ESG Controversies and Non-Audit Service Fees: European Evidence

Abstract

Lapses in environmental, social, and governance (ESG) conduct often manifest through controversies like environmental violations, social misconduct, or governance failures, creating reputational and informational risks for firms and their auditors. While many studies focus on how ESG performance influences audit and assurance outcomes, few examine how adverse ESG events, particularly controversies, shape auditor behavior and market pricing. This study examines whether such controversies affect non-audit services (NAS) pricing and explores how auditors incorporate ESG-related reputational risks into advisory engagements. Drawing on a panel of 4,552 firm-year observations from European listed firms between 2014 and 2023, ESG controversy data from Refinitiv Eikon are analyzed with two-way fixed-effects and instrumental variable (IV) estimations. The findings suggest that ESG controversies and NAS fees are positive and significantly correlated only for severe controversies, indicating that auditors selectively respond to material ethical risks. Supplementary analyses indicate that, in Europe, this relationship is not systematically conditioned by cross-country institutional strength or firm-level governance characteristics, suggesting their limited moderating role. The IV analysis reveals a weak instrumental relationship, implying the observed associations may partially reflect correlated omitted factors rather than definitive causal effects. Overall, the findings suggest ESG controversies have economic repercussions for firms through advisory cost adjustments, particularly when reputational risk is salient. The study enhances understanding of how auditors price ethical and reputational risks, contributing to ongoing debates regarding auditor independence, ESG accountability, and corporate ethics in assurance markets, while offering insights for regulators, managers, and auditors regarding pricing of ESG-related advisory risk.