The Role of Auditors in the Nexus between ESG Practices and Company Performance

Abstract

In this study, we first investigate the impact of environmental, social and governance (ESG) practices on company’s performance. Using samples of Chinese publicly listed (i.e. A-share companies only) from 2017 to 2021, we analyze the association between ESG practices and company’s performance in terms of ROA and Tobin’s Q. We argue that companies with better ESG practices tend to draw more attention from stakeholders, which in turn encourage management to improve the company ROA and Tobin’s Q. Secondly, this study analyzed the effect of auditors as evidence by audit fees on the relationship between ESG practices and company performance. Our analyses show two main results. Our results show that ESG practices have a positive impact on company performance in our samples, which means that good ESG scores promote better company performance. Furthermore, the relationship between ESG practices and company performance is moderated by the audit fees of listed companies, which indicates that the higher the company audit fees, the higher the corresponding effect of ESG scores on company performance. The results imply that auditors consider ESG as part of their audit risk assessment, although the current assurance scope of the audit work does not include ESG practices. Hence, auditing does influence the nexus between ESG practices and company performance.

Keywords: China listed companies; ESG; audit fees; ROA; Tobin’s Q