Monitoring Carbon Risk: Auditor Pricing of Stranded Asset Exposure in U.S. Energy Firms

ABSTRACT This paper examines whether external auditors incorporate carbon asset risk disclosures (CARD) when assessing a client's exposure to stranded asset risks and how these disclosures influence audit pricing decisions. Using data from Ceres' Sustainability Disclosure Search Tool, we assess a firm's CARD specificity by analyzing the proportion of text in 10‐K filings devoted to the impacts of climate change on reserves, accounting treatment, and the transition to a low‐carbon economy. We use this measure as a proxy for a firm's perceived and communicated exposure to stranded asset risks. Drawing on a sample of 1077 firm–year observations of US energy companies from 2010 to 2021, our findings reveal a positive association between a firm's specific CARD and its audit fees. Further cross‐sectional analyses indicate that this relationship is weaker at higher levels of external monitoring by financial analysts but becomes more pronounced following the Paris Climate Agreement. Overall, our findings highlight the importance of transparent and consistent carbon risk reporting and the need to effectively monitor and manage carbon asset risks to balance disclosure transparency with audit cost considerations in the transition to a low‐carbon economy.