Do Environmental Administrative Penalties Affect Audit Fees? Results from Multiple Econometric Models

Abstract

The construction of ecological civilization is an important requirement to realize high-quality development of the economy. Over recent decades, natural disasters, global warming, and other ecological problems have occurred frequently, and countries around the world are facing severe environmental challenges. Sustainable development is an effective way to solve these environmental threats, and environmental administrative penalties play a fundamental role in sustainable growth. So, we explore the response of external stakeholders to environmental administrative penalties from the perspective of auditors. The study examines whether environmental administrative penalties affect audit fees, the heterogeneity effects and the mechanisms. The research uses data of heavily polluting listed firms in China that have been revealed by the Institute of Public and Environmental Affairs (IPE). The findings show the following: (1) environmental administrative penalties can increase audit fees; (2) the effective internal control environment can weaken the positive relationship between firms’ environmental administrative penalties and audit fees, and the stronger regional environmental regulation can enhance the positive impact of firms’ environmental administrative penalties on audit fees; (3) further analysis shows that the impact of environmental administrative penalties on audit fees mainly comes from the “risk premium mechanism” rather than the “cost compensation mechanism”, and the response from audit fees can encourage firms to engage in green innovation activities. The above research conclusions provide a certain reference for auditors’ pricing decisions.