Sustainability Through Scrutiny: Enhancing Transparency in Chinese Corporations via Environmental Audits

This study comprehensively examines the impact of government environmental audits on real earnings management among Chinese A-share listed firms between 2012 and 2021. Employing a time-varying Difference-in-Differences (DID) methodology, the research investigates how these audits affect various forms of earnings manipulation, including production, sales, and expense manipulation. The findings reveal that government environmental audits effectively curb these practices, particularly in environmentally sensitive companies. The severity of audit enforcement correlates positively with reductions in real earnings management techniques, underscoring the pivotal role of robust regulatory frameworks in advancing corporate transparency, sustainability, and governance objectives. Furthermore, the study elucidates mechanisms through which environmental audits deter earnings manipulation, offering insights into the broader implications for environmental stewardship and corporate sustainability. By highlighting the relationship between environmental auditing and corporate behavior, this study contributes to a deeper understanding of how regulatory oversight can promote financial integrity and environmental responsibility, laying the groundwork for sustainable economic development. The research also provides practical insights for policy makers, emphasizing the importance of targeted regulatory measures to mitigate manipulative activities and foster a more sustainable corporate landscape.