Air Pollution, Auditors' Affective States, and Audit Quality

ABSTRACT This study examines the impact of auditors' negative affective states, proxied by their exposures to client cities' air pollution, on audit quality. We first provide survey evidence that auditors spend considerable time in their clients' cities during the annual audit period and they perceive air pollution to trigger negative effects that impair their capacity to deliver high‐quality audits. Our archival results show that, when client cities experience heavier air pollution during the annual audit period, auditors become less likely to issue modified audit opinions and their clients' absolute discretionary accruals and below‐the‐line items are significantly higher. Further analyses show that this effect is mitigated by auditors' experience but not the social trust levels of their located provinces, suggesting that auditors' negative affective states harm audit quality by impairing auditors' cognitive function rather than motivating them to undertake unethical decisions. We find no association between air pollution and audit fee or audit delay, suggesting that air pollution‐triggered negative effects do not impair audit quality through reduced audit effort. Our results are robust to difference‐in‐difference analyses using the coal‐to‐gas policy and the 2008 Beijing Olympics as exogenous shocks. Collectively, our findings highlight the importance of auditors' emotions and moods in professional judgement and the role of environmental conditions in shaping auditor behaviour.