Regulation by Third-Party Verification

Abstract

This Article proposes greater governmental reliance on private auditors to enhance the achievement of regulatory objectives. Regulatory failure is a growing problem as governmental agencies lack resources to adequately monitor and detect noncompliance. Third-party verification partially privatizes the regulatory function by requiring regulated entities to hire independent third parties to verify compliance data and make compliance determinations. As a type of privatization, third-party verification presents both opportunities and potential problems. The key issue, as in other forms of public-private governance, is ensuring that accountability and other public values are protected when private actors perform functions that are fundamentally public. This Article argues that, as third-party verification is incorporated into regulatory frameworks, it must be carefully regulated itself. Regulatory agencies must assume the role of “auditing the auditors” through making and enforcing rules that govern who can serve as a verifier, how regulated entities select verifiers, and how verifications are performed. With well-designed rules and strong governmental oversight, third-party verification has the potential to cost-effectively improve the implementation of social regulation.

Keywords: regulatory governance, private-public partnership, social regulation, environment, food safety, certification

JEL Classification: K23, K32