ESG rating disagreement and audit fees: evidence from China

Purpose The purpose of this study is to examine whether environmental, social and governance (ESG) rating disagreement is related to future audit fees. The authors hypothesize that ESG rating disagreement increases audit risk and audit input, which in turn increases audit fees. Design/methodology/approach This paper measures firm ESG rating disagreement on the basis of ESG rating data from 10 rating agencies. A total of 25,064 observations from China from 2010 to 2023 are used, and ordinary least squares is used to test the impact of ESG rating disagreement on audit fees. Findings This paper finds that ESG rating disagreement positively affects audit fees by increasing audit risk and audit input, and that internal controls and analyst forecast accuracy mitigate the positive relationship between ESG rating disagreement and audit fees. Further tests show that both foreign ESG rating divergence and rating divergence on ESG segmentation dimensions have a positive impact on audit fees. Heterogeneity analysis reveals that the effect of ESG rating disagreement on audit fees is greater at high auditor industry expertise levels, large-scale audit firms, state-owned enterprises, high annual report readability, high ESG media coverage and high industry competition. Originality/value The research in this paper provides new empirical evidence on the economic consequences of ESG rating disagreement and the factors influencing audit fees, and it offers new perspectives for understanding the relationship between ESG rating disagreement and audit fees in emerging capital markets.