Do socially responsible firms demand high‐quality audits? An international evidence

Abstract

AbstractThis paper investigates whether corporate social responsibility (CSR) performance influences the demand for high‐quality audits in terms of audit effort measured by audit fee. Using a sample of listed firms from 20 developed countries across three regions, namely United States (US), United Kingdom (UK) and Europe (EU) over the period 2002–2016 and different measures of CSR performance (environmental and social), we find that socially responsible firms demand high‐quality audits from external auditors. Further analysis shows that this result is robust to the use of alternate samples, country and firm level governance systems, and endogeneity concerns. Taken together, these findings suggest that socially responsible attributes of being ethical, honest, trustworthy, and transparent while reporting financial results motivate firms to demand high‐quality audits in order to preserve their reputation or socially responsible image. The main implication of our findings is that the stakeholders may place greater confidence in the financial reports of socially responsible firms as they are likely to demand high‐quality audits.