The mediating role of audit quality in carbon emission disclosure and financial reporting quality: evidence from Vietnam

This study examines whether carbon emission disclosure (CED) is associated with earnings management–based financial reporting quality (FRQ) in Vietnam, with a focus on the mediating role of audit quality (AQ). Unlike prior studies employing aggregated ESG indicators, this study focuses specifically on carbon disclosure to assess how audit assurance shapes the credibility of environmental reporting. Using two-step system-GMM regression on 133 non-financial firms (2016–2022), the findings indicate that CED is negatively associated with FRQ in the absence of high-quality audit assurance, suggesting that voluntary disclosure may be used strategically alongside earnings management. Crucially, this adverse effect vanishes when firms engage Big 4 auditors, as AQ fully mediates the CED–FRQ link. These results provide new evidence for emerging markets and extend Signalling and Stakeholder theories by showing that strong audit assurance can turn voluntary carbon disclosure into real improvements in reporting credibility. The findings also have important practical implications. Indeed, policymakers must recognize that requiring disclosure without verification may backfire and potentially encourage greenwashing rather than accountability. For practitioners, the evidence highlights the importance of high-quality audits in enhancing the reliability and value of relevance of environmental disclosures. Overall, the study shows that credible audit assurance is a key mechanism for improving transparency and supporting the transition to a low-carbon economy.