Institutional investors’ distraction and audit fees: The mediating effect of ESG rating disagreement

Abstract

The growing focus on sustainability and responsible corporate behaviour makes the analysis of the impact of institutional investors on audit fees extremely important to ensure the transparency and reliability of non-financial reporting in the current environment. The purpose of the study was to identify the degree of influence of institutional investors on the payment for audit services of Chinese companies based on environmental, social and governance (ESG) ratings. The study was conducted using the methods of sampling, observation, analysis, and description of statistical characteristics. The results indicate a significant relationship between institutional investor distraction and increased audit fees caused by discrepancies in ESG ratings. This highlights the critical role of investor oversight in maintaining audit quality and controlling costs. While divergent ESG ratings provide auditors with more information, thereby reducing audit workloads and fees, this effect is not sufficient to offset the overall increase in audit fees due to investor distraction. The effect is more pronounced for low-tech companies, companies with high environmental impacts, and companies with lower cash flow volatility, making them more vulnerable to increased audit scrutiny and higher fees. The various differences in ESG ratings, including environmental, social and governance aspects, serve as key mediating factors, highlighting the importance of taking these differences into account when assessing audit risk and setting fees. The results obtained in the course of the study can be used to improve the ESG rating methodology, namely to increase transparency and reduce information asymmetry in the stock market