Air Pollution and Audit Quality within the United States

• In Event: Audit Quality

Abstract

We examine whether PM2.5 air pollution impacts audit quality within the United States. We find a positive association between air pollution at an audit client’s location (measured during the yearend audit window when auditors are likely to travel to their client’s headquarters) and the likelihood of a non-reliance restatement. Further, we examine a sub-sample where auditors travel more than 100 miles to their audit client’s location and, therefore, are more likely to be exposed to a difference in pollution levels relative to their auditor’s home office. Using this sub-sample, we find restatement likelihood is increasing in this difference in pollution at the audit client’s site, which is incremental to any pollution effect attributable to the auditor’s home office. Moreover, we find this negative air pollution effect manifests even in states with air pollution levels traditionally thought of as being ‘little to no risk’ per the EPA. Finally, the pollution effect on audit quality is greater for a subset of firms we measure as being more challenging or difficult to audit.

Authors

• Jade Huayu Chen, University of Arizona

• Paul N Michas, University of Arizona-Tucson

• Daniel Russomanno, University of Arizona-Tucson

• Wenzi Zhuang, Sun Yat-sen University