Managing Expectations: How Assurance Level and Sustainability Reporting Approach Affect Investor and Auditor Confidence

Abstract

We use a set of experiments to examine how a company's choice of assurance level (reasonable versus limited) affects nonprofessional investor confidence in sustainability information disclosed under two different reporting approaches (investor-oriented and broad-stakeholder) and how these choices contribute to investor-auditor expectation gaps. We find that nonprofessional investors distinguish limited from reasonable assurance, regardless of reporting approach. However, when we compare investor to auditor confidence, results reveal significant expectation gaps with limited but not reasonable assurance, suggesting investors fail to sufficiently adjust for the lower level of assurance that a limited-assurance engagement provides. These results are not sensitive to reporting approach. Our findings have implications for future research on ESG assurance, audit firms as they seek to expand their assurance services on sustainability disclosures, and policy makers around the world as they consider whether to mandate assurance over sustainability disclosures and, if so, at what level.

Keywords: ESG reports, ESG assurance, expectation gap, reporting approach, confidence assessments