Government auditing and environmental governance: Evidence from China's auditing system reform

Abstract Government auditing is an important mechanism for supervising the use of fiscal funds, preventing official corruption, and improving governance performance. The performance of government auditing is affected by its independence. Taking vertical management reform of government auditing institutions—an initiative China began to pilot in 2015—as the exogenous shock to government auditing and its incentive structure, this paper used the differences-in-differences method (DID) to evaluate the impact of government auditing on the performance of environmental governance. The reform was found to have significantly reduced the intensity of pollutant emissions and a series of robustness tests confirm the validity of this conclusion. The environmental effect of government auditing reform was mainly achieved by improving environmental performance, not by increasing environmental investment. Specifically, the reform had no direct impact on environmental fiscal expenditure; Rather, it improved environmental input–output performance and environmental governance capabilities. The research presented in this paper not only enriches the study of the relationship between (de)centralization and local environmental governance but also provides new evidence of and policy insights into the impact of government auditing on environmental governance.