TY - JOUR
T1 - Do auditors respond to stringent environmental regulation? Evidence from China's new environmental protection law
AU - Liu, Xinghe
AU - Xu, Huifeng
AU - Lu, Meiting
PY - 2021/3/1
Y1 - 2021/3/1
N2 - 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.
AB - 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.
KW - Audit fees
KW - Environmental regulation
KW - Environmental risks
UR - http://www.scopus.com/inward/record.url?scp=85098958066&partnerID=8YFLogxK
U2 - 10.1016/j.econmod.2020.12.029
DO - 10.1016/j.econmod.2020.12.029
M3 - Article
AN - SCOPUS:85098958066
SN - 0264-9993
VL - 96
SP - 54
EP - 67
JO - Economic Modelling
JF - Economic Modelling
ER -