Economics at your fingertips  

Do auditors respond to stringent environmental regulation? Evidence from China’s new environmental protection law

Xinghe Liu, Huifeng Xu and Meiting Lu

Economic Modelling, 2021, vol. 96, issue C, 54-67

Abstract: 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.

Keywords: Environmental regulation; Audit fees; Environmental risks (search for similar items in EconPapers)
Date: 2021
References: View references in EconPapers View complete reference list from CitEc
Citations: Track citations by RSS feed

Downloads: (external link)
Full text for ScienceDirect subscribers only

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link:

DOI: 10.1016/j.econmod.2020.12.029

Access Statistics for this article

Economic Modelling is currently edited by S. Hall and P. Pauly

More articles in Economic Modelling from Elsevier
Bibliographic data for series maintained by Catherine Liu ().

Page updated 2021-06-30
Handle: RePEc:eee:ecmode:v:96:y:2021:i:c:p:54-67