Do auditors respond to stringent environmental regulation? Evidence from China's new environmental protection law

Xinghe Liu, Huifeng Xu*, Meiting Lu

*Corresponding author for this work

Research output: Contribution to journalArticlepeer-review

1 Citation (Scopus)

Abstract

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.

Original languageEnglish
Pages (from-to)54-67
Number of pages14
JournalEconomic Modelling
Volume96
DOIs
Publication statusPublished - 1 Mar 2021

Keywords

  • Audit fees
  • Environmental regulation
  • Environmental risks

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