On accounting’s twenty-first century challenge: evidence on the relation between intangible assets and audit fees

Is a client's corporate social responsibility performance a source of audit complexity?

“…For example, Bosch invests 50% of its research and development (R&D) budget in environmentally friendly technologies (Vilas, 2017). Datta et al (2020) find that auditors perceive intangible assets, such as expenses on R&D, to be a source of audit complexity, and that firms with a greater proportion of intangible assets pay higher audit fees. To the extent that investments in CSR activities may give rise to complex economic activities that result in increased volume and diversity of accounting information to be processed and reported in the financial statements, audit complexity increases with firms' involvement in positive CSR activities (Campbell, 1988).…”

“…An inspection of the definition to these performance indicators suggest that activities specified in the criteria for ENVA , ENVB , and ENVK have complex accounting reporting implications. For example, investment and innovation in clean technologies ( ENVA and ENVB ) requires additional spending on research and development, the accounting treatment for which is inherently complex and vulnerable to manipulation (Datta et al, 2020). ENVK indicates the presence of better risk management systems related to environmental issues, suggesting the need to audit the more complex management systems 5 .…”

“…We use two measures of audit complexity. First, we use the ratio of research and development expense over total assets ( R&D ) (Datta et al, 2020). Second, we use the accounting reporting complexity measure, ARC, following Hoitash and Hoitash (2018).…”

“…As such, a firm's investment in CSR initiatives could increase its operating complexity and accounting reporting complexity (Campbell, 1988), leading to increased audit complexity and a higher level of audit fees for firms involved in positive CSR activities as a result. For example, a firm's investment in research and development of clean technology could give rise to accounting issues dealing with intangible assets, an area perceived to be of high audit complexity (Datta, Jha, & Kulchania, 2020). Thus, the effect of positive CSR activities on audit fees is an empirical question.…”

“…In addition, we find a positive effect on audit fees from both positive and negative CSR activities. In additional analyses, we use measures of audit complexity following Hoitash and Hoitash (2018) and Datta et al (2020) and find that positive, as well as negative, CSR activities are associated with higher audit complexity. Our findings are robust to controlling for potential endogeneity biases using the entropy balancing matching approach following recent research (Chahine, Colak, Hasan, & Mazboudi, 2020; Wilde, 2017), by way of conducting a quasi‐natural experiment based on the Energy Policy Act 2005, and using a firm fixed effects specification.…”