Corporate Greenwashing and Audit Risk: The Effect and Mechanism

In recent years, China has vigorously promoted the construction of an ecological civilization, dual-carbon goals, and strengthened corporate environmental responsibility and information disclosure requirements. In this context, to meet regulatory pressure or market preferences, some enterprises adopt the practice of “greenwashing” to create a false image of sustainable development. This results in distorted financial reporting information. Such behavior not only undermines stakeholder trust but also heightens audit risk by significantly increasing audit complexity and risk exposure through hidden compliance risks as well as a management propensity for fraud and uncertainty around environmental liability. Hence, we took Chinese A-share firms from 2011 to 2023 as the research object, empirically tested the impact of corporate greenwashing behavior on audit risk by using a fixed-effects model, and explored the mechanism that affects the relationship between the two. The empirical results indicate that opportunistic greenwashing behavior increases audit risk; stable equity plays a negative moderating role between the two, and relational debt plays a positive moderating role between the two. Simultaneously, greenwashing increases audit risk by raising Type II agency costs. The effect of corporate greenwashing on audit risk is more significant in non-Big Four accounting firms and non-high-tech industries. This study provides directions for enterprises to optimize their capital structure and reinforce their internal controls, and helps regulators formulate precise regulatory policies to maintain the sustainable development of the market.