Local Government Environmental Auditing and Corporate Audit Fees: Risk Revelation or Governance Improvement?

As environmental governance becomes increasingly important to capital-market risk oversight, local government environmental auditing may affect not only public-sector accountability but also private auditors’ risk assessments and pricing decisions. Based on the sample of A-share listed companies in Shanghai and Shenzhen from 2008 to 2023, this study examines the association between local government environmental auditing intensity and corporate audit fees and explores the channels underlying this association. We find that more intensive local government environmental auditing is significantly associated with lower corporate audit fees. Channel analyses show that this negative association is consistent with stronger internal controls, higher accounting information quality, and better environmental performance. Additional analyses show that the negative association is concentrated in positive abnormal fees and the absolute deviation of fees from predicted levels; the coefficient for negative abnormal fees is not statistically significant. The negative association is stronger among state-owned enterprises, heavily polluting firms, firms in more market-oriented regions, and firms receiving greater media attention. This study extends research on the economic consequences of government environmental auditing and identifies public environmental oversight as an institutional factor associated with private audit pricing.