Does environmental judicial reform influence audit fees? Evidence from China's environmental public interest litigation
Simiao Song, Guanghui CuiPurpose
A careful study of the impact of the environmental public interest litigation (EPIL) pilot policy on audit fees would not only make the economic costs of judicial innovation in environmental governance but also the study would make a strong empirical statement about improving the environmental practices of the business community and audit policies.
Design/methodology/approach
We are working with a quasi-natural experiment in China based on its EPIL pilot program and we apply a difference-in-differences framework.
Findings
We find that firms in pilot regions pay 4.7% higher audit fees than non-pilot peers, a result robust to parallel-trend checks, placebo tests, propensity score matching and controls for concurrent policies. Mechanism evidence indicates that the EPIL pilot policy elevates auditors' perceived litigation and regulatory risk, leading to higher risk premia in pricing without commensurate increases in engagement hours. Effects are stronger for firms with weaker ESG, greater information asymmetry, higher auditor specialization, lower auditor workload pressure, or strong regional environmental policy enforcement. Further analysis shows that the increase in audit fees associated with the EPIL pilot policy does not lead to an improvement in audit quality.
Originality/value
(1) Incorporating bottom-up judicial environmental regulation (EPIL) into audit pricing frameworks, filling a research gap, (2) developing a unified auditor-auditee strategic interaction framework that reveals how external policies affect audit fee equilibrium through risk-sharing and resource allocation and (3) systematically explicating the transmission mechanism from environmental legal risks to audit risk premiums, enriching audit pricing theory.