Air Pollution in the United States and Misstatements in Financial Reporting

We argue air pollution can jointly impede the quality of work performed by a client’s financial reporting personnel and its auditor. We exploit PM_2.5 data from the Environmental Protection Agency and find a positive association between air pollution and misstatements in annual financial reports. Moreover, we find this association using a subsample where auditors must travel a significant distance to their client’s headquarters and accordingly, are more likely to be exposed to a change in air pollution. Finally, our main finding is more salient when both a client’s reporting personnel and its auditor are likely to be present on site, as well as in more complex engagements where the physical and cognitive demands placed on a client’s reporting personnel and its auditor are likely higher. We interpret this evidence as air pollution impeding the quality of work performed by a client’s reporting personnel, its auditor, or both.