Auditor selection and corporate social responsibility

Abstract

This study examines the association between the selection of an industry-specialist auditor and corporate social responsibility (CSR).We find that firms with higher CSR ratings are more likely to hire industry-specialist auditors (national-level industry leaders, citylevel industry leaders or joint city-national industry leaders). Moreover, firms with better CSR performance related to product quality and the environment in controversial industries are found to select non-specialized auditors. The results suggest that such firms may overinvest in CSR activities associated with the environment and product issues to disguise the sin nature of their manufactured goods, and simultaneously engage low quality auditors perhaps to avoid full disclosure of potential environmental and legal liabilities. Overall, we conclude that CSR is associated with the non-controversial firms ensuring high quality financial reporting in response to societal expectations, and thus CSR firms in such industries have strong incentives to engage industry-specialist auditors.

Determinants of auditor choice: Review of the empirical literature

“…In particular, specialist auditors are more likely to be engaged by firms with high research and development expenditure (Godfrey & Hamilton, 2005) and by firms with high degrees of internationalization (Tsao, Lu, & Keung, 2017). Sun, Huang, Dao, and Young (2017) found that firms with high ratings for their corporate social responsibility reporting are more likely to appoint industry-specialist auditors; however, this is confined only to firms without controversial operations. There is also evidence to suggest that management may also choose certain auditors for collusion purposes (Kim, Chung, & Firth, 2003).…”

“…Many existing research studies can be further expanded by adopting an institutional theoretical framework. These include: (i) coercive pressure (e.g., mandatory audit requirements; Lennox & Pittman, 2011), managers' legal liabilities (Chi & Weng, 2014;Gerakos & Syverson, 2015), corporate social responsibility ratings (Sun et al, 2017), and country-level legal environment (Francis et al, 2009;Guedhami & Pittman, 2006;Piot, 2001); (ii) mimetic effect (e.g., professional networks; Carson, 2009), governance models (Piot, 2005), and personal connections and interlocks (Houghton & Jubb, 2003;Johansen & Pettersson, 2013); and (iii) normative conformity (e.g., culture; Hope et al, 2008) and professional CEOs (Hsu et al, 2018).…”

The Effect of Corporate Social Performance on Audit Hours: Moderating Role of the Emphasis of Matter Paragraphs in Audit Report

“…Previous studies focused on the role of auditors as an external monitoring mechanism by examining whether firms with better CSP appoint auditors with high audit quality or whether auditors provide credibility to CSR [10,21]. Unlike this, this study investigates auditors' role as an CSP related information intermediary by using EOM as a proxy for auditors' perception to a potential firm risk.…”

“…Their findings are consistent with the theoretical intuition suggesting stakeholder orientation of genuine CSR companies. Sun et al [21] also provided evidence suggesting that higher CSR performance increases the possibility of the selection of industry-specialist auditors. Moreover, Carey et al [8] interpreted the same result differently, arguing that higher audit fees are the result of increased risk based on the opportunistic behavior of managers.…”

“…Regarding audit, most studies focused on the role of external auditors as independent assurance of CSR or supplemental or alternate corporate governance [10]. CSR is generally expected to be associated with stakeholder perspective, but it can be used to disguise adverse events, such as pollution; thus, companies have incentives to signal their reliability via assurance or high-quality auditors [8,10,21,22]. Consistently with this, Chen et al [22] used the US setting and showed that higher audit fees of CSR firms lend greater credibility to their CSR disclosures.…”