Are auditor’s professional judgments influenced by air quality?

Abstract

This paper tests the influence of air quality on auditor's professional judgments using air quality data disclosed by Ministry of Ecology and Environment of the People's Republic of China in 2013-2015. We find that air pollution exposure of the client's headquarter during fieldwork days has a negative impact on the auditor's professional judgments. Further analysis shows that the influence of air quality on auditor's professional judgments pertains to periods when air pollution problem attracts public attention, in regions with air pollution and in samples with air quality differences between the audit firm and the auditee.The results indicate that it is the negative emotion induced by the perception of air pollution rather than the pollution itself that influences auditor's professional judgments. We also discover that air pollution affects auditor's professional judgments through audit effort.

The Impact of Smog Pollution on Audit Quality: Evidence from China

“…Under more rigorous model settings, the results of this study support the earlier view that air pollution is negatively correlated with audit quality through audit effort [12]. We also note that the conclusions of this paper are not consistent with another paper, which believes air pollution is positively correlated with audit quality [13].…”

“…To complete the audit work in a shorter period of time, the auditor may narrow the scope of substantive testing and abandon some audit procedures, thus failing to obtain adequate and appropriate audit evidence. The auditor may also reduce the time required to obtain audit evidence through computational processing as well as the time allocated to communicating with the audited entity's management, and may make inappropriate judgments [12], resulting in lower audit quality.…”

“…One groundbreaking study tests the influence of air quality on auditor's professional judgments using air quality data from 2013 to 2015 in China and finds that air pollution exposure of the client's headquarter during fieldwork days has a negative impact on the auditor's professional judgments through the audit effort [12]. By contrast, another study uses a sample of Chinese public firms for the period 2013 to 2018 to examine the effects of air pollution on audit quality and finds that auditors exposed to higher levels of air pollution are more likely to put more effort into their audits, resulting in higher audit quality [13].…”

“…Some studies on the factors affecting audit quality mainly examine the topic on the company level [16], the accounting firm level [17,18], and the individual auditor level [19][20][21]. Since the individual auditor, the auditee (company), and the external audit environment are all affected by smog pollution, the weather phenomenon, as suggested in the above literature [12,13], may also affect auditors' audit quality. Audit time reflects the audit investment to a certain extent, thereby affecting the auditor's ability to find misreporting fraud.…”

How does air pollution affect corporate information environment?

“…In this circumstance, uninformed traders would be at a disadvantage because informed traders always have information advantages and can better interpret earnings (Kim & Verrecchia, 1994). In addition to the decreasing analyst report accuracy, Du et al (2018) and Song and Song (2018) reveal that the air pollution exposure of the headquarters of client firms during audit fieldwork negatively influences auditors' professional judgments, as the perception of air pollution induces negative emotions. Thus, external corporate governance is deteriorated by air pollution, which further weakens the firm's information environment.…”