Academic Conference on Good Business

How Do Auditors Respond to Corporate Social Responsibility Performance?

Many market participants such as financial analysts and investors around the world have started to realize that nonfinancial information, in addition to financial information, can provide crucial information in assessing firms’ sustainability. We examine whether and how auditors respond to one major type of nonfinancial performance, corporate social responsibility (CSR) performance of their client firms. Using the KLD’s social responsibility rating scores in 2000 – 2008 to proxy for the level of CSR performance, we find that auditors consider client firms’ CSR concern as a potential risk and show that client firms’ CSR performance is significantly and negatively associated with the level of audit fees, the auditors’ propensity to issue going concern opinions, and the auditors’ propensity to resign from the clients. Further tests on industries with high CSR concern and pollution-prone industries reveal that good CSR practices can play an even more crucial role in reducing client firms’ risk for these industries. Our results are robust to the change specification of audit fees model, alternative measures of firms’ CSR performance, and additional control variables such as variables measuring the client firms’ internal control weakness and their CSR self-reporting behaviors.