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On the EPA’s Radar: The Role of Financial Reports in Environmental Regulatory Oversight

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How does the Environmental Protection Agency (EPA) use corporate financial reports to enhance its regulatory activities, particularly in high-pollution industries and during enforcement investigations and rulemaking processes?

Image courtesy of interviewee. October 31, 2024

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This video discusses the role of the Environmental Protection Agency (EPA) in using corporate financial reports for environmental regulation. Despite the significance of its regulatory role, there is limited knowledge about how the EPA acquires and utilizes information from these reports. The paper emphasizes the importance of both financial and non-financial information in the EPA’s decision-making process and argues for a comprehensive understanding of how these types of data interact.

The author highlights that the EPA actively downloads numerous corporate financial reports primarily from firms in high-pollution industries. This video data acquisition is particularly prominent during enforcement investigations and when developing new regulations, suggesting that financial information is crucial for cost-benefit analyses and assessing compliance with environmental laws.

A novel measure called "EPA downloads" was developed to track the EPA’s retrieval of financial reports from the SEC EDGAR system. The findings indicate that a variety of factors, including compliance costs and financial assurance requirements, influence the EPA's demand for and use of financial information.

The author concludes that greater transparency in financial reporting could enhance regulatory efficiency and positively impact environmental oversight. Future research should focus on identifying specific financial information that is most relevant for regulatory purposes and how such insights can be utilized effectively by the EPA. Overall, the study aims to shed light on the opaque decision-making processes of environmental regulators and improve environmental regulatory practices.

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Here are five key points from the video regarding how the EPA acquires and uses information from corporate financial reports:

1. **EPA's Role and Information Acquisition**: The video emphasizes the critical role of the EPA in environmental protection and decision-making. It highlights the lack of transparency in how the EPA acquires and utilizes information, suggesting that the regulatory decision-making process is a "black box." The paper investigates how the EPA uses corporate financial reports alongside traditional non-financial environmental information.

2. **Use of Financial Information**: Contrary to the assumption that non-financial data (like pollution levels) is most relevant for environmental regulation, the paper argues that financial information is also crucial for the EPA. The study finds that the EPA actively downloads thousands of financial reports, particularly from high-pollution industries, indicating that financial data significantly influences regulatory processes, especially in rulemaking and enforcement convideos.

3. **EPA's Download Behavior**: The research measures the frequency and types of corporate financial reports downloaded by the EPA using a novel measure called "EPA downloads." This approach tracks the EPA's direct access to the SEC’s EDGAR system, allowing the study to uncover patterns in how the EPA seeks and utilizes financial information, particularly during enforcement investigations and significant regulatory proposals.

4. **Implications for Regulatory Efficiency**: The findings imply that improved transparency and accessibility of financial reports could enhance the EPA's regulatory efficiency. More comprehensive financial information can aid the EPA in conducting cost-benefit analyses and making informed decisions regarding compliance costs and penalties, thereby supporting the overall regulatory framework.

5. **Future Research and Policy Insights**: The paper calls for further exploration into how financial report metrics impact regulatory decision-making. It suggests that understanding the relationship between financial and non-financial information is essential for enhancing environmental oversight. The study highlights the importance of considering both types of information together in the convideo of regulatory actions and future policy developments.

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Here are some key quotes extracted from the video, capturing its main ideas and themes:

1. **On Environmental Concern**: "Environmental protection or environmental problems has become a major concern, a global concern for a lot of people in recent decades."

2. **On EPA's Role**: "The EPA plays a central role in making those environmental decisions and in protecting the environment and human health."

3. **On Information Acquisition**: "We don't really know much about how the EPA acquires and uses information... Because its decision-making process is pretty much like a black box to us."

4. **On Financial Reports and Regulation**: "Who would imagine that accounting information or financial information would also matter to the environmental regulators?"

5. **On the Research Focus**: "Our paper takes a look into the input side of environmental regulation decisions rather than the output side."

6. **On the Information Types**: "We should probably also consider these two types of information together, both non-financial information, like the facts about violations and pollution, and financial information from firms corporate financial reports."

7. **On Transparency**: "More transparent financial reports could help the regulators acquire and use information from firm corporate financial reports and improve their regulatory efficiency."

8. **On the Importance of Information**: "For environmental regulators, I think, it's pretty simple that, my belief is more information is better than less information."

9. **On Financial Reports Usage**: "The EPA may use financial reports for three different purposes: enforcement, compliance, monitoring, and rulemaking."

10. **On Enforcement Stages**: "The enforcement process can be divided into four different stages: violation discovery, case investigation, case resolution, and case review."

11. **On Financial Reports and Compliance**: "This suggests that the EPA may use more corporate financial reports to assist the resolution of enforcement cases."

12. **On Future Research**: "Given escalating global concerns about environmental protection, understanding the role of accounting information processes is very important for us because it tells us something about the black box."

These quotes highlight the key points and insights regarding the role of financial information in environmental regulation and the operations of the EPA.

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Here are some articles and resources that discuss the role of financial information in environmental regulation, the EPA's use of data, and the interactions between corporate reporting and environmental performance:

1. **EPA's Use of Corporate Data for Environmental Protection**: This article delves into how the EPA utilizes corporate disclosures and financial information to assess compliance and inform regulatory decisions. It provides insights into the significance of financial metrics in environmental regulatory processes.

2. **The Role of Financial Accountability in Environmental Regulation**: This resource examines the intersection of financial reporting and environmental compliance, focusing on how accounting information influences the decision-making of environmental regulators.

3. **Corporate Environmental Reporting and Financial Performance**: This study explores the relationship between corporate environmental activities and financial performance, highlighting the importance of transparent reporting for regulatory bodies like the EPA.

4. **Regulatory Impact of Environmental, Social, and Governance (ESG) Factors**: This article analyzes the growing trend of integrating ESG factors into corporate disclosures and regulatory frameworks, discussing how financial information is critical for environmental regulators.

5. **Improving Regulatory Efficiency Through Financial Reporting**: This research outlines how enhanced transparency in financial reports can aid environmental regulators in monitoring and enforcement, emphasizing the value of firm-level financial data.

6. **Decision-Making Processes of Environmental Regulators**: This paper provides a comprehensive overview of the decision-making mechanisms within environmental regulatory agencies, including how they source and utilize various types of information, including corporate financial reports.

7. **The Black Box of Environmental Regulation**: This article critiques the lack of transparency in environmental regulatory decision-making and suggests methodological improvements to better understand the inputs used by regulators, including financial data.

8. **Cost-Benefit Analysis in Environmental Rulemaking**: This analysis focuses on the role of financial information in the EPA’s cost-benefit assessments for new environmental regulations, illustrating how financial data informs regulatory processes.

9. **Best Practices in Environmental Disclosure**: This guide discusses the best practices for corporate environmental disclosure, including financial reporting, and its significance for regulators and stakeholders.

10. **Challenges in Environmental Regulation and Corporate Disclosure**: This article addresses the challenges faced by regulators in acquiring reliable information from corporate reports, underlining the need for effective communication between firms and regulatory agencies.

These resources can deepen your understanding of the relationship between corporate financial reporting and environmental regulation, particularly from the perspective of the EPA and similar regulatory bodies.

X-TIMESTAMP-MAP=LOCAL:00:00:00.000,MPEGTS:90000

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About how the EPAS

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and environment environmental regulator acquires

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and uses information from corporate financial reports.

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Let me give you a little bit more

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background information about this.

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As we know that environmental protection

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or environmental problem problems has become a major

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concern, a global concern for a lot

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of people in recent decades especially,

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and environmental problems, this concern is, attracts

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so much attention from the public, from regulators,

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from academics like me.

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Um, so as the main environmental regulator in the us,

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the EPA plays a central role in making those environmental

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decisions and in protecting, environment,

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the environment and human health.

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Uh, with the employee size of about 15,000 employees,

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the EPA in, spend spends billions of dollars,

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to enforce hundreds of cases to inspect thousands

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of facilities and issues, numerous policies and rules.

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So despite its central role in environmental regulation

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and protection, we don't really know much about

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how the EPA acquires

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and uses information, especially, you know,

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what inputs are used, in the decision making process.

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Because it's decision making process is pretty much like a

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black box to us, for example,

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apart from the traditional information

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or typical information about firms environmental performance

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and pollution, does the EPA also use any

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other types of information?

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If so, how does such information facilitates

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this decision making process?

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If you check the vast,

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vast literature on environmental protection

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or ESG in general, you will find that

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that's exactly why most of price studies,

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they focused on the consequences

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of environmental protection rather than the input side,

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used by the regulators in its decision making process.

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As an accountant, we just couldn't help asking how,

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whether and how firm level accounting information

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or financial information will play a role in this

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process before our paper.

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Who would imagine that accounting information

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or financial information would also matter

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to the environmental regulators?

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I think our paper takes a look into the input side

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of reg environmental regulation decisions

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rather than the output side.

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Um, and I, I think while it seems natural to assume that,

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non-financial information such as firm pollutions

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or violations, is the most relevant for the EPA,

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our paper reviews that financial information also matters

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to the environmental regulators.

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So in this sense, we consider environmental regulation.

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We should probably also consider these two types

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of information together, both non-financial information,

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like the facts about violations and pollution and non

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And financial information from firms

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corporate financial reports.

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Um, and I also think,

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although this is not not the main focus of our paper,

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I also think that our paper has implications

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for firm transparency.

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In general. I would imagine

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that more transparent financial reports

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could help the regulators acquire

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and use information from, firm corporate firms,

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corporate financial reports,

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and improve their regulatory efficiency in the sense.

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So as such, our paper may have implications

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for policy makers.

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Now that we understand, environmental regulators,

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they may actively seek information from corporate finance.

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Right. How fi corporate, corporate financial reports,

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how would different stakeholders react?

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That's probably a bigger question to address.

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Well, for environmental regulators, I think,

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it's pretty simple that, my,

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my belief is more information is better

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than less information.

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So for example, our, our evidence suggests

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that the EPA uses firm level financial information in the

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rulemaking process because they will need,

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financial information to conduct cost benefit analysis

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for propo significant proposed rules.

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So in this regard, more,

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county information could help the EPA make better rules, so,

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in, in the rule development process

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and make better rules.

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And for, other parties, for example,

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like the firms, right?

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It's almost, I believe it's almost like a constant cat rat

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and cat, cat and rat game.

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Um, knowing that their financial reports are inspected

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and used by environmental regulators.

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The firms may opportunistically seek, some opportunities

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to disclose or withhold certain material information.

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They may even manipulate some information in the financial

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reports to achieve some private goals

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for disclosure regulators

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and, accounting standard standards.

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For example, like, the SEC

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or fsb I-I-I-F-R-S,

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IBI believe that they may consider how to improve

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the transparency and timeliness of firm disclosure

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because this may potentially affect environmental regulators

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in their utilization of financial reports.

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And this will, this may ultimately impact the regulatory

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efficiency of different environmental regulators.

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As mentioned earlier, the regulators'

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decision making process is more like a black box,

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because it's difficult to observe

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what specific information it uses, right?

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For example, from what sources

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and when it acquires such information

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and why it acquires such information.

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So in this paper,

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we create a novel measure called EPA downloads by tracking

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its direct retrieval

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of corporate financial reports from the SSEC EDGAR system,

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which is the ultimate de depository for all,

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financial, corporate financial reports for,

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for public firms in the US specifically,

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we use the EPAs IP address to attract to, to,

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to identify those clicks made by EPA employees to

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request or download from specific SEC filings from

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the SCO egar system.

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This has several advantages, essentially allows us to,

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to measure or identify which firm's financial reports were

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downloaded by the EPA

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and what types of financial reports,

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how frequent are the downloads, when does the,

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when the downloads happen.

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Uh, so I think basically the intuition is the measure serves

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as a proxy for unobservable efforts of EPA employees

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to acquire and acquire

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and use firm level accounting information,

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from financial reports.

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Yes. So, by constructing, by constructing this,

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this measure, we already got some

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very interesting observations.

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We find that the EPA actively downloads thousands

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of financial reports every year,

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and most of the downloads are concentrated

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or, on high pollution industries,

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or they're targeted at high pollution firms.

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And there's a large variation in its information acquisition

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behavior across firms and over time.

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So in the main analysis, what we did was we tried

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to relate EPA downloads

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or EPAs acquisition of financial information

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to its regulatory activities.

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Uh, generally speaking, the EPA may use financial reports

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for three different purposes, enforcement compliance,

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monitoring, and rulemaking.

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So before running the large sample analysis,

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we actually have already found a lot of

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interesting anecdotal examples from the EPAs internal

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documents in line with our expectation.

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And then we also had long, long conversations with EP EPAs,

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officers to confirm these insights.

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Overall, our evidence indicates that the EPA actively seeks

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a, a fin financial report information mainly

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during the periods of, enforcement investigations

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and significant rule proposals,

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but less so during compliance monitoring process.

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Let me first give you a little bit, a,

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a brief idea about the timeline of EPA enforcement.

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Generally speaking,

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the enforcement process can be divided

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into four different stages.

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Uh, the first one is just violation discovery.

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That's not too hard. I mean, when,

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once the EPA observes some violations,

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you know, that's the stage.

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Then there's, case investigation,

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case resolution, and case review.

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Right? Case resolution is the stage

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where an EPA issues a final order,

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for this violation case.

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While case investigation is between the discovery, discovery

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and resolution case review is the, the subsequent part.

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So what we find here is, the EPA acquires

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and uses more financial reports during enforcement

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investigations, relative to other stages in the process.

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This suggests that the EPA may use more corporate financial

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reports to assist the resolution of enforcement cases,

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and we also find that the increase in EPA downloads

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during enforcement investigation is much greater for cases

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with financial assurance requirements

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as specified in different environmental laws,

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and also for cases

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with higher compliance costs and penalties.

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Well, this evidence actually implies

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that financial reports are probably more useful for,

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the EPA to evaluating the firm's compliance status

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with financial assurance requirements

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in different environmental laws.

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And also it might be useful

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for the EPA in determining firm's specific compliance

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costs and the penalties.

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I think these objectives should not

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be separately considered.

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Uh, for example, if financial reports could assist the EPA

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in developing better environmental rules,

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this will also help their monitoring

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and reinforcement process.

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If we just focus on enforcement alone, I think the,

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the regulators goal, I'm just guessing, is probably

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to make sure that the firm has enough financial resources

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to cover its, potential remediation costs,

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and to, the regulator may also want

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to use financial reports

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to assess what's the appropriate level for compliance costs

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and penalty assessments.

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So whether and how accounting informa,

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accounting information or financial reports in general can

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provide more accurate information

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for these decisions is a big question for us.

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Um, I, I, I think also for disclosure regulators and,

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and accounting standard setters, also, I think in our paper,

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in the latter part of our paper, we find that,

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the EPA focuses on some specific accounting ratios,

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because the, the, the regulatory rules

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or laws require them to do so.

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So whether or not we should pay more attention

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to these specific accounting ratios

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or whether these are the best ratios

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for their specific purposes is debatable for us.

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I think taken together our evidence

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or our paper speaks to the following aspects

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of environmental regulation.

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First of all, we review our paper reviews,

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what particular regulatory act activities

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are most relevant for the utilization of financial reports,

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for example, enforcement monitoring and,

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And, com and the rulemaking

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and our paper reviews, the timing of the regulators,

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utilization of accounts, such accounting information,

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and the extent to which the regulator will focus on a

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particular type of accounting information.

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Um, and also, our paper speaks to

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what specific accounting metrics might be interested

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or might be interesting for, for the EPA or the regulator,

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and whether their acquisition of such information is driven

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by their demand for such information.

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So,

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I think given escalating global concerns about environmental

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protection, understanding the role of accounting information

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or financial information in regulators decision making

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process is very important for us

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because it tells us something about the black box, right?

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What, what inputs are used in the black box so that,

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it'll be important for any future improvements in the

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environmental regulatory oversight

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or decision making process.

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I hope our study

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represents a first attempt under at understanding this

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bigger picture question.

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Of course. Uh, we, what we find is interesting.

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I think we combine both financial

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and the non-financial information side of the story,

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which tells us we cannot, these two types

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of information are not independent.

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We should consider them together perhaps.

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So in terms of future research, I think we could

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probably continue to explore

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what specific information in financial reports

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are most interesting to, or most relevant for the regulator.

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And, how do,

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how does the regulator extract valuable insights

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from such information?

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Another area I think that might, might be promising

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or interesting is, how firm disclosures in general

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can help the EPA achieve its regulatory goals with

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probably higher efficiency.

EPA's Information Acquisition in Environmental Regulation

00:00:00 - About how the EPAS and environment environmental regulator acquires and uses information from corporate financial reports. Let me give you a little bit more background information about this. As we know that environmental protection or environmental problem problems has become a major concern, a global concern for a lot of people in recent decades especially, and environmental problems, this concern is, attracts so much attention from the public, from regulators, from academics like me.

00:00:35 - the EPA plays a central role in making those environmental decisions and in protecting, environment, the environment and human health. with the employee size of about 15,000 employees, the EPA in, spend spends billions of dollars, to enforce hundreds of cases to inspect thousands of facilities and issues, numerous policies and rules.

00:01:09 - and protection, we don't really know much about how the EPA acquires and uses information, especially, you know, what inputs are used, in the decision making process. Because it's decision making process is pretty much like a black box to us, for example, apart from the traditional information or typical information about firms environmental performance and pollution, does the EPA also use any other types of information?

Exploring Inputs in Environmental Regulation Decision-Making

00:01:38 - this decision making process? If you check the vast, vast literature on environmental protection or ESG in general, you will find that that's exactly why most of price studies, they focused on the consequences of environmental protection rather than the input side, used by the regulators in its decision making process. As an accountant, we just couldn't help asking how, whether and how firm level accounting information

00:02:09 - process before our paper. Who would imagine that accounting information or financial information would also matter to the environmental regulators? I think our paper takes a look into the input side of reg environmental regulation decisions rather than the output side. and I, I think while it seems natural to assume that, non-financial information such as firm pollutions or violations, is the most relevant for the EPA,

00:02:42 - to the environmental regulators. So in this sense, we consider environmental regulation. We should probably also consider these two types of information together, both non-financial information, like the facts about violations and pollution and non And financial information from firms corporate financial reports. and I also think, although this is not not the main focus of our paper,

Enhancing Regulatory Efficiency through Financial Transparency

00:03:11 - for firm transparency. In general. I would imagine that more transparent financial reports could help the regulators acquire and use information from, firm corporate firms, corporate financial reports, and improve their regulatory efficiency in the sense. So as such, our paper may have implications for policy makers. Now that we understand, environmental regulators, they may actively seek information from corporate finance.

00:03:43 - how would different stakeholders react? That's probably a bigger question to address. Well, for environmental regulators, I think, it's pretty simple that, my, my belief is more information is better than less information. So for example, our, our evidence suggests that the EPA uses firm level financial information in the rulemaking process because they will need, financial information to conduct cost benefit analysis

00:04:15 - So in this regard, more, county information could help the EPA make better rules, so, in, in the rule development process and make better rules. And for, other parties, for example, like the firms, right? It's almost, I believe it's almost like a constant cat rat and cat, cat and rat game. knowing that their financial reports are inspected and used by environmental regulators.

Transparency and Manipulation in Financial Reporting: Implications for Regulatory Efficiency

00:04:48 - to disclose or withhold certain material information. They may even manipulate some information in the financial reports to achieve some private goals for disclosure regulators and, accounting standard standards. For example, like, the SEC or fsb I-I-I-F-R-S, IBI believe that they may consider how to improve the transparency and timeliness of firm disclosure

00:05:20 - in their utilization of financial reports. And this will, this may ultimately impact the regulatory efficiency of different environmental regulators. As mentioned earlier, the regulators' decision making process is more like a black box, because it's difficult to observe what specific information it uses, right? For example, from what sources and when it acquires such information and why it acquires such information.

00:05:49 - we create a novel measure called EPA downloads by tracking its direct retrieval of corporate financial reports from the SSEC EDGAR system, which is the ultimate de depository for all, financial, corporate financial reports for, for public firms in the US specifically, we use the EPAs IP address to attract to, to, to identify those clicks made by EPA employees to request or download from specific SEC filings from

Tracking EPA's Financial Report Downloads: Insights and Implications

00:06:20 - This has several advantages, essentially allows us to, to measure or identify which firm's financial reports were downloaded by the EPA and what types of financial reports, how frequent are the downloads, when does the, when the downloads happen. so I think basically the intuition is the measure serves as a proxy for unobservable efforts of EPA employees to acquire and acquire

00:06:54 - from financial reports. Yes. So, by constructing, by constructing this, this measure, we already got some very interesting observations. We find that the EPA actively downloads thousands of financial reports every year, and most of the downloads are concentrated or, on high pollution industries, or they're targeted at high pollution firms. And there's a large variation in its information acquisition

00:07:25 - So in the main analysis, what we did was we tried to relate EPA downloads or EPAs acquisition of financial information to its regulatory activities. generally speaking, the EPA may use financial reports for three different purposes, enforcement compliance, monitoring, and rulemaking. So before running the large sample analysis, we actually have already found a lot of interesting anecdotal examples from the EPAs internal

EPA Information Acquisition in Enforcement Investigations

00:07:57 - And then we also had long, long conversations with EP EPAs, officers to confirm these insights. Overall, our evidence indicates that the EPA actively seeks a, a fin financial report information mainly during the periods of, enforcement investigations and significant rule proposals, but less so during compliance monitoring process. Let me first give you a little bit, a,

00:08:28 - Generally speaking, the enforcement process can be divided into four different stages. the first one is just violation discovery. That's not too hard. I mean, when, once the EPA observes some violations, you know, that's the stage. Then there's, case investigation, case resolution, and case review. Right? Case resolution is the stage where an EPA issues a final order, for this violation case.

00:09:01 - and resolution case review is the, the subsequent part. So what we find here is, the EPA acquires and uses more financial reports during enforcement investigations, relative to other stages in the process. This suggests that the EPA may use more corporate financial reports to assist the resolution of enforcement cases, and we also find that the increase in EPA downloads

Role of Financial Reports in EPA Compliance Assessment

00:09:32 - with financial assurance requirements as specified in different environmental laws, and also for cases with higher compliance costs and penalties. Well, this evidence actually implies that financial reports are probably more useful for, the EPA to evaluating the firm's compliance status with financial assurance requirements in different environmental laws.

00:10:01 - for the EPA in determining firm's specific compliance costs and the penalties. I think these objectives should not be separately considered. for example, if financial reports could assist the EPA in developing better environmental rules, this will also help their monitoring and reinforcement process. If we just focus on enforcement alone, I think the, the regulators goal, I'm just guessing, is probably to make sure that the firm has enough financial resources

00:10:35 - and to, the regulator may also want to use financial reports to assess what's the appropriate level for compliance costs and penalty assessments. So whether and how accounting informa, accounting information or financial reports in general can provide more accurate information for these decisions is a big question for us. I, I, I think also for disclosure regulators and,

Evaluating EPA's Use of Accounting Ratios in Environmental Regulation

00:11:07 - in the latter part of our paper, we find that, the EPA focuses on some specific accounting ratios, because the, the, the regulatory rules or laws require them to do so. So whether or not we should pay more attention to these specific accounting ratios or whether these are the best ratios for their specific purposes is debatable for us.

00:11:34 - or our paper speaks to the following aspects of environmental regulation. First of all, we review our paper reviews, what particular regulatory act activities are most relevant for the utilization of financial reports, for example, enforcement monitoring and, And, com and the rulemaking and our paper reviews, the timing of the regulators, utilization of accounts, such accounting information, and the extent to which the regulator will focus on a

00:12:07 - and also, our paper speaks to what specific accounting metrics might be interested or might be interesting for, for the EPA or the regulator, and whether their acquisition of such information is driven by their demand for such information. So, I think given escalating global concerns about environmental protection, understanding the role of accounting information

Understanding Inputs in Environmental Regulatory Decision-Making

00:12:40 - process is very important for us because it tells us something about the black box, right? What, what inputs are used in the black box so that, it'll be important for any future improvements in the environmental regulatory oversight or decision making process. I hope our study represents a first attempt under at understanding this bigger picture question. Of course. we, what we find is interesting.

00:13:10 - and the non-financial information side of the story, which tells us we cannot, these two types of information are not independent. We should consider them together perhaps. So in terms of future research, I think we could probably continue to explore what specific information in financial reports are most interesting to, or most relevant for the regulator. And, how do, how does the regulator extract valuable insights

00:13:53 - Another area I think that might, might be promising or interesting is, how firm disclosures in general can help the EPA achieve its regulatory goals with probably higher efficiency.

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