The Effect of ESG Performance on Key Audit Matters and the Mediating role of Media Attention: Evidence from Listed Companies in China

This paper investigates the effect of ESG performance on the disclosure of KAMs in the audit reports of Chinese A-share listed companies, with a particular focus on the mediating role played by media attention. Drawing on signaling theory, agenda-setting theory, and modern risk-oriented auditing theory, the study constructs an analytical framework that links ESG performance, media attention, and KAM disclosures. We find a significant negative association between ESG performance and both the textual length of KAM disclosures. This indicates that auditors tend to perceive firms with higher ESG performance as lower-risk entities, thereby reducing the scope and depth of KAMs. In addition, firms with better ESG ratings experience less negative media coverage and more favorable media sentiment. This result suggests that media reports about the ESG performance of a firm play a critical role in relaying non-financial information (i.e., ESG-related signals) to the public and stakeholders. Mediation analysis further confirms that media attention-particularly negative sentiment-fully mediates the relationship between ESG performance and KAM disclosures. Therefore, it is in fact the media report of ESG performance of a firm that affects KAM disclosure of the firm. This implies that media not only shape public perception of the firm's ESG performance but also influence auditors’ professional judgments by altering their perception of client risk, thus directly affecting the content and form of audit disclosures.