This study examines whether prior environmental performance of a firm, temporal orientation of a society and stakeholder-oriented corporate governance influence the relationship between corporate environmental controversies and audit pricing.
We analyze 16,787 firm-year observations drawn from companies in 30 countries, for the period from 2005 to 2020, using a battery of econometric procedures.
We find robust evidence that audit fees increase with a client-firm's involvement in controversial environmental activities. More importantly, we find that the association is weaker (or even muted) for client-firms with stronger prior year environmental performance and is more pronounced for client-firms embedded in societies with stronger future orientation and in countries with stakeholder-oriented corporate governance system.
This study is the first to offer insights into how and whether auditors would incorporate a client-firm's environmental track record, and the temporal and corporate governance orientation of the society within which it operates in pricing the client-firm's involvement in environmental controversies. Understanding how these factors influence audit pricing enables stakeholders to better anticipate audit cost implications of environmental controversies, informs regulators and standard-setters seeking to enhance ESG-related assurance practices, and provides auditors with a broader framework for risk assessment in diverse institutional contexts.
