Do clients’ environmental risks affect audit pricing? Evidence from environmental violations in China
ISSN: 0268-6902
Article publication date: 14 February 2023
Issue publication date: 22 May 2023
Abstract
Purpose
Existing studies have shown that all kinds of audit risks greatly affect audit pricing for accounting firms. However, it is still unclear whether environmental risks caused by environmental violations lead to a high audit fee. This study aims to investigate whether accounting firms raise audit fees after client firms have violated environmental regulations or have been punished for such violations.
Design/methodology/approach
This study selects listed firms with environmental violations between 1994 and 2018 as the treatment sample and match the treatment group with a control group of firms from the same industry, of similar asset size and with no environmental violations for the same time period. Then, this study constructs a difference-in-difference (DID) model to explore the impact of firm environmental violations (or punishment for environmental violations) on the audit pricing.
Findings
This study finds that accounting firms tend to raise audit fees after client firms have violated environmental regulations or have been punished for such violations, and this increasing effect is different due to environmental regulation intensity, regional span and internal control defects. Further evidences show that environmental violations influence audit fees through financial restatement, whereas environmental punishments impact audit fees through earnings management and risk-taking.
Originality/value
This study enriches the literature on determining factors of audit fees and economic consequences of environmental violations and provides empirical supports to understand the pricing behavior of accounting firms.
Keywords
Acknowledgements
Funding: This work was supported by National Natural Science Foundation of China under Grant 71572189 and 71102163, and Shanghai philosophy and social science project grant 2022BGL009.
Citation
Yao, S., Wei, S. and Chen, L. (2023), "Do clients’ environmental risks affect audit pricing? Evidence from environmental violations in China", Managerial Auditing Journal, Vol. 38 No. 5, pp. 634-658. https://doi.org/10.1108/MAJ-08-2021-3282
Publisher
:Emerald Publishing Limited
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