The Effect of ESG Assurance on Audit Quality: An Empirical Analysis

Abstract Against the backdrop of continuous advancement of the "dual carbon" goals and strengthening requirements for sustainable information disclosure in capital markets, ESG report assurance has gradually become an important institutional arrangement to mitigate distortions in corporate non-financial information disclosure, reduce "greenwashing" risks, and enhance market trust. However, in the reality that China's ESG information disclosure system is still in a mature stage and verification standards are not yet fully unified, listed companies often prefer to choose their annual report audit accounting firms to simultaneously provide ESG report verification services. The key issue arising from this is: does the same accounting firm simultaneously undertake annual report audits and ESG report assurance, which weakens audit independence and thus damages audit quality due to increased economic dependence, or does it create a knowledge spillover effect through the acquisition of non-financial information, deepening client business understanding, and the synergy of professional knowledge, thereby improving audit quality? Focusing on this issue, this paper takes enterprises among China's A-share listed companies that implemented ESG report assurance from 2009 to 2021 as research samples, manually organizes and matches information on ESG report verification institutions and annual report audit institutions, constructs core explanatory variables for whether annual report audit and ESG report assurance are provided by the same accounting firm, and uses financial restatement as the main metric for audit quality, systematically examining the impact and mechanism of coordinated provision of ESG assurance and annual report audit services on audit quality. The study found that providing ESG report assurance services simultaneously does not weaken audit independence; instead, it significantly reduces the likelihood of financial restatements, indicating that ESG report assurance can improve audit quality through knowledge spillover effects. Further mechanism testing shows that the same accounting firm providing two types of services simultaneously significantly increases audit investment, manifesting as longer audit delays, while higher levels of audit investment further reduce the probability of financial restatement, indicating that audit investment is an important transmission pathway for ESG assurance services to affect audit quality. The robustness test results show that after controlling for individual enterprise characteristics, accounting firm characteristics, fixed effects, and clustering standard errors, the research conclusions remain valid; After replacing audit quality measurements and using propensity score matching and Heckman two-stage methods to mitigate sample selection bias and endogeneity issues, the core conclusions remain robust. Heterogeneity analysis further indicates that the knowledge spillover effect generated by the coordinated provision of ESG report assurance and annual report audit does not play a uniform role across all companies, but is more pronounced in contexts with relatively weak information environments, insufficient external oversight, or higher demand for audit risk identification. Specifically, this effect is more pronounced in companies with lower levels of internal control, companies listed only on the A-share market, companies with high industry concentration, and companies with low analyst attention. The economic consequences test found that the same accounting firm providing both annual report audit and ESG report assurance services not only helps improve audit quality but also raises audit fee levels and positively impacts corporate value. The research conclusions of this paper expand on the economic consequences of ESG report assurance and the knowledge spillover effect of non-audit services, providing empirical evidence for understanding the synergistic relationship between ESG assurance services and financial report audits, and offering valuable insights for regulatory authorities to improve ESG assurance systems, accounting firms to expand sustainable assurance services, and for listed companies to optimize ESG information disclosure governance mechanisms.