Abstract
This study investigated the effect of corporate social performance (CSP) on audit hours and whether the emphasis of matter (EOM) paragraphs in audit report moderates the association between CSP and audit hours. Auditors input audit hours based on the judgement of audit risk related to firm and managerial characteristics. They increase audit hours when they perceive that client companies are riskier; thus, audit hours reflect auditors’ perceptions of the firm. Prior studies have shown that high CSP is associated with ethical managers, leading to fewer audit hours. However, auditors’ perceptions of CSP can be different depending on their knowledge about firms’ potential risks. EOM paragraphs consists of risk-related factors, such as going-concern opinions or litigation and they should be considered when auditors determine that users need to check this information acquired in the auditing process. Therefore, EOM is likely to affect auditors’ perceptions of CSP. This study investigates this possibility by examining whether the associations between CSP and audit hours are different in firms with and without EOM paragraphs in audit reports. Using Korean listed companies from 2011 to 2016, we found that CSP has a negative association with audit hours, suggesting that better CSP is related to ethical corporate social responsibility (CSR) in Korea, consistently with the literature. However, CSP is not related to audit hours for firms with EOM paragraphs, possibly indicating that auditors differently interpret CSP based on their knowledge gained in the auditing process. Our findings contribute to the literature by suggesting that EOM paragraphs can be used in distinguishing firms’ CSR motivations and that information users should be careful in interpreting CSP.
Highlights
The Dow Jones Sustainability Index defines sustainability as the assessment of corporate economic, environmental and social performance
Supporting Hypothesis 1, we found that corporate social performance (CSP) is negatively associated with LNAH at the 5% level of significance, which suggests that the auditors tend to consider firms with a high CSP as having a low audit risk, resulting in fewer audit hours
Previous studies focused on the role of auditors as an external monitoring mechanism by examining whether firms with better CSP appoint auditors with high audit quality or whether auditors provide credibility to corporate social responsibility (CSR) [10,21]
Summary
The Dow Jones Sustainability Index defines sustainability as the assessment of corporate economic, environmental and social performance. Potential risks related to EOM increase the possibility that high CSP is the result of opportunistic CSR because managers of riskier firms have incentives to engage in CSR, dispersing negative attentions [8]. This study has implications that the combination of CSP and EOM may give financial information users a clue to infer which CSR motivations, ethical or opportunistic, lead to a high CSP. This can be used for investors to distinguish firms whose CSR contributes to their sustainability. To identify the way in which auditors perceive CSP or CSR, audit hours are necessary, but most prior studies use audit fees due to the lack of data.
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