Do Auditors Consider Clients’ Compliance with Environmental Regulations?

Posted: 3 May 2017 Last revised: 18 Apr 2018

See all articles by Yue Li

Yue Li

University of Toronto - Joseph Rotman School of Management

Dan A. Simunic

University of British Columbia (UBC) - Sauder School of Business

Minlei Ye

University of Toronto - Rotman School of Management; University of Toronto at Mississauga - Department of Management

Date Written: April 6, 2018

Abstract

We examine whether auditors are sensitive to their clients’ compliance with environmental regulations. Under current auditing standards, auditors’ responsibilities with respect to the detection and reporting of violations of environmental regulations by their clients are limited and quite vague. However, a client’s non-compliance with environmental regulations potentially increases audit risk and audit task complexity. Thus, it is ex ante unclear whether auditors care about clients’ compliance with environmental regulations. Using a longitudinal sample from 2000 to 2012, we find that audit fees are higher for clients with environmental compliance risk. Further analysis indicates that the complexity in corporate environmental regulations has a more direct impact on audit fees than the magnitude of individual environmental risk factors. Our findings is consistent with auditors charging higher fees when auditing clients with environmental compliance issues. However, we do not find evidence that the magnitude of corporate environmental liability affects audit fees directly. This study contributes to both environmental accounting research and the auditing literature concerning the impact of environmental compliance risk on audit task complexity.

Keywords: environmental regulation; compliance; complexity; audit fees

JEL Classification: M42; M48

Suggested Citation

Li, Yue and Simunic, Dan A. and Ye, Minlei, Do Auditors Consider Clients’ Compliance with Environmental Regulations? (April 6, 2018). Available at SSRN: https://ssrn.com/abstract=2961998

Yue Li

University of Toronto - Joseph Rotman School of Management ( email )

Joseph Rotman School of Management
105 St. George Street
Toronto, Ontario M5S 3E6
Canada
416-978-0857 (Phone)
416-971-3048 (Fax)

Dan A. Simunic

University of British Columbia (UBC) - Sauder School of Business ( email )

2053 Main Mall
Vancouver, BC V6T 1Z2
Canada
416-486-5361 (Phone)
416-486-6158 (Fax)

Minlei Ye (Contact Author)

University of Toronto - Rotman School of Management ( email )

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

University of Toronto at Mississauga - Department of Management ( email )

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