Sustainable products and audit fees: empirical evidence from western European countries

Abstract

Purpose –The present study examines whether firms that appear to exhibit high sustainable outputs are more likely to pay higher audit fees than firms without such outputs. Design/methodology/approach–The sustainability outputs are measured using a sustainable product portfolio consisting of four products: clean energy products (CEP), eco-design products (EDP), environmental products (EP) and sustainable building projects (SBP). The audit fee variable is measured by the natural logarithm of the total amount of audit fees. The study tests two models of the association between these outputs and audit fees; Model 1 tests this association in the absence of the moderating variable (sustainability committee) and Model 2 tests the association in the presence of the moderating variable. Findings– An analysis of data on 261 European firms from the Refinitiv Eikon database from 2010 to 2019, shows that high sustainability outputs are significantly and positively associated with audit fees. More importantly, this association is moderated by the presence of a board-level sustainability committee, suggesting that this type of committee reflects a factor considered by auditors in their audit risk assessment practices. The findings indicate that in Model 1, one (EP) out of four variables has a significant and positive association with audit fees, while in Model 2 and in the presence of sustainability committee, two variables (EP and EDP) have a significant and negative association with audit fees. However, the robust analysis shows that three variables (EP, EDP and SBP) have significant and negative associations with audit fees. Practical implications –The study findings have important implications for policy makers, auditors and firms’ managers. For policy makers, the findings provide support for the argument that sustainable attitudes incentive firms to manage sustainable product profiles more effectively. As such, policy makers should incentivise firms to establish a sustainability committee and regulate its role and responsibilities. Auditors should coordinate with the sustainability committee to facilitate audit efforts and reduce audit fees. Social implications Understanding the relationship between sustainable products and audit fees will allow firms to improve their portfolio of sustainable products. In addition, other social implications of this study relate to improving relationships with society by establishing a sustainability committee that is responsible to communicate with that society. Originality/value–The results support the argument that firms should manage sustainable product portfolios more effectively. In addition, the results of the study highlight the importance of a new variable as a moderator, the sustainability committee, which has not been examined before.