002). 222 The structure of the Board was altered after two studies of the TSSA (M. Winfield, S. Kaufman and D. Whorley, The ‘New Public Management’ Comes to Ontario: A Study of Ontario’s Technical Standards and Safety Authority and the Impacts of Putting Public Safety in Private Hands (Toronto: Canadian Institute for Environmental Law and Policy, 2000) and PSTG Consulting Inc. (2001)) raised concerns about industry control of the Board. In addition, a coroner’s jury verdict in 2000 concerning the death of Jerome Charron on an amusement ride criticized the structure of the TSSA (Winfield, Whorley and Kaufman (2002)). 223 Winfield, Whorley and Kaufman (2002).

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The Courts

A concern about DAAs is the extent that they must comply with the administrative law

and constitutional controls that constrains the actions of traditional government institutions.

These controls are found in both statutory law and the common law and are administered through

the courts. They attempt to incorporate into government action certain principles such as

fairness, transparency and participation.224

The TSSA may be subject to administrative law principles (such as fairness) such that

members of the public and industry can seek judicial review of TSSA decisions. This would

occur if the courts take an expansive approach to standing and government functions to find that

the TSSA is subject to judicial review requirements. However, there remains a serious issue of

funding for the public. As in the case of government decisions, the public does not have the

resources of industry and may not be able to effectively access judicial review.225

The TSSA is, however, likely subject to the Charter of Rights and Freedoms. This result

flows from two recent Supreme Court of Canada decisions in which the Court held that the

Charter is applicable to bodies that are implementing public programs or exercising statutory

powers of compulsion.226 The TSSA therefore would be subject to all the rights and freedoms -

from equality rights to the rights attendant on investigations and prosecution of offences.

Finally, the TSSA may also be sued civilly. For example, the TSSA could potentially be

sued for regulatory negligence – the negligent implementation of policy decisions. Such actions

could relate, for example, to inspections, issuance of permits and enforcement.227 Such actions

provide an incentive to maintain appropriate standards and policies so the TSSA can avoid

damage awards or increased insurance and legal costs.228 Presently, the TSSA is required to hold

comprehensive general liability insurance, approved by the MCBS, protecting it from potential

224 K. Beattie, “Fairness, Openness and Self-Regulation: An Examination of Administrative Law Values and the Use of Voluntary and Self-regulatory Measures for Environmental Protection” (2001) 14 Canadian J. Administrative Law and Practice 1. 225 Beattie (2001). 226 Eldridge v. British Columbia (Attorney General), [1997] S.C.R. 624 and Blencoe v. British Columbia (Human Rights Commission), (2000) SCC 44. See Winfield, Whorley and Kaufman (2002) and Beattie (2001). 227 See Beattie (2001) for a discussion of the case law governing liability of the delegatee. 228 CPRN (1999).

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claims and subject to limits of not less than $10 million inclusive per occurrence. However, as

noted above, to the extent the TSSA believes the government would provide funds so the TSSA

would not face bankruptcy as a result of civil actions, the incentives from civil actions would be

reduced. The government has attempted to insulate itself from any such incentives by providing

some protection for actions of Crown employees and by requiring the TSSA to indemnify it for

any damages because of the actions of the TSSA.229

Stakeholder Participation and TSSA Decisions

Stakeholders have a number of means of influencing the decisions of the TSSA. First,

they may have a representative on the Board of Directors. As noted above, the Board currently

has 17 members (increased from 15) with the Ministry appointing three of the members. Of the

remaining 14 directors, the directors nominate and elect 13. Eight of the elected directors must

represent the specific industries regulated by the TSSA; five must be unaffiliated to the industries

regulated by the TSSA. The final director of the Board is the President & CEO of the TSSA.

The Governance and Nomination Committee nominates directors for the Board. The

Committee is composed of the Chair, the CEO, and at least one of the MCBS appointed

directors. The Committee must consider nominees recommended by the Authority’s Advisory

Councils (discussed below). Elected directors may serve for a maximum of two consecutive

three-year terms.

The resulting Board is more representative than the prior configuration in which 10 of 15

directors represented regulated interests. However, while regulated industries are well

represented, there is no guarantee that five non-affiliated members effectively represent a cross-

section of interests impacted by the actions of the TSSA. The appointment of the two additional

Board members in 2002 may provide evidence of this lack of effective representation – one was

a management consultant and the other was an advisor for HSBC Bank Canada. In fact, while

the Board appears to be very strong in terms of business knowledge, as an accountability

mechanism it is weak in terms of representing other interested parties. For example, while there

is a representative for the Consumers’ Council of Canada, there do not appear to be directors

229 SCSAA, s. 9 and Administrative Agreement, s. 14. See also Beattie (2001).

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concerned with environmental or labour interests (both of which are effected by the actions of

the TSSA).230

On the other hand, due to concerns about potential conflicts of interest in directors from

industry sitting on the Board, the MCBS amended the Administrative Agreement in October

2000 to require the TSSA to develop a binding code of conduct for board members.231 The

TSSA developed a Board Specific Code of Conduct that was approved by the MCBS in 2002.

The Code states that directors must “ensure that he or she and the Board as a whole acts in the

best interests of TSSA rather than in the interests of an individual director or any other interests.”

A director may request the Board to review the compliance of another director with the Code.

The TSSA’s by-laws authorize the Board to remove an elected director determined to have

violated the Code. As a further check on the actions of Board members, an independent third

party evaluates the Board annually to assess compliance with the Code as well as the

performance of the Board, Chair and individual directors.232 These mechanisms all aid in

reducing the probability of self-interested action by Board members in favour of regulated

interests.

The second manner in which interested parties may become involved in TSSA decisions

is through its advisory panels. The TSSA has ten Advisory Councils representing consumers and

industry. There are nine Industry Advisory Councils (“IACs”).233 The IACs are sector-specific,

non-statutory voluntary organizations, chaired by industry. In addition to nominating

representatives to the Board of Directors, these IACs are intended to facilitate communication

(e.g., feedback and advice) regarding public safety policy between the TSSA and industry.

The TSSA has also formed a Consumers Advisory Council (“CAC”). The CAC is

designed to advise the TSSA on safety issues relevant to the purchasers and users of regulated

products. The CAC must include members from the Consumers’ Association of Canada and the

Consumers’ Council of Canada. All CAC members must be independent of the TSSA, the

230 TSSA, Achieving and Advancing Public Safety: 2001/2002 Annual Report (Toronto: TSSA, 2002). 231 Mark S. Winfield, Shelley Kaufman, and David Whorley, “Public Safety in Private Hands: A Study of Ontario’s Technical Standards and Safety Association,” Canadian Public Administration, (Spring 2002), p. 36. 232 TSSA, Board Charter. 233 The nine IACS are: agricultural, amusement devices, boilers & pressure vessels, elevating devices, natural gas, operating engineers, petroleum, propane, and upholstered & stuffed articles. TSSA (2002).

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TSSA’s Board of Directors, and the IACs.234 In addition to making nominations for the Board of

Directors, the CAC oversees the TSSA’s complaint handling process and Safety Education

Fund.235

The TSSA provides resources and information to the CAC.236 This support should aid

the CAC in evaluating and providing advice on TSSA initiatives. However, as was noted with

the Board of Directors, interested parties appear to be excluded from the process. These parties

include environmental and labour interests as well as general members of the public.

In terms of decisions of the TSSA, the TSS Act appeal provisions heavily favour industry

concerns. For example, an individual is entitled to an authorization if he or she meets the

requirements in any regulation. If an authorization is refused, the applicant is entitled to request

a hearing on the authorization and then further appeal any loss at hearing to Divisional Court.

However, no other person gets notice of the decision, can appeal a decision through the

administrative processes, is provided notice of any hearing on a refusal or is party to any such

hearing. A party “aggrieved” by a decision of the TSSA or a Minister’s order may, however,

appeal the decision to Divisional Court – a much more expensive process.237

The TSS Act, however, has one valuable exception to this process. It states that the

Environmental Bill of Rights applies to any decisions under the Act which were governed by the

predecessor Gasoline Handling Act.238 This provision allows decisions relating to, for example,

standards for underground storage tanks to come under the notice and comment and appeal

provisions of the Environmental Bill of Rights.239 While the appeal provisions of the

Environmental Bill of Rights set up many hurdles for third parties, these provisions at least

provide a less expensive administrative option for affected parties. They also bring at least some

234 PSTG Consulting Inc. (2001). 235 TSSA (2002). 236 PTSG Consulting Inc. (2001). 237 TSS Act, Sections 6 – 12. 238 TSS Act, s. 42. 239 Although the Environmental Commissioner of Ontario has criticized the TSSA (along with a number of Ministries), stating that they have “consistently failed to explain the potential environmental impacts in their instrument proposal notices” on the Environmental Bill of Rights registry. Environmental Commissioner of Ontario, 2001-2002 Annual Report (Toronto: Environmental Commissioner of Ontario, 2002), p. 19.

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decisions of the TSSA under a third party auditor – the Environmental Commissioner of

Ontario.240

A further concern about the ability of all interested parties to monitor the operations of

the TSSA is that because the TSSA is not a Crown agency, it is under no obligation to comply

with freedom of information statutes.241 The Administrative Agreement requires the TSSA to

establish a policy with respect to information privacy and access. In 1998 the TSSA developed a

Privacy and Access Code. While it does provide access to some information, Ontario’s

Information and Privacy Commissioner has stated that these provisions do not provide the same

protection as applies to provincial agencies.242

On the other hand, the TSSA annually releases the number of incidents (an event that

upon investigation (physical or otherwise) that suggests that public safety has been

compromised)243, serious injuries (an injury requiring medical treatment)244, and fatalities by

division (e.g. boilers and pressure vessels, elevators, fuels, etc.). This information includes the

causes of the incidents (e.g. vandalism, rider error, device malfunction and/maintenance error,

etc.). These reports aid in providing the information necessary for the TSSA, public, government

and industry to determine how safety issues can most effectively and efficiently be addressed and

assess the record of the TSSA. The TSSA appears to be collecting, processing and disseminating

information in order to lower asymmetric information and moral hazard problems by providing

educational services to users and purchasers.

Accountability

The government attempted to build into the TSSA framework a series of accountability

mechanism. The government itself retains the ability to make policy decisions, to use oversight

mechanisms and to appoint a (minority) of Board members. These mechanisms are weakened by

240 Beattie (2001) and Winfield, Whorley and Kaufman (2002). 241 Winfield, Whorley and Kaufman (2002). 242 Winfield, Whorley and Kaufman (2002). 243 TSSA, 2000/2001 Annual Report, p. 24. 244 TSSA (2001).

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the Ministry’s lack of expertise and resources and the ability to appoint only a minority of the

Board.

However, the TSSA structure provides for other, though also weak, accountability

mechanisms from the composition of the Board, to its use of stakeholder advisory panels and

(limited) rights of appeal and review of TSSA decisions by third parties. While there are some

safeguards (such as the Board’s Code of Conduct), each of these mechanisms is weighted in

favour of industry and potentially neglects important interests such as environmental groups,

labour and the public more generally. These deficiencies are not mitigated by the lack of

oversight by independent auditors traditionally overseeing government functions. For example,

the TSSA does not fall under a range of statutes for monitoring the actions of government bodies

such as the Audit Act and the Ombudsman Act.245 These statutes, along with the Freedom of

Information and Protection of Privacy Act discussed above, provide for an independent review of

government actions and would aid in monitoring the actions of the TSSA. These problems are

overcome to a limited extent by potential court action, although a lack of resources and

information for such action by the public may hinder their use.

These accountability concerns, particularly regarding government oversight and policy

making, must take account of the information and principal-agent problems associated with

government identified in Part II. These problems suggest that any government’s ability to

effectively fulfill its numerous obligations will always be compromised to a greater or lesser

extent (i.e. increasing staffing may do little to increase oversight effectiveness). However, the

structure of the TSSA appears to exacerbate these problems. On the other hand, the history of

the TSSA so far has indicated that the MCBS and TSSA have been quite responsive to the

concerns expressed by third parties.

(d) Delegated Enforcement and Safety Performance Each of the accountability mechanisms discussed above apply to varying degrees to the

enforcement process. The government has some ability to oversee the resulting enforcement

record of the TSSA. This oversight and government involvement has been increased recently by

amendments to the Administrative Agreement requiring the TSSA to follow an enforcement

245 Beattie (2001) and Winfield, Whorley and Kaufman (2002).

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protocol which is to ensure government involvement in the investigation of serious incidents.246

In addition, the TSSA is liable through the courts for both its inspection and enforcement

programs.

Stakeholders have some ability to oversee the enforcement by the TSSA through the

Board and the Councils. However, such stakeholder oversight is limited by at least two factors.

First, the TSSA may benefit from the government’s general prosecutorial discretion which

makes it difficult for third parties to challenge any decision regarding enforcement. Second, the

TSSA has attempted to separate the prosecution function from the Board to protect against self-

interested influence. While the Board obviously remains responsible for the overall enforcement

record of the TSSA, the separation may make it difficult to hold those involved in enforcement

decisions accountable.247

The TSSA initially faced some criticisms of its enforcement process. The TSSA

increased its number of inspectors from 108 to 122 between 2001 and 2002. This change appears

to have been partly motivated by criticism that the while TSSA budget levels have increased

over time, its front-line service-delivery staff had remained static.248 In addition, a concern that

has been raised regarding the fining of parties contravening safety regulations. Because the

TSSA must forward fines levied to the Ministry of Finance, the concern has been expressed that

the TSSA has entered into plea bargains in which an alleged violator of a safety regulation makes

a donation to the TSSA’s safety education fund instead of paying a fine.249 The early years of

the TSSA appear to supply evidence of such a trend. The TSD levied $84,800 in fines in

1996/97 while in 1997/98 and 1998/99, the fines dropped to $20,500 and $35,000

respectively.250 However, following the leveling of this criticism, the TSSA appears to have

246 Winfield, Whorley and Kaufman (2002). 247 Winfield, Whorley and Kaufman (2002) note that this broad grant of discretion to the TSSA is very different from the grant of prosecution powers by the Province to municipalities which provides for greater oversight of prosecutions by the Province. 248 Winfield, Whorley and Kaufman (2002). 249 Winfield, Whorley and Kaufman (2000). 250 Winfield, Whorley and Kaufman (2000).

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reversed the trend (in the 2001/2002, the TSSA handled 31 prosecutions with the result that

$177,000 in fines was imposed).251

Has the TSSA decreased the safety risks in the areas it regulates?252 The TSSA has not

been in operation long enough to provide an adequate answer to this question. Moreover, the

numbers of incidents are very low making it difficult to detect a pattern. However, as the figures

in Table 3 illustrate, the safety results over the period have been mixed. Some indicators, such as

for elevators, have improved. Improvement is less clear in the case of fuels and amusement

devices. In addition, some of the patterns of increased safety began before the TSSA

commenced operations.253

(e) Delegating Public Safety A government-initiated review of the functioning and governance of the DAAs

concluded that while some adjustments are required, “Ontario’s move to a Delegated

Administrative Authority model has been well founded.”254 However, it seems too early to make

such a conclusion in the case of the TSSA. The TSSA has been given the task of administering

and enforcing a number of highly salient public safety regulations. Such a task requires a careful

balancing of the interests of industry and the public in order to overcome asymmetric

information and moral hazard problems. The accountability mechanisms need some

improvement to ensure that the interests of potentially affected parties are not lost in this

delegation of regulatory powers.

The TSSA does appear to have made some “service” improvements. For example, it has

significantly reduced the time necessary for device design reviews. Whether this time reduction

is due to increased productivity or merely a reduction in the time taken to scrutinize design is

still in an open question that will require future assessment.255 Further, the extensive

251 TSSA, 2000/2001 Annual Report (Toronto: TSSA, 2001). Unfortunately, while the 2001/2002 Annual Report notes that the TSSA commenced 33 prosecutions, it does not mention the resulting amount of fines or convictions (if any) (TSSA (2002)). 252 See TSSA, 2001 State of Public Safety, (2002); PSTG Consulting Inc. (2001).

253 Winfield, Whorley and Kaufman (2002). 254 PSTG Consulting Inc. (2001), p. ii. 255 Winfield, Whorley and Kaufman (2002).

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accountability mechanisms in place within the TSSA, the TSSA’s similar exposure to court

actions to government and the need for a strong government oversight role (with committed

resources), it is not clear that the delegation of authority to the TSSA will in the end cost less

than provision by government or result in more efficient regulation once greater accountability is

put in place.256

VII CONCLUSIONS AND RECOMMENDATIONS

These case studies of self-regulation illustrate the importance of the institutional context

to the success or failure of the regime. The institutional context includes the social and

economic norms and conditions as well as the governmental rules within which the self-

regulatory structure will operate.257 As North observed, “[g]iven the behavioral characteristics of

human beings, there is simply no way to devise institutions that solve the complex exchange

problems and are at the same time free of some incompatible incentives.”258 However, these

case studies point to some possible recommendations concerning self-regulation.

Self-Regulation Requires a Check

Self-regulation by industry needs some form of check on self-interested behaviour. The

check may be internal to the industry such as in the form of peer pressure or the creation of

norms. However, as the U.S. Responsible Care program illustrates, the form of self-regulation

can hinder these checks. Under the U.S. program, facilities do not have to provide verified

256 One potentially concerning development was that in 1999, the TSSA expressed an interest in expanding its services (i.e. offering safety inspections) to jurisdictions outside of Ontario (i.e. the United States and other Canadian provinces). This may represent the TSSA becoming more commercially (i.e. profit) oriented and drifting from its intended purpose of ensuring the safety of Ontario citizens. Alternatively, the revenue generated from exporting TSSA expertise may also augment the TSSA’s ability to enforce safety standards and promoted public safety education within the province. Ultimately, such activities do constitute a significant departure from the original mandate of the TSSA and requires further analysis and dialogue with the relevant stakeholders. Lonti and Verma (1999), p. 25. 257 Gunningham and Ress (1997) (“[t]he effectiveness (or ineffectiveness) of self-regulation varies enormously among industries, due partly to its social and economic context, which varies widely, and partly to the self-regulation program’s institutional design, a highly variable matter as well.” (p. 370)). 258 North (1990), p. 109.

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information to any party outside individual facilities, including other members of the program.

Members of the program appear to have used this power to act without oversight

opportunistically, with members making less environmental progress than non-members of the

program.

Most self-regulatory regimes, however, will need an external check. For example, the

government essentially granted the accounting profession complete discretion to make and

enforce its own rules without an internal or external check. Until recently, the ICAO appears to

have used these rules to develop a monopoly and foster the interests of accountants rather than of

the public.

The external check does not necessarily have to take the form of government regulation

or oversight. Other institutions can play a role. As Gunningham and Rees note, “the most

effective self-regulatory initiatives have involved an underpinning of government regulation, or

third-party oversight, or more commonly both.”259 In particular, the public can potentially play a

large role in controlling the actions of self-regulating bodies. The public can act as consumers,

either through directly consuming (or not consuming) the service provided by the industry (such

as in the case of Green Consumerism) or through punishing those who use low quality services

(such as in the case of investors not investing in companies using low quality auditors). The

public, if harmed by the decisions of the self-regulating body, may be able to use the courts to

either alter decisions or obtain damages for harm. Finally, the public can participate in the

decision-making process of the self-regulating industry – providing the industry with information

about issues or monitoring the exercise of self-regulatory powers.

The Public’s Power to Check Self-Regulation has Limits

While there is potential in the public acting as a check on self-regulation, there are

significant limitations on public action. In the case of the market, the information and resource

constraints that made regulation seem necessary in the first place can hinder the market as a

check on self-regulation. The weak impact of the Canadian Responsible Care program on small

companies relative to medium sized companies may in part be due to the inability or

unwillingness of the public to monitor and punish these smaller companies. It is costly to obtain

259 Gunningham and Rees (1997), p. 406.

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information and organize action. The public may be unwilling to do so where they perceive the

benefits to be small (such as in the case of small companies). Further, the self-regulatory body

itself may be acting in a manner which hinders the market mechanism such as in the case of the

ICAO creating rules which limited the ability of accountants to compete on quality.

Public access to the courts is also limited by information and resource constraints. In

many cases, the public will not have information on whether or not they are harmed and, even

when harmed, face high legal and organization costs of taking action. Further, the self-

regulatory body may not even fall under many of the legal constraints that bind government

actions such as relating to fairness and constitutional rights and freedoms. In addition, the self-

regulatory regime can hinder the use of the courts. The regime may have explicit rules favouring

appeal and court action by the regulated parties. For example, in the case of the TSSA, the

regulated parties have easier and cheaper administrative appeal options while the public does not

even appear to receive timely notice of TSSA decisions. The one valuable exception relates to

TSSA decisions relating to issues that used to be under the Gasoline Handling Act. Such

decisions fall under the notice and comment and appeal provisions of the Environmental Bill of

Rights which may lower the cost of participating in, and appealing, TSSA decisions. On the

other hand, the government has attempted to limit the ability of the public to hold it to account

for public safety decisions through the liability and indemnity provisions relating to the TSSA.

Finally, public participation in the decision-making process can be valuable. It can

provide considerable opportunity for public preferences to be expressed, for the public to gain

confidence in the self-regulatory process and for monitoring of self-interested action. However,

at times those advocating public participation take a utopian view of its potential. Unfortunately,

the public’s time and resources for monitoring industry action is limited. These limits are in part

the reason for delegation of powers to the government – the public cannot do everything. The

cost and time involved in participating in and monitoring a myriad of self-regulatory schemes

can quickly overwhelm the public leading to ineffective controls on industry action.260 In

addition, as with the market and courts, the self-regulatory regime itself can hinder this check on

self-interested action. The only partially inclusive, and often weak, nature of the participation

260 See, for example, Green (2002) for a discussion of the cost and time considerations involved in public participation in environmental contracts.

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systems established by the ICAO and for the TSSA allow these bodies to claim they are being

inclusive without providing a significant check on their actions.

There are therefore significant limits on the public check on self-regulation. The limits

stem in large part from three factors. First, the public needs information to be able to effectively

act as consumers, litigants or participants. In many contexts, the public cannot obtain this

information or will not perceive the value in using the information. Second, the public may not

take action where the issue is not salient, even though the issue is in fact quite important. This

lack of action stems in part from the public’s inability to process information about risk.261

Finally, the public faces high costs of taking action –in terms of both actual resources and time.

The Government’ Role depends on the Context

Not surprisingly, as with the other institutions, the role and potential scope for

government varies with the context. In some cases, government may need to play a strong

regulatory role, although not necessarily using a command and control model of regulation. For

example, the chemical industry only introduced the Responsible Care program because there was

a regulatory structure in place and it feared further regulation following the events of the 1980s.

Further, the Responsible Care example seemed to illustrate that there were other forces than

Responsible Care at work in decreasing the levels of pollution since non-members experienced

substantial declines. Additional research needs to be done to determine the exact role of

government but it may have played a role in this decline.

However, in terms of self-regulation, government could play a large and fruitful role in

two ways. First, government can help strengthen other forms of checks on self-regulation. In

terms of the public, for example, government can require the self-regulating industry to supply

information that can aid the public in its various roles. It can also mandate stronger appeal

provisions that aid third parties in challenging decisions of the self-regulatory body and eliminate

barriers to civil actions. Further, government can compel a higher percentage of public interest

representatives in the self-regulatory bodies’ decision-making processes. The ICAO example of

two ICAO-chosen public representatives on a 25 person Professional Conduct Committee does

not represent effective public participation.

261 See the discussion of irrationalities in Part II.

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The first role of government should be strengthening other checks on self-regulation

because an overly strong government role would tend to reduce the advantages of self-regulation.

The second potential role for government is overseeing the self-regulation. Where there are

limits on other institutions or there are other compelling reasons for government involvement

(such as vindication of collective decisions that could not be guaranteed through the other

institutions), the government will need to oversee self-regulation. This oversight role does not

necessarily mean less government than prior to self-regulation. While government can always

under-resource its oversight staff or not ensure it has the required expertise (as has arguable

happened in the case of the TSSA), effective government oversight is likely to be expensive.

The government needs to ensure it is an adequate check on self-interested action and therefore

needs to have the staff to obtain and analyze the information and the ability to act on that

information.

Self-Regulation Requires Rules

One conclusion from this analysis of self-regulation is that government needs to analyze

carefully the entire institutional, social and economic context before selecting self-regulation by

an industry rather than an alternative framework (e.g. market ordering or direct government

oversight). However, one of the reasons for self-regulation was to avoid the information and

principal-agent problems that hinder effective government action. Government needs a

framework for addressing issues relating to regulation which minimize the impacts of these

concerns.

One potential beneficial institutional reform would be to require government agencies to

assess the impact of proposed self-regulation and consider alternatives instruments as well as

different institutional checks on the self-regulatory body. The Canadian federal government’s

Regulatory Impact Assessment Statement (“RIAS”) and Ontario’s Regulatory Impact and

Competitiveness Statement (“RICS”) are attempts to motivate government ministries and

agencies to quantify the costs and benefits and consider the full spectrum of regulatory options

before implementing new regulations. For example, the RICS requires that a ministry identify

alternatives to provincial regulation (e.g. voluntary codes of conduct, self-regulation, co-

regulation, etc.) and provide a justification when alternatives are rejected.262

262 Red Tape Review Commission (1997), p. 17.

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These instruments have not been fully adopted by government. A study of the RIAS

initiative revealed agency-problems to be quite severe. In 1996, 50 regulations (out of 455

applicable regulations) were passed without a RIAS.263 Of the 405 regulations that did have a

RIAS, 189 cases did not quantify the costs of the regulation, 241 cases did not quantify the

benefits of the regulation, 191 cases did not estimate the compliance costs to industry or the

public and 188 cases did not estimate the cost to government of administering the regulations.264

No similar study has been conducted with respect to Ontario’s use of RICS.

The presence of such checklists and guidelines for regulatory development do not imply

that the problems associated with regulatory design by government will disappear. Such

analyses face a range of problems including the impossibility of quantifying many costs and

benefits, the difficulty in measuring costs and benefits that are in theory quantifiable and the

difficulty in accounting for the preferences of future generations. Strict adherence to the results

of a cost-benefit analysis can be extremely misleading especially when the principal benefits

from regulation are expected to be of a public interest nature (e.g., environmental quality).265

The presence of these difficulties has led some commentators to suggest that cost-benefit

analysis will typically reflect the preferences (e.g., an ideological commitment to economic

efficiency or equity) of the analyst rather than a balanced assessment of the associated costs and

benefits.266

However, government needs to consider all relevant factors including both quantifiable

and unquantifiable costs and benefits. Government should consider binding rules on decision-

making to achieve this result in the face of potential agency problems. Such binding rules would

require a comprehensive analysis of the costs and benefits (both qualitative and quantitative) for

all potential self-regulatory regimes. This analysis would aid government officials in reaching

decisions. However, it would have a second beneficial impact. If the analysis were made public

263 Fazil Mihlar, “The Federal Government and the ‘RIAS’ Process: Origins, Needs, and Non-compliance,” Changing the Rules: Canadian Regulatory Regimes and Institutions, (1999), p. 287-8. 264 Ibid., p. 287-88. 265 Lester B. Lave, “Benefit-Cost Analysis: Do the Benefits Exceed the Costs?”, in Robert W. Hahn (ed.) , Risks, Costs, and Lives Saves: Getting Better Results from Regulation, (New York: Oxford University Press, 1996), pp. 104-34. 266 Ibid.

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and a system was in place for discussion of the result, the analysis could aid in ensuring that the

public understands the decisions that are being made so they can register their preferences or

constrain self-interested behaviour. This system would not eliminate the problems facing

government action or self-regulation but it may make the choices being made clearer to those

who are impacted. As Elizabeth Colson has commented “[r]ules do not solve all problems; they

only simplify life”267 - we believe some rules will also lead to better rule-making.

267 Elizabeth Colson, Tradition and Contract: The Problem of Order, (Chicago: Adeline, 1974) as quoted in North (1990).

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Figure 1Total Emissions (Tonnes)

140,000.00

120,000.00

100,000.00

80,000.00 Chemical IndustryAll Other Industry

60,000.00

40,000.00

20,000.00

0.00 1994 1995 1996 1997 1998 1999

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Figure 2Total Emissions: Members v. Non-Members

25000

20000

15000 Tonnes

MembersNon-members

10000

5000

0 1994 1995 1996 1997 1998 1999

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Figure 3Pollution Intensity (Total Emissions per Employee)

0.00

0.20

0.40

0.60

0.80

1.00

1.20

1.40

1.60

1994 1995 1996 1997 1998 1999

MembersNon-Members

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Figure 4Average Emissions: 0-100 Employees

0.00

2.00

4.00

6.00

8.00

10.00

12.00

14.00

1994 1995 1996 1997 1998 1999

Non-MembersMembers

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Figure 5Pollution Intensity: 0-100 Employees

0.00

0.05

0.10

0.15

0.20

0.25

0.30

1994 1995 1996 1997 1998 1999

Non-MembersMembers

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Figure 6Average Emissions: 101 - 250 Employees

0.00

100.00

200.00

300.00

400.00

500.00

600.00

1994 1995 1996 1997 1998 1999

Non-MembersMembers

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Figure 7Pollution Intensity: 101-250 Employees

0.00

0.50

1.00

1.50

2.00

2.50

3.00

3.50

1994 1995 1996 1997 1998 1999

Non-MembersNon-Members

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Figure 8Average Emissions: Over 250 Employees

0.00

100.00

200.00

300.00

400.00

500.00

600.00

700.00

800.00

900.00

1994 1995 1996 1997 1998 1999

Non-MembersMembers

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Figure 9Pollution Intensity: Over 250 Employees

0.00

0.20

0.40

0.60

0.80

1.00

1.20

1.40

1994 1995 1996 1997 1998 1999

Non-MembersMembers

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Table 1: PROFESSIONAL CONDUCT COMMITTEE

SELECTED STATISTICAL INFORMATION 1990 – 2002268

Year Number of Complaints Received

Number of Files on Which Charges Laid269

Number of Reviews Made by Reviewer of

Complaints2

1990 227 21 N/A

1991 240 23 N/A

1992 260 23 N/A

1993 252 15 N/A

1994 290 27 N/A

1995 301 22 N/A

1996 235 19 N/A

1997 207 17 3

1998 211 25 8

1999 216 40 15

2000 190 17 19

2001 198 13 20

2002 193 7 9

Source: ICAO.

268 All data is for the fiscal year ended February 28. 269 Not all investigations on files opened during 2000 – 2002 have been completed; accordingly, charges may be laid on some of these files and others may be referred to the Review of Complaints

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Table 2: ICAO DISCIPLINE CASES 1990 - 2003 YEAR NUMBER OF

DISCIPLINE CASES EXPULSIONS SUSPENSIONS

1990 14 3 6 1991 19 4 9 1992 20 4 9 1993 15 4 5 1994 16 2 6 1995 15 6 7 1996 21 12 5 1997 18 6 6 1998 17 3 8 1999 19 5 6 2000 21 6 11 2001 20 6 3 2002 15 10 3 Source: ICAO.

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Table 3: TSSA SAFETY OUTCOMES

1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 Boilers and Vessels:

Incidents 17 12 10 3 4 3 9 Serious Injuries

15 15 20 13 2 2 3 0 2 3

Fuel Safety: Incidents 305 480 390 272 275 260 250 211 489 444 Serious Injuries and Fatalities

28 56 48 39 36 10 49

Amusement Devices:

Incidents 34 44 89 105 270 348 79 Serious Injuries

14 21 16 6 6 15 11

Elevators: Incidents 590 240 230 240 233 219 226 157 143 134 Serious Injuries

35 34 20 18 16 13 10

Source: TSSA (2001), PTSG Consulting Inc. (2002) and Winfield, Whorley and Kaufman (2002).

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