Essays in Auditing and ESG Regulation

The first chapter of this PhD Thesis explores the effect of expanded audit report rules on the client-auditor relation. The fact that in the U.K. these rules were implemented in several stages allows applying difference-in-differences methodology to analyze the consequences of the new reporting regime. We test whether expanded reporting rules create additional tension between companies and their auditors which leads to an increase in auditor turnover rate. Companies might want to minimise the number of the reported KAMs (i.e., risky areas) as some papers show that receiving too many of them can be perceived by the users of financial statements as a bad signal. At the same time, auditors might prefer to report more KAMs in order to provide high audit quality and minimize potential litigation and reputation losses in cases of detected misreporting. Empirical results suggest that, in line with this idea of the opposing interest of companies and their auditors regarding KAM disclosure, the implementation of the new audit reporting regime lead to an increase in the probability of auditor switch. Cross-sectional analyzes give further support to the idea that KAM disclosure increases tension between auditors and their clients as in the post-implementation period the probability of auditor switch is positively associated with the number of reported KAMs. Finally, there is some evidence of a reduction in the number of reported KAMs following auditor switches, which may indicate a new form of successful opinion shopping. The second chapter investigates how U.S. auditors respond to shifts in litigation risk driven by two Supreme Court rulings—Tellabs (2007) and Janus (2011)—which altered legal standards across federal circuits. These rulings created exogenous variation in auditors’ legal exposure, allowing us to examine adjustments in audit pricing, reporting conservatism, and audit quality. We consistently find that auditors raise their fees in circuits where litigation risk increased following both rulings. However, the evidence for other auditor responses is mixed: while some findings support the expected effects following Tellabs ruling, others are contradictory. For Janus, we find no meaningful evidence of auditor responses beyond fee adjustments. The third chapter examines if and how U.S. public companies adjust their ESG practices after receiving penalties for violating ESG-related regulations. We seek to understand whether these firms take steps to improve their ESG standing in order to signal a renewed commitment to ESG principles, rebuild their tainted reputations, and reduce the likelihood of future violations. Consistent with the stated hypotheses, the results indicate that firms with material or repeated violations are more likely to adopt targeted environmental initiatives and experience significant improvements in ESG standing relative to industry peers. Furthermore, we observe greater transparency in ESG reporting, particularly following repeated violations. The findings related to quantitative ESG outcomes — such as waste generation, energy use, or injury rates — are generally weak or statistically insignificant.