Air Pollution and Audit Quality within the United States
Coauthored with: Paul Michas, Dan Russomanno, and Wenzi Zhuang
Abstract: We examine whether PM2.5 air pollution impacts audit quality within the United States. We find a positive association between air pollution at an audit client’s location, measured during the year-end audit window when auditors are likely to travel to their client’s headquarters, and the likelihood of a non-reliance restatement. Further, we examine a sub-sample where auditors travel more than 100 miles to their audit client’s location and, therefore, are more likely to be exposed to a difference in pollution levels relative to their auditor’s home office. Using this sub-sample, we find restatement likelihood is increasing in this difference in pollution at the audit client’s site, which is incremental to any pollution effect attributable to the auditor’s home office. Moreover, we use wildfires as an instrumental variable within a two-stage estimation method and find the predicted unbiased estimates of air pollution are positively associated with restatement likelihood. Finally, we find pollution incrementally impedes audit quality when auditing a subset of firms we measure as being more challenging or difficult to audit. Taken together, our findings are consistent with air pollution impeding audit quality.