Environment, Social and Governance Risks and Audit Quality

• In Event: History and Regulations

Abstract

This study examines the association between a firm’s environment, social and governance (ESG) risks and audit quality. We measure audit quality using two proxies: discretionary accruals and fees. ESG risks are measured by Representative Risk Index from the RepRisk AG database. Using a sample of public U.S. firms from the period between 2007 and 2016, we find that there is a negative relationship between ESG risk measures and discretionary accruals suggesting firms assessed as have high ESG risks do not manage their earnings as much. The results also show that firms have ESG risks pay high audit fees. Overall, our results suggest that auditors take ESG risks of a firm into account when performing financial statement audit.

Authors

• Meiying Hua, Kent State University

• Pervaiz Alam, Kent State University