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Actions speak louder than words: environmental law enforcement and audit fees

Author

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  • Xiting Wu

    (Shandong University)

  • Le Luo

    (Macquarie University)

  • Jiaxing You

    (Xiamen University)

Abstract

Using the staggered establishment of environmental courts in China, we study the effect of environmental law enforcement on audit fees. We find that companies’ abnormal audit fees increase significantly after the establishment of a specialized environmental court strengthens environmental law enforcement. Our cross-sectional analyses show that the increase in abnormal audit fees is greater for companies with worse environmental performance and for those in heavily polluting industries. We then assess the channels through which environmental courts affect companies’ audit fees and find that the effect of the courts on fees is driven by both audit effort and audit risk and the establishment of a particular type of environmental court (an independent environmental adjudication division). Finally, our results reveal that public concern about environmental protection plays a substitutive role for environmental courts in affecting the increase in audit fees. Our findings suggest that environmental courts aimed at strengthening environmental laws and regulations alter firms’ and auditors’ behaviors and decisions, having unintended spillover effects on audit pricing.

Suggested Citation

  • Xiting Wu & Le Luo & Jiaxing You, 2025. "Actions speak louder than words: environmental law enforcement and audit fees," Review of Accounting Studies, Springer, vol. 30(1), pages 519-574, March.
    • Handle: RePEc:spr:reaccs:v:30:y:2025:i:1:d:10.1007_s11142-024-09823-x
    DOI: 10.1007/s11142-024-09823-x
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    More about this item

    Keywords

    Environmental court; Law enforcement; Audit fees; China;
    All these keywords.

    JEL classification:

    • M42 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Auditing
    • Q51 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Valuation of Environmental Effects
    • Q56 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Environment and Development; Environment and Trade; Sustainability; Environmental Accounts and Accounting; Environmental Equity; Population Growth
    • K41 - Law and Economics - - Legal Procedure, the Legal System, and Illegal Behavior - - - Litigation Process
    • K42 - Law and Economics - - Legal Procedure, the Legal System, and Illegal Behavior - - - Illegal Behavior and the Enforcement of Law

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