The Impact of Corporate Charitable Contributions on Audit Hours

Hongmin Chun,Yongsuk Yun,Jaeyon Chu

doi:10.3390/su11041045

Hongmin Chun, Yongsuk Yun + Show 1 more

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https://doi.org/10.3390/su11041045

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Abstract

Corporate social responsibility (CSR) is a pertinent strategy to enhance consumer perception of product quality and a company’s reputation. A growing body of literature has investigated whether corporate charitable contributions play a similar role to that of corporate social responsibility. Controversy still remains over the cause and effect of corporate charitable contributions. This study’s objective was to examine whether auditors apply more effort when reviewing firms with a higher level of corporate charitable contributions. For example, if auditors perceive corporate charitable contributions as the opportunistic behavior of managers, then the auditors thoroughly review and prepare financial statements. However, if auditors assess corporate charitable contributions as one of a firm’s ethical responsibilities, then they are not likely to put in more effort when reviewing such firms. This paper aims to examine how capital market participants assess a firm’s charitable contributions. Using an extensive set of data for Korea from 2008 to 2015, we conducted a battery of robustness analyses to address various endogeneity issues using the abnormal audit hour model, propensity score matching method, and 2SLS regression. We found that corporate charitable contributions were positively associated with audit hours. It indicated that auditors applied more effort when they reviewed firms with corporate charitable contributions. The results suggest that auditors in Korea do not perceive corporate charitable contributions as a CSR activity but rather as an indication of the opportunistic behavior of managers.

Highlights

Corporate social responsibility (CSR) is a pertinent strategy to enhance consumer perception of product quality and a company’s reputation [1] and to lower the cost of capital [2,3]
This study examines the relation between firms’ corporate charitable contributions and audit efforts using Korean data
We found that a higher level of corporate charitable contributions was significantly associated with higher levels of audit hours, suggesting that engaged auditors spend more time auditing firms with higher corporate charitable contributions

Summary

Introduction

Corporate social responsibility (CSR) is a pertinent strategy to enhance consumer perception of product quality and a company’s reputation [1] and to lower the cost of capital [2,3]. We examined whether corporate charitable contributions influenced auditors’ perceptions of firm risk. If corporate charitable contributions are attributed to the opportunistic behavior of managers, auditors concentrate more time on thoroughly reviewing and preparing financial statements. If they assess corporate charitable contributions as one of a firm’s ethical responsibilities, they are not likely to put in more effort when reviewing such firms. Despite the growing importance of corporate charitable contributions, there are few studies examining how capital market participants assess firms’ charitable contributions. This study aims to fill the void by examining auditors’ responses to firms’ charitable contribution choices using audit hours

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