Accounting for Emissions: Evidence from Auditor Pricing of Climate Change Risk

Abstract

We investigate whether, and how, auditors price risks related to greenhouse gas emissions (GHG) for a sample of firms traded in the US that disclose their CO2 emissions data. Specifically, we assess whether auditors price CO2 physical and transition risks among multiple categories of emission measures as auditor business risks. After controlling for audit fee determinants, we find that auditors assign a fee premium in the presence of greater total and direct emissions measures, signifying auditor perception of greater risk arising from higher emitting clients. Our findings are robust to alternate specifications (endogeneity, headquarter state membership in a cap and trade agreement, the Paris climate change agreement). Our paper contributes to the literature by shedding light on whether and how auditors respond to emissions information through their pricing decision.