The complementary nature of audited financial reporting and corporate social responsibility disclosure

Abstract

ABSTRACT The confirmation hypothesis posits that the quality of audited financial reporting and nonfinancial disclosures, including CSR disclosure, are complementary. This study investigates the relationships between Big 4 audit firms and audit fees and the level of corporate social responsibility (CSR) disclosure. Previous studies used the first two variables as proxies for higher commitment to financial reporting verification. However, the present study provides evidence that those variables can also be used as proxies for nonfinancial disclosure (i.e. CSR). The findings show that positive relationships between Big 4 and audit fees and CSR disclosure exist, particularly with the general, energy, and community CSR themes. Therefore, these findings provide evidence that both Big 4 audit firm and audit fees have the potential to explain a company’s commitment to a higher level of CSR disclosure. The findings suggest that in the context of a country with a two-tier board system, low investor protection, and weak legal enforcement, regulations that enacted mandatory CSR disclosure for public companies are not sufficient to motivate them to disclose more. Companies’ commitment to higher levels of audit verification on financial reporting plays that role and is a signal of such commitment. This study provides empirical evidence to investors and regulators that the quality of audited financial reporting matters and can be used as a confirmatory of the level of CSR disclosure.