Voluntary Audits of Nonfinancial Disclosure and Earnings Quality: The Assurance of Corporate Social Responsibility Reports

Abstract

We investigate the association between voluntary assurance of a firm's corporate social responsibility (CSR) report and earnings management. CSR reporting is believed to benefit a firm by increasing understanding of risks and opportunities, highlighting links between financial and nonfinancial performance, improving corporate transparency and improving a company's reputation with stakeholders. A concern, however, is that managers use CSR reports to promote a socially responsible image without a meaningful commitment to actual CSR activities, referred to as "green-washing." To negate this concern and signal a credible commitment to CSR activities and transparency, a company can obtain assurance on its CSR report. Using a global sample of CSR reporters, we find that issuing a CSR report in itself is not associated with lower accrual-based earnings management nor real activities manipulation. CSR assurance is associated with less accrual-based when the assurance is provided by either a Big or Non-Big auditor. Firms with CSR reports assured by Non-Big auditors are more likely to engage in real activities manipulation. The interaction of assurance by Non-Big auditors and governance mitigates real activities manipulation.