Abstract
Previous studies have found many factors that affect audit fees, such as company size, business complexity, internal control quality, firm characteristics and so on. Under the background of increasingly severe environmental problems, environmental risks will inevitably affect the business conditions of the company and thus affect the auditor’s judgment of risks. However, we know little about whether and how environmental risks affect audit fees. In this paper, we use the monitoring after the PM2.5 explosion as an exogenous event, and the propensity matching score method and the difference-in-difference model are used to study the relationship between environmental risk and audit fees. The empirical results show that, first, after the monitoring of PM2.5 began in 2012, those listed companies located in cities that take the lead in monitoring PM2.5 would be charged higher audit fees. Second, this relationship exists only in heavily polluting enterprises with low internal control quality.
Highlights
In 2006, China issued a series of auditing standards, of which No 1631 proposed that auditors should pay attention to environmental issues in relevant industries during the audit process
We use the monitoring after the PM2.5 explosion as an exogenous event, and the propensity matching score method and the difference-in-difference model are used to study the relationship between environmental risk and audit fees
The environmental issues mentioned in the standard include four categories: mandatory or voluntary environmental protection measures; consequences that may result from violating environmental laws and regulations; consequences of environmental damage on others or natural resources; and liabilities caused by environmental damage
Summary
In 2006, China issued a series of auditing standards, of which No 1631 proposed that auditors should pay attention to environmental issues in relevant industries during the audit process. It can be foreseen that after this, the business risk of heavy polluting enterprises located in the monitored city will greatly increase This article takes this opportunity to study the impact of environmental risks on audit costs, and consider the role of internal control in its regulation. From the perspective of environmental risks, this paper uses the exogenous events to construct the DID model and believes that auditors will consider environmental risks when deciding audit fees. It will help deepen people’s understanding of the PM2.5 event in 2011. The following structure of the paper is arranged as follows: The second part is the literature review, which summarizes the existing studies; the third part introduces the institutional background and puts forward the research hypothesis; the fourth part introduces the sample, variables, model and empirical results; summarize the full text
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