Does Severe Air Pollution Affect Audit Judgment?: Evidence From China

44 Pages Posted: 18 Aug 2018

See all articles by Feng Chen

Feng Chen

University of Toronto - Rotman School of Management

Xiaofeng Peng

University of Toledo - College of Business and Innovation

Jianguang Zeng

Chongqing University

Date Written: August 15, 2017

Abstract

This study examines whether and how air pollution affects auditors’ proclivity for modified audit opinion issuance. We argue that air pollution affects auditors’ audit judgment through two separate channels, i.e., the productivity reduction channel and the cognitive bias channel. Our empirical tests confirm that high levels of air pollution make auditors less likely to issue modified audit opinions. Consistent with the adverse effect on audit quality, we further show that air pollution is positively associated with client companies’ discretionary accruals and subsequent restatements. Applying a discontinuity design that focuses on observations with air quality index falling in the narrow range around 100, we again confirm that local air pollution leads to lower audit quality.

Keywords: Air Pollution, Modified Audit Opinions, Audit Fees, China

JEL Classification: M42, Q53, D91

Suggested Citation

Chen, Feng and Peng, Xiaofeng and Zeng, Jianguang, Does Severe Air Pollution Affect Audit Judgment?: Evidence From China (August 15, 2017). Available at SSRN: https://ssrn.com/abstract=1538658 or http://dx.doi.org/10.2139/ssrn.1538658

Feng Chen (Contact Author)

University of Toronto - Rotman School of Management ( email )

105 St. George Street
Toronto, Ontario M5S 3E6 M5S1S4
Canada

Xiaofeng Peng

University of Toledo - College of Business and Innovation ( email )

United States

Jianguang Zeng

Chongqing University ( email )

School of Economics and Business Administration
Chongqing University
Chongqing, Chongqing 400044
China

HOME PAGE: http://ceba.cqu.edu.cn/nry.jsp?urltype=news.NewsContentUrl&wbtreeid=2608&wbnewsid=2135

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
258
Abstract Views
1,773
Rank
244,463
PlumX Metrics