Spillover Effects of Comment Letters and Risk Management Role of ESG Performance: From the Perspective of Common Auditors

This study examines whether the supervisory effect of comment letters spills over to non-commented firms through common auditors and whether ESG performance mitigates this risk. Using 13,080 Chinese firm-year observations, we find that auditors become increasingly prudent to non-commented clients after others receive comment letters, leading to increased audit fees, delayed reports and higher frequency of going concern opinions. Strong ESG performance mitigates this heightened prudence. Additional analysis shows that comment letter characteristics influence auditor behaviour, and spillover effects enhance non-commented firms' audit quality. Our study underscores the regulatory spillover of comment letters and ESG's role in risk mitigation.