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

Thumbnail Image
Zambrana, Carlos
Rao, Sunita
Gordon, Elizabeth A.
Washburn University. School of Business
Kaw Valley Bank
Issue Date
September 2019
Alternative Title
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.