Corporate social responsibility risk and auditor–client retention

Abstract

Literature suggests that firms engaging in irresponsible corporate social responsibility (CSR) activities are more likely to increase auditor's engagement risk. Using audit firm tenure as a continuous measure for retention decisions made by either auditors or client firms, we find a significant and negative association between CSR risk and auditor tenure. Moreover, when the continuous variable audit tenure is replaced with a dichotomous variable auditor change, the likelihood of auditor change intensifies with increases in CSR risk. These results suggest that both clients and auditors are more likely to sever relationships when client firms exhibit high CSR risk than low CSR risk. This study has implications for future research on audit firm tenure and audit outcomes.

Corporate social impact and auditor changes

“…The total ESG score and auditor changes are negatively correlated (‐0.0288, P ‐value = <.0001). The result is consistent with the findings in prior study that auditor changes are less likely for socially responsible companies (Brooks et al., 2019). Our two social irresponsibility measures: total number of concerns and indicator variable have positive correlations with auditor changes respectively ( ESG_Con : 0.0192, p‐value = 0.0661; Irreponsible_Firm : 0.0239, P ‐value = .0118).…”

“…Prior research documents that corporate social responsibility has influence on financial performance and financial reporting (Dhaliwal et al., 2011, 2012; Kempf & Osthoff, 2007; Kim et al., 2012; Webb, 2004). Additional research resonates with the literature by providing evidence that companies’ social responsibility activities also affects auditors’ perceived risk, auditor tenure and auditors’ professional judgment (Brooks et al., 2019; Han et al., 2020; Koh & Tong, 2013). Although various corporate corruption scandals, accounting scandals, and man‐made environmental disasters surface repeatedly in the last two decades, prior academic literature did not sufficiently address “preventing corporate social irresponsibility.” Consistent with the Lin‐Hi and Müller (2013) which suggests “avoiding bad” as the bottom line of CSR, our study investigates the impacts of social irresponsibility on auditor–client relationship.…”

“…Following prior research, we first define a total ESG score ( ESG ), which is computed as the net score of total strengths and concerns of all seven dimensions in the MSCI ESG database (Brooks et al., 2019; Kim et al., 2012). The sign and scale of each score symbolize a firm‐level social impact during a year.…”

“…Different from prior studies that mainly use the total score to proxy social impact (Brooks et al., 2019; Kim et al., 2012), we focus only on companies’ social irresponsibility because some prior studies suggest corporate social responsibility and irresponsibility should be treated as separate yet related constructs (Lin‐Hi & Müller, 2013; Strike et al., 2006). Instead of fusing all positive and negative indicators into a single variable, the sum of the negative indicators is a cleaner measure of corporate social impact, specifically corporate social irresponsibility, because the media always unveil more negative stories about corporate social responsibility instead of positive stories about corporate social responsibility.…”

Sustainability assurance practices: a systematic review and future research agenda

“…This is consistent with what is supported by the stakeholder theory. In the sustainability assurance literature, this theory is used in different studies with a different framework such as the risk of CSR and auditors (Brooks et al 2019 ), carbon auditing (Qingliang Tang 2019 ), sustainability development and corporate governance (Suttipun & Saelee 2015 ), and corporate sustainability and social assurance (Gao & Zhang 2004 ). The significance of stakeholder theory is that it guides stakeholders in general to commercial firms’ proper thinking.…”