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Do auditors respond to stringent environmental regulation? Evidence from China’s new environmental protection law
Ist Teil von
Economic modelling, 2021-03, Vol.96, p.54-67
Ort / Verlag
Elsevier B.V
Erscheinungsjahr
2021
Link zum Volltext
Quelle
Alma/SFX Local Collection
Beschreibungen/Notizen
Stringent environmental regulation can impact corporations in both positive and negative ways. However, how external auditors respond to the changes in environmental regulation, and alter their assessment of the audit and client environmental risk accordingly, remains underexplored. This study exploits the promulgation of China’s new Environmental Protection Law (EPL) as an exogenous shock, and adopts a difference-in-differences approach to examine the effect of environmental regulation on audit fees. We find that the new EPL increases environmental and audit risk for heavy-polluting firms, to which auditors charge higher audit fees for compensation. The impact of environmental regulation on audit fees is stronger for firms with low-quality environmental disclosure, those in regions with strong regulation and legal enforcement, and those without political connections. Overall, our findings indicate that stringent environmental regulation can generate extra costs and risks for firms and their external auditors.
•Stringent environmental regulation impacts firms positively and negatively.•How auditors respond to changes in environmental regulation is underexplored.•China’s new EPL increases environmental and audit risks for heavy-polluting firms.•After EPL, auditors charge higher audit fees for higher environmental risk firms.•There is a stronger effect for poor disclosure and strong legal enforcement firms.