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Do auditors understand the implications of ESG issues for their audits? Evidence from financially material negative ESG incidents

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  • Aobdia, Daniel
  • Yoon, Aaron

Abstract

We exploit a unique dataset to examine how auditors integrate financially material environmental, social, and governance (ESG) issues into their audits, particularly following the introduction of the Sustainability Accounting Standards Board (SASB) and the 2013 Committee of Sponsoring Organizations (COSO) frameworks, which highlighted the link between ESG and clients’ internal control over financial reporting (ICFR). We find that auditors exhibit excessive optimism when evaluating ICFR effectiveness in the presence of material ESG incidents. Auditors often fail to detect material weaknesses in ICFR when clients experience negative ESG incidents, which leads clients to restate their financial statements. These results are driven by the post-SASB and the 2013 COSO period and are the strongest when ESG incidents are illegal and occur well before the fiscal year-end. Overall, audit firms do not seem to fully understand the implications of material ESG issues from an ICFR standpoint and make assessments that are incorrect.

Suggested Citation

  • Aobdia, Daniel & Yoon, Aaron, 2026. "Do auditors understand the implications of ESG issues for their audits? Evidence from financially material negative ESG incidents," Journal of Accounting and Economics, Elsevier, vol. 81(2).
    • Handle: RePEc:eee:jaecon:v:81:y:2026:i:2:s0165410125000679
    DOI: 10.1016/j.jacceco.2025.101831
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