Creating Legitimacy for Sustainability Assurance Practices: Evidence from Sustainability Restatements

Abstract

This study investigates whether sustainability reporting assurance (SRA) providers appear to use sustainability restatements as a means to create legitimacy in the developing SRA market, where a large number of firms have yet to commit to SRA (untapped profits). We argue that, in comparison to financial data, mistakes in sustainability reporting are more likely to be made and less likely to be discovered prior to reporting, and potential liability is decreased due to a lack of clear reporting standards and ambiguous SRA guidelines. These factors, in conjunction with prior evidence of negotiations between SRA providers and clients, suggest providers can use restatements in an attempt to demonstrate both a problem in sustainability reporting and assurance as the solution to that issue. Based on a sample of U.S. S&P 500 firms from 2010–14, we find that SRA is associated with an increased likelihood of sustainability restatements, that the association is stronger for error restatements than for restatements due to methodological updates, and that SRA is significantly associated with the disclosure of quantitatively non-material restatements. We also document differences in these relations across provider-type, with only consultant assurance significantly associated with methodological restatements and restatements of a non-material amount. Our findings show that sustainability report restatements differ from financial restatements, and provide evidence in support of our argument that assurance providers may be using restatements in an attempt to expand market share in a new professional space. Further, we add to the understanding of professionalization through the exploration of the reliance on differing skill sets within a setting of interprofessional competition.