IDEAS home Printed from https://ideas.repec.org/a/eee/jaecon/v81y2026i2s0165410125000679.html

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

Author

Listed:
  • 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
    as

    Download full text from publisher

    File URL: http://www.sciencedirect.com/science/article/pii/S0165410125000679
    Download Restriction: Full text for ScienceDirect subscribers only
    File URL: https://libkey.io/10.1016/j.jacceco.2025.101831?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to

    for a different version of it.

    References listed on IDEAS

    as
    1. Florens Focke & Stefan Ruenzi & Michael Ungeheuer, 2020. "Advertising, Attention, and Financial Markets," The Review of Financial Studies, Society for Financial Studies, vol. 33(10), pages 4676-4720.
    2. Park, Min & Yoon, Aaron & Zach, Tzachi, 2025. "Sell-side analysts’ assessment of ESG risk," Journal of Accounting and Economics, Elsevier, vol. 79(2).
    3. George Serafeim & Aaron Yoon, 2022. "Which Corporate ESG News Does the Market React To?," Financial Analysts Journal, Taylor & Francis Journals, vol. 78(1), pages 59-78, January.
    4. George Serafeim & Aaron Yoon, 2023. "Stock price reactions to ESG news: the role of ESG ratings and disagreement," Review of Accounting Studies, Springer, vol. 28(3), pages 1500-1530, September.
    5. Hollis Ashbaugh‐Skaife & Daniel W. Collins & William R. Kinney Jr & Ryan Lafond, 2009. "The Effect of SOX Internal Control Deficiencies on Firm Risk and Cost of Equity," Journal of Accounting Research, John Wiley & Sons, Ltd., vol. 47(1), pages 1-43, March.
    6. Beng Wee Goh, 2009. "Audit Committees, Boards of Directors, and Remediation of Material Weaknesses in Internal Control," Contemporary Accounting Research, John Wiley & Sons, vol. 26(2), pages 549-579, June.
    7. William R. Kinney, Jr. & Marcy L. Shepardson, 2011. "Do Control Effectiveness Disclosures Require SOX 404(b) Internal Control Audits? A Natural Experiment with Small U.S. Public Companies," Journal of Accounting Research, John Wiley & Sons, Ltd., vol. 49(2), pages 413-448, May.
    8. Sarah C. Rice & David P. Weber, 2012. "How Effective Is Internal Control Reporting under SOX 404? Determinants of the (Non‐)Disclosure of Existing Material Weaknesses," Journal of Accounting Research, John Wiley & Sons, Ltd., vol. 50(3), pages 811-843, June.
    9. Brant E. Christensen & Stevanie S. Neuman & Sarah C. Rice, 2019. "The Loss of Information Associated with Binary Audit Reports: Evidence from Auditors' Internal Control and Going Concern Opinions," Contemporary Accounting Research, John Wiley & Sons, vol. 36(3), pages 1461-1500, September.
    10. Florian Berg & Julian F Kölbel & Roberto Rigobon, 2022. "Aggregate Confusion: The Divergence of ESG Ratings [Corporate social responsibility and firm risk: theory and empirical evidence]," Review of Finance, European Finance Association, vol. 26(6), pages 1315-1344.
    11. Datar, Srikant M. & Feltham, Gerald A. & Hughes, John S., 1991. "The role of audits and audit quality in valuing new issues," Journal of Accounting and Economics, Elsevier, vol. 14(1), pages 3-49, March.
    12. Joyce, Ej & Biddle, Gc, 1981. "Anchoring And Adjustment In Probabilistic Inference In Auditing," Journal of Accounting Research, John Wiley & Sons, Ltd., vol. 19(1), pages 120-145.
    13. Lawson, Bradley P. & Muriel, Leah & Sanders, Paula R., 2017. "A survey on firms' implementation of COSO's 2013 Internal Control–Integrated Framework," Research in Accounting Regulation, Elsevier, vol. 29(1), pages 30-43.
    14. Alexander Dyck & Natalya Volchkova & Luigi Zingales, 2008. "The Corporate Governance Role of the Media: Evidence from Russia," Journal of Finance, American Finance Association, vol. 63(3), pages 1093-1135, June.
    15. Zingales, Luigi & Dyck, Alexander, 2002. "The Corporate Governance Role of the Media," CEPR Discussion Papers 3630, Centre for Economic Policy Research.
    16. Ege, Matthew S. & Stuber, Sarah B., 2022. "Are auditors rewarded for low audit quality? The case of auditor lenience in the insurance industry," Journal of Accounting and Economics, Elsevier, vol. 73(1).
    17. Craig Emby & David Finley, 1997. "Debiasing Framing Effects in Auditors' Internal Control Judgments and Testing Decisions," Contemporary Accounting Research, John Wiley & Sons, vol. 14(2), pages 55-77, June.
    18. Zingales, Luigi & Dyck, Alexander, 2002. "The Corporate Governance Role of the Media," Working Papers 184, The University of Chicago Booth School of Business, George J. Stigler Center for the Study of the Economy and the State.
    19. Titman, Sheridan & Trueman, Brett, 1986. "Information quality and the valuation of new issues," Journal of Accounting and Economics, Elsevier, vol. 8(2), pages 159-172, June.
    20. Doyle, Jeffrey & Ge, Weili & McVay, Sarah, 2007. "Determinants of weaknesses in internal control over financial reporting," Journal of Accounting and Economics, Elsevier, vol. 44(1-2), pages 193-223, September.
    21. Mark L. Defond & Clive S. Lennox, 2017. "Do PCAOB Inspections Improve the Quality of Internal Control Audits?," Journal of Accounting Research, John Wiley & Sons, Ltd., vol. 55(3), pages 591-627, June.
    22. Kenneth L. Bills & Quinn T. Swanquist & Robert L. Whited, 2016. "Growing Pains: Audit Quality and Office Growth," Contemporary Accounting Research, John Wiley & Sons, vol. 33(1), pages 288-313, March.
    23. Daniel Aobdia, 2020. "The Economic Consequences of Audit Firms’ Quality Control System Deficiencies," Management Science, INFORMS, vol. 66(7), pages 2883-2905, July.
    24. Claus Strue Frederiksen & Morten Ebbe Juul Nielsen, 2013. "The Ethical Foundations for CSR," CSR, Sustainability, Ethics & Governance, in: John O. Okpara & Samuel O. Idowu (ed.), Corporate Social Responsibility, edition 127, chapter 0, pages 17-33, Springer.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Ge, Weili & Koester, Allison & McVay, Sarah, 2017. "Benefits and costs of Sarbanes-Oxley Section 404(b) exemption: Evidence from small firms’ internal control disclosures," Journal of Accounting and Economics, Elsevier, vol. 63(2), pages 358-384.
    2. DeFond, Mark & Zhang, Jieying, 2014. "A review of archival auditing research," Journal of Accounting and Economics, Elsevier, vol. 58(2), pages 275-326.
    3. Navarro, Patricia & Robb, Sean W.G. & Sutton, Steve G. & Weisner, Martin M., 2020. "The cost stickiness of information technology material weaknesses: An intertemporal comparison between it-related and other material weaknesses," International Journal of Accounting Information Systems, Elsevier, vol. 37(C).
    4. Colak, Gonul & Korkeamäki, Timo P. & Meyer, Niclas Oskar, 2024. "ESG and CEO turnover around the world," Journal of Corporate Finance, Elsevier, vol. 84(C).
    5. Deng, Kebin & Hu, Fang & Tian, Gary Gang & Zhong, Ziying, 2022. "Does the disclosure of internal control deficiency matter for accrual quality? Evidence from China," Journal of Contemporary Accounting and Economics, Elsevier, vol. 18(1).
    6. Misra, Shekhar & Mishra, Saurabh, 2026. "Environmental, social, and governance performances, media sentiments, and shareholder wealth," Journal of Business Research, Elsevier, vol. 203(C).
    7. Gao, Xin & Xu, Weidong & Li, Donghui, 2025. "Media coverage and managerial investment learning from stock markets: International evidence," Research in International Business and Finance, Elsevier, vol. 76(C).
    8. Gipper, Brandon & Sequeira, Fiona & Shi, Shawn X., 2026. "Carbon accounting quality: Measurement and the role of assurance," Journal of Accounting and Economics, Elsevier, vol. 81(2).
    9. Devora Peña‐Martel & Jerónimo Pérez‐Alemán & Domingo J. Santana‐Martín, 2022. "Media visibility and board gender diversity," Business Ethics, the Environment & Responsibility, John Wiley & Sons, Ltd., vol. 31(1), pages 192-208, January.
    10. Elsayed, Mohamed & Elshandidy, Tamer, 2021. "Internal control effectiveness, textual risk disclosure, and their usefulness: U.S. evidence," Advances in accounting, Elsevier, vol. 53(C).
    11. Di Giuli, Alberta & Laux, Paul A., 2022. "The effect of media-linked directors on financing and external governance," Journal of Financial Economics, Elsevier, vol. 145(2), pages 103-131.
    12. Skaife, Hollis A. & Veenman, David & Wangerin, Daniel, 2013. "Internal control over financial reporting and managerial rent extraction: Evidence from the profitability of insider trading," Journal of Accounting and Economics, Elsevier, vol. 55(1), pages 91-110.
    13. Zhang-Hangjian, Chen & Mengqing, Xu & Fei, Ren & Xiong, Xiong, 2025. "SDG performance and stock returns: Fresh insights from China," Journal of International Money and Finance, Elsevier, vol. 152(C).
    14. Siddiqui, Sayla & Shams, Syed, 2023. "Media coverage and patent trolls: A study on US high-tech firms," Journal of Behavioral and Experimental Finance, Elsevier, vol. 37(C).
    15. Liu, Mingzhi & Tang, Songlian & Wu, Zhenyu & Zeng, Rong, 2023. "The impact of foreign ownership on the media’s role in curbing insider trading around private meetings," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 88(C).
    16. Chalmers, Keryn & Hay, David & Khlif, Hichem, 2019. "Internal control in accounting research: A review," Journal of Accounting Literature, Elsevier, vol. 42(C), pages 80-103.
    17. Xu, Yingying & Lien, Donald, 2022. "Which affects stock performances more, words or deeds of the key person?," International Review of Financial Analysis, Elsevier, vol. 84(C).
    18. Murad Harasheh & Roberta Provasi, 2023. "A need for assurance: Do internal control systems integrate environmental, social, and governance factors?," Corporate Social Responsibility and Environmental Management, John Wiley & Sons, vol. 30(1), pages 384-401, January.
    19. Oliver Henk, 2020. "Internal control through the lens of institutional work: a systematic literature review," Journal of Management Control: Zeitschrift für Planung und Unternehmenssteuerung, Springer, vol. 31(3), pages 239-273, September.
    20. Guo, Chun & Luo, Jingbo, 2026. "Green supply chain management and ESG rating divergence: A quasi-natural experiment in China," Technological Forecasting and Social Change, Elsevier, vol. 223(C).

    More about this item

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:eee:jaecon:v:81:y:2026:i:2:s0165410125000679. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Catherine Liu (email available below). General contact details of provider: http://www.elsevier.com/locate/jae .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.