Towards a more accurate audit assessment: can corporate social performance provide clues?

Abstract

Regulators have been particularly concerned with the increased frequency of auditor's deficiencies related to material misstatement as reported in the 2017 Public Company Accounting Oversight Board (PCAOB) inspection brief. This research examines the relationship between auditor's risk of failing to capture material misstatement and the clients' social responsibility concerns. The findings indicate that clients with social performance concerns (human rights, environment, and governance) were associated with higher auditor's risk assessment, as indicated by higher audit fees. The results are consistent after controlling for various auditor and client variables. Implications of this study support the importance of incorporating social performance of clients in the auditor's evaluation since it can provide key insights into the client's underlying risk of future litigations which can arise due to socially irresponsive behaviours. In doing so, we seek to come closer to an accurate client assessment as well as respond to the call of PCAOB for minimising the deficiencies of the auditing process particular in the area of material misstatement.