Corporate Social Responsibility and the Assessment by Auditors of the Risk of Material Misstatement
Forthcoming in Journal of Business Finance and Accounting (DOI: 10.1111/jbfa.12268)
Posted: 10 Aug 2017
Date Written: December 11, 2015
This paper investigates whether, and how, firms’ Corporate Social Responsibility (CSR) Performance influences the auditors’ assessment of the risk of material misstatement, whether due to fraud or error, at the financial statement level by analysing their pricing decision (i.e., audit fees). Using a panel data set of 12,330 firms from 28 countries over the period 2003-2012 and different measures of CSR performance, we find a U-shaped relationship between firms’ CSR performance and audit fees. This result suggests that there is an optimal level of CSR performance that minimizes the auditors’ assessment of the risk of material misstatement, which in turn lowers the need for greater auditor effort; that is why auditors charge firms significantly less when their CSR performance is at the optimal level. Finally, we also show that the optimal level of CSR performance varies with the degree of environmental dynamism, ownership concentration and leverage.
Keywords: Corporate Social Responsibility (CSR); CSR performance; Audit fees; Risk of material misstatement
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