How does corporate social responsibility decrease serious misstatement likelihood?

Abstract

In this article, we offer two explanations for the observed negative association between corporate social responsibility (CSR) performance and the likelihood of serious misstatements being detected (PSMD). We find that CSR significantly decreases the probability of engagement in a serious misstatement (PE) in general, whereas it increases the detection probability (PD) only when there are salient indicators of misstatement engagement. The asymmetrical impact of CSR on the engagement probability and detection probability provides the first explanation for the lower PSMD in CSR firms. Second, we provide evidence that CSR indirectly affects PSMD by attenuating the materiality and magnitude of misstatements. A path analysis suggests that the indirect path accounts for 33.3% of the total impact of CSR on serious misstatement likelihood. These findings advance our understanding of the mechanism through which CSR reduces PSMD.

The two sides of corporate social responsibility and the quality of internal control audit opinions

“…Tran and O'Sullivan (2020) document a negative association between the client's net CSR performance and the likelihood of misstatement and SEC enforcement actions. Similarly, Hong and Young (2021) find a negative association between net CSR performance and the probability of engagement in a misstatement. Kim et al (2017) find that net CSR activities are negatively associated with adverse ICOPs.…”

The effect of short selling on corporate social responsibility: Evidence from a quasi‐experiment

“…CSR has multiple definitions (Carroll, 1999). We follow the stakeholders-based definition of CSR, which refers to a firm's discretionary multidimensional (economic, ethical, environmental, social, and political) activities directed toward the firm's stakeholders (investors, communities, customers, employees, regulators, and suppliers) (Carroll, 1979(Carroll, , 1999Hong & Young, 2021;Malik, 2015).…”