Once bitten, twice shy : the effect of experiencing a client with an environmental accident on audit effort

We investigate whether individual auditors increase their audit efforts for other clients after auditing a client with a major environmental accident, using mixed methods. Results from archival and survey data show that (1) auditors work harder, as proxied by abnormal audit fees and audit report lag, after the environmental accident experience, and (2) the effects of environmental accident experience on auditing efforts are (1) moderated by situational factors (industry pollution level and regional environmental regulation) and individual factors (auditor age and position), and (2) mediated by auditor risk awareness. Our further analyses on the influence of Auditing Standard No. 1631, The Consideration of Environmental Matters in the Audit of Financial Statements, show that auditors’ knowledge of this standard strengthens the effects of environmental accident experience on audit efforts, although the standard perse has little impact on audit behavior. Together, this study offers a psychological account for audit behavior.