Academic Conference on Good Business

Auditor Selection and Corporate Social Responsibility

This study examines the association between auditor selection and corporate social responsibility (CSR). We find that firms with better CSR ratings are significantly associated with higher probability of hiring specialized auditors, who are either national industry leaders or joint city-national industry leaders. In addition, firms with higher CSR ratings in non-controversial industries are more likely to hire industry specialized auditors (national-level industry leaders, city-level industry leaders, or joint city-national industry leaders). However, the results do not continue to hold for those firms in such controversial industries as alcohol, tobacco gambling, military, and nuclear power. We find that these controversial firms overinvest on CSR activities associated with environment and product issues to disguise the sin nature of their products and simultaneously engage low quality auditors perhaps to affect financial disclosure of potential environmental and legal liabilities. These findings suggest that CSR may drive non-controversial firms’ management to ensure high quality financial reporting in response to societal expectations, and therefore CSR firms have strong incentive to engage specialized auditors.