Purpose This study aims to investigate the impact of environmental, social and governance (ESG) performance on audit pricing and examine how linguistic impression management in annual reports reshapes this relationship. Specifically, it explores the role of abnormal positive tone as a mechanism that either facilitates or suppresses the transmission of ESG signals into audit fees across auditors of differing quality. Design/methodology/approach Using a panel data set of 3,386 nonfinancial Chinese listed firms from 2010 to 2022, this study integrates textual analysis with econometric modeling to quantify abnormal positive tone and assess its interaction with ESG performance. The analysis uses a dual-path framework to disentangle substantive risk-mitigation signals from symbolic rhetorical manipulation. To ensure robustness, this study incorporates alternative ESG measures, lagged variables, propensity score matching and Heckman two-stage models. Findings Results reveal that ESG performance significantly reduces audit fees exclusively for firms audited by high-quality auditors, suggesting that these auditors effectively translate ESG credentials into lower risk assessments. In contrast, this relationship is absent among lower-quality auditors. Crucially, this study identifies a significant suppression effect among the lower-quality auditors: while superior ESG performance reduces inherent risk, it simultaneously induces abnormal positive tone, where the upward pricing pressure from identified narrative risks offsets the risk-mitigating benefits of ESG performance. This internal conflict between substantive signals and rhetorical noise leads to pricing paralysis, where the fee-reduction benefits of ESG are effectively neutralized. Conversely, high-quality auditors exhibit governance-deterrence, filtering out narrative noise to achieve superior audit pricing efficiency. Originality/value This study contributes to the audit pricing literature by introducing narrative tone as a behavioral channel through which ESG performance shapes auditors’ judgments. It integrates impression management theory with audit quality and reputation frameworks, offering a nuanced understanding of how linguistic cues influence risk perception. Methodologically, it advances research on nonfinancial conduct by operationalizing narrative tone as a measurable indicator of disclosure risk, highlighting that audit quality is the fundamental determinant of whether ESG performance is priced as a reliable signal or dismissed as rhetorical noise.
Purpose Drawing on the technology–organization–environment (TOE) framework, this study examines the factors influencing internal auditors’ intention to adopt data analytics (DA) and their role in enhancing organizational sustainability goals. This study aims to further investigate whether DA adoption intention mediates the relationship between the TOE factors and sustainability goals. Design/methodology/approach Data were collected through an online survey administered to internal auditors of publicly listed Malaysian firms. The hypotheses were tested using partial least squares structural equation modeling (PLS-SEM) via SmartPLS. Findings The findings demonstrate that technological, organizational and environmental factors significantly influence internal auditors’ intention to adopt DA, with organizational factors exerting the greatest influence. While all factors contribute to sustainability performance, technological factors have the strongest effect. Importantly, DA adoption intention acts as a key mediating mechanism through which these contextual factors translate into sustainability outcomes. Practical implications The findings of this study provide valuable insights for professionals and regulators regarding the key factors influencing DA adoption intentions and sustainability goals. Originality/value This is one of the few studies that has attempted to understand the relationship between DA and sustainability goals within an internal audit setting.
Purpose This study aims to revisit the information advantage of local signing auditors from the perspectives of geographic proximity and place attachment. Design/methodology/approach Using all firms that went public under the Chinese registration system from July 2019 to October 2022, the authors conduct multiple regression analysis to test how signing auditors’ geographic proximity and place attachment are jointly associated with client firms’ IPO underpricing. Findings Local signing auditors are associated with lower IPO underpricing than non-local auditors, consistent with the view that geographic proximity provides an information advantage that helps mitigate the information asymmetry faced by IPO firms. However, this association is weaker when signing auditors are more place-attached. Specifically, only local signing auditors with low levels of place attachment are associated with lower information asymmetry and IPO underpricing. Originality/value By examining the interplay between geographic proximity and place attachment, this study provides new insights into the role of local signing auditors in capital market pricing efficiency. The findings also offer a deeper understanding of place attachment in the financial field.
Purpose In recent years, a wealth of research has been conducted on the strategic consequences of institutional cross-ownership (ICO) for companies. However, there has been little research on the impact of ICO on audit practices. Focusing on audit fees, this paper aims to examine the relationship between ICO and abnormal audit fees. Design/methodology/approach Using data from Chinese-listed companies, the authors adopted fixed-effects regression and a series of endogeneity tests to explore the impact of ICO on abnormal audit fees. Findings This paper finds that ICO is associated with abnormal audit fees. After distinguishing the direction of abnormal audit fees, the authors find that ICO is associated with positive rather than negative abnormal audit fees. Through the mechanism test, this paper finds that ICO can lead to rent-seeking behaviour, which in turn increases abnormal audit fees. Originality/value This paper offers a novel and important perspective on the antecedents of abnormal audit fees, thereby contributing to a more comprehensive understanding of the economic consequences of ICO. Finally, the findings of this paper are instructive and relevant. Regulators should pay more attention to firms with ICO, and this paper calls for the strengthening of monitoring and supervision for possible audit collusion.
PurposeThis study aims to examine the impact of adopting the International Standard on Auditing (ISA) 701 on audit quality (AQ) across different economic contexts. It assesses whether the standard has effectively enhanced the informational value and reliability of audit reports for publicly listed companies. Design/methodology/approachThis study adopts a quantitative approach using a panel data set of publicly listed companies in both developed and emerging markets. The AQ indicators are compared before and after the implementation of ISA 701, allowing for an assessment of the standard’s effectiveness across distinct regulatory environments. FindingsThe results show that ISA 701 adoption has not yet fully achieved its objective of enhancing AQ on a global scale. Although improvements are observed, AQ in emerging markets remains lower than that in developed markets. However, these markets have shown relatively greater improvements post adoption, suggesting that ISA 701 has helped increase audit rigor in markets where institutional frameworks are less mature. Practical implicationsThe findings support the continued promotion of ISA 701 and highlight the need for complementary reforms in emerging markets to ensure that the standard reaches its full potential in enhancing AQ. Originality/valueThis study is one of the first, to the best of the authors’ knowledge, large-scale comparative assessments of ISA 701’s implementation effects across different economic contexts. This contributes to the understanding of how global audit standards perform in practice and identifies opportunities to strengthen their effectiveness, particularly in emerging markets.
PurposeThe communication between predecessor and successor auditors is of great importance in theory and practice, which aims to reduce information asymmetry and assist the successor auditors in identifying potential risks. Given that social connections based on homophily may further facilitate effective communication and knowledge sharing, would audit quality be further improved if the predecessor and successor auditors have a close relationship? It is still unknown. Accordingly, this study aims to examine how social connections between predecessor and successor auditors influence audit quality. Design/methodology/approachThis study examines this question by using unique data manually collected from China. It empirically examines the impact of social connections between predecessor and successor auditors on audit quality, using a sample of Chinese A-share listed companies from 2013 to 2021. FindingsSocial connections between predecessor and successor auditors significantly reduce audit quality, with the underlying mechanism being the reduced audit effort. In addition, this study incorporates factors including mandatory auditor rotation, audit firm rotation, more detailed social connection measure and the persistence of social connection effect into our analysis. The study’s core conclusions remain robust to a battery of robustness checks. Notably, the negative effect of such social connection is more pronounced for important clients and firms located in provinces with a lower degree of regional marketization. Originality/valueTo the best of the authors’ knowledge, this study is the first to examine whether and how the social connection between predecessor and successor auditors on audit quality. The findings contribute to the literature by demonstrating the social connection effect in the culture in which connection (guanxi in Chinese) plays a central role.
PurposeWhile previous research has enriched the understanding of the economic consequences of auditor characteristics, but little research has explored the relationship between the characteristic of auditor busyness and capital markets. This paper aims to examine the impact of auditor busyness on stock price crash risk. Design/methodology/approachThis paper collects data on auditor busyness from 2012 to 2023 and examines the impact of the behavioral characteristics of auditor busyness on stock price crash risk. Hypotheses are tested using a baseline ordinary least squares regression model. FindingsResearch findings indicate a significant positive correlation between auditor busyness and stock price crash risk. Mechanism analysis reveals that auditor busyness expands management’s scope for earnings manipulation and ultimately elevating stock price crash risk. Further analysis indicates that when firms have more effective internal controls and audit committee operations, and when auditors possess stronger industry expertise, the positive relationship between auditor busyness and stock price crash risk is significantly weakened. In contrast, this positive relationship becomes more pronounced in firms with highly concentrated ownership, distracted institutional investors and audits conducted by Big4 audit firms. Originality/valueOverall, this study enriches the literature examines the relationship between auditor busyness and stock price crash risk, while providing evidence for understanding the impact of auditor behavior on capital market stability.
Purpose This paper aims to investigate the influence of firm underperformance duration on audit fees. Grounded in the behavioral theory of the firm, underperformance duration indicates the length of time a firm's performance falls below its industry-based aspiration level. The authors hypothesize that persistent underperformance intensifies pressure for short-term earnings improvements from shareholders, thereby increasing managerial risk-taking or misconduct and, consequently, audit risk and fees.Design/methodology/approach Using 71,682 US firm-year observations spanning from 2001 to 2022, we regress audit fees on the firm's underperformance duration together with a set of control variables adopted from well-established audit fee models. Various robustness checks, including a firm fixed-effect model, an alternative proxy and measurement for firm underperformance duration and the entropy-balanced method, are also adopted.Findings The results reveal a positive association between the duration of underperformance and audit fees, suggesting that auditors interpret sustained performance shortfalls relative to aspiration levels as indicators of heightened risk. However, the marginal effect of the underperformance duration on audit fees diminishes over time, consistent with auditor learning or the normalization of perceived risk as the client's performance becomes more predictable. The authors also find that a longer audit report lag correlates with extended underperformance duration, suggesting increased auditor effort and supporting our audit risk hypothesis. Finally, the authors find that auditor-client tenure could moderate the positive relationship between audit fees and underperformance duration, implying that familiarity and trust partially offset auditors' perceived heightened risk.Originality/value This study enriches the audit fee literature by emphasizing the significance of firm underperformance duration in influencing audit pricing.
PurposeThis study aims to design a chain mediation model to investigate the effect of digital technology risk exposure on audit fees. Moreover, it highlights the possible mechanisms and moderators underlying this relationship. Design/methodology/approachThe auditor’s sense of responsibility and effort is taken as the mediators, according to psychological contract and audit risk theories. The study also has examined the moderating effects of external pressures (such as the regulation strength of information security and public concern) and internal pressures (including audit engagement complexity and auditor reputation). The study also finds that audit committee regulation, the digital transformation of audit firms, CEOs with IT background, and auditor industry specialization mitigate the effects. FindingsThe positive and significant connection between exposure to the risk digital technology and audit fees is revealed by the findings. This relationship is mediated by both auditors’ sense of responsibility and effort, along with their sequential chain. Both external and internal stresses exacerbate the above positive association. It has also been found that the relationship is negatively moderated by audit committee regulation, audit firm digital transformation, CEOs with IT backgrounds and auditor industry specialization. Originality/valueThis study contributes to research in the field of digital transformation by illustrating the impact of digital technology risk exposure on audit pricing, incorporating psychological contract theory into audit risk theory and demonstrating how the security of digital construction affects audit fees.
PurposeThis study aims to explore the impact of ownership structure and board composition on Key Audit Matter (KAM) disclosures in the Gulf Cooperation Council (GCC) region, where concentrated ownership and unique governance structures prevail. Design/methodology/approachUsing a hand-collected sample of 430 nonfinancial firms listed on GCC stock exchanges from 2016 to 2021, the study examines the effects of royal, family and foreign ownership and board composition on KAM disclosures. Multiple regression models control for firm characteristics and address potential endogeneity concerns. FindingsThe results reveal a significant negative association between royal ownership and KAM disclosures, indicating that firms with royal owners report fewer KAMs. In contrast, family and foreign ownership are positively associated with KAM disclosures. Similarly, whereas royal board directors reduce KAM disclosures, foreign directors increase them. Practical implicationsUnderstanding how ownership structures and board composition influence audit transparency can guide policy reforms and investor strategies, particularly in emerging markets characterized by concentrated ownership and politically connected board members. Originality/valueTo the best of the authors’ knowledge, this study is the first to empirically examine the effects of royal, family and foreign ownership and board composition on KAM reporting in the GCC. It contrasts the role of royal influence in reducing audit transparency with the positive effect of foreign ownership and directorship. The findings extend KAM literature to developing markets, offering important implications for governance reform, audit practices and investors in emerging economies.
PurposeThe purpose of this study is to examine how intuitive versus deliberative information-processing and linguistic versus visual information influences auditors' judgement and decision-making (JDM) in a risk assessment. The authors focused on: assessing the risk of material misstatement (RoMM), identifying and documenting risks and controls and task completion time.Design/methodology/approachThe authors conducted an experiment with 284 practicing auditors, manipulating processing mode and presentation format. Participants reviewed a case which they assessed as "realistic." Hypotheses were tested using ANCOVA analyses.FindingsThe authors found that intuitive processing led to higher RoMM estimates than deliberative processing - but only in the linguistic format. No difference appeared in the visual format, contrary to expectations. As expected, auditors using intuitive information-processing completed the task faster than those using deliberative-processing but identified fewer risks and controls. Surprisingly, this effect was not dependent on the presentation format.Originality/valueThe authors contribute to prior studies (Fuller and Kaplan, 2004; Griffith et al., 2021; Wolfe et al., 2020) by showing that intuitive and deliberative processing have distinct effects not only between tasks but also within a single task. Hamdam et al. (2022) theorized that data visualization might enhance intuitive processing in auditor JDM. To the best of the authors' knowledge, the current study is among the first to test this premise empirically in the auditing context. Finally, this study informs firms and regulators that while deliberative processing may improve risk identification and documentation, it does not necessarily affect perceived client risk.
PurposeThis study aims to investigate whether audit committees shape the corporate social responsibility (CSR) disclosure practices of family-controlled and politically connected firms. Specifically, this study examines the extent to which audit committees mitigate the tendency of these firms to withhold CSR information and enhance transparency in an emerging market context. Design/methodology/approachThis study analyses 1,108 firm-year observations from 140 non-financial firms listed on the Dhaka Stock Exchange over the period 2013–2023. To examine how family control, political connections and audit committees influence CSR disclosure. This study estimates several multivariate regression models. In addition, to strengthen causal inference and address potential endogeneity concerns. This study employs entropy balancing and a regression discontinuity design as complementary identification strategies. FindingsThis study finds that family control and political connections significantly reduce CSR disclosure, whereas effective audit committees enhance transparency and mitigate these negative effects. CSR disclosure is lowest in firms that are both family-controlled and politically connected, indicating mutually reinforcing constraints on transparency. However, audit committees consistently counteract these tendencies. Their effectiveness strengthens after the Corporate Governance Code 2018 and is particularly pronounced in firms with low institutional ownership and in environmentally sensitive industries. Finally, audit committees’ independence, accounting expertise and female representation further improve CSR reporting and enhance the committee’s moderating role. Practical implicationsThis study suggests that regulators and firms should promote balanced governance mechanisms that curb opportunistic behaviour by family owners and politically connected directors while retaining the benefits these governance structures offer. Strengthening audit committees, particularly by enhancing their independence, expertise and diversity, has significant potential to mitigate the negative effects of family influence and political capture and support greater CSR disclosure. Social implicationsThis study highlights the critical role of strong internal governance, particularly effective audit committees, in promoting transparent CSR practices in firms characterised by concentrated family ownership and political connections. In emerging markets like Bangladesh, where external enforcement is limited, empowered audit committees help curb opportunistic behaviour, strengthen accountability and protect stakeholder interests. The findings support ongoing governance reforms and emphasise the need for greater public awareness around the social responsibilities of influential business groups, ultimately contributing to improved transparency, fairer stakeholder treatment and stronger trust between firms and society. Originality/valueThis study offers novel evidence by jointly examining how family control and political connections shape CSR disclosure, and by establishing the moderating role of audit committees within these ownership settings. Unlike prior research, which typically investigates these governance factors individually, this study provides an integrated analysis that reveals how audit committees can counteract the combined influence of family dominance and political embeddedness. This multidimensional approach advances understanding of internal governance effectiveness in emerging markets.
PurposeThis study aims to identify predictive patterns of material accounting misstatements using detailed audit adjustments and preaudit financial statement data to improve early detection of reporting risks among listed companies.Design/methodology/approachA regularization-based prediction algorithm is applied to identify patterns in preaudit data that signal the risk of material misstatements before audit completion. The analysis uses preaudit and audited financial statements from Croatian listed companies.FindingsThe key predictors differ systematically across types of misstatements. The most relevant income-related misstatement predictors include absolute total accruals, company size, high return on assets, receivable turnover and sales. However, accounts payable turnover is the strongest predictor of material adjustments across operating, investing and financing cash flows. A distinct predictor set is associated with the likelihood of receiving modified audit opinions. Smaller firms exhibiting financial distress indicators (going concerns and losses), higher soft assets and greater leverage are more likely to receive modified opinions.Practical implicationsThe findings offer valuable insights for auditors, audit committees, financial statement users and other stakeholders by enabling earlier identification of misreporting risks, thereby enhancing audit efficiency and financial reporting quality.Originality/valueUsing a unique institutional setting in which firms disclose both preaudit and audited financial statements, this analysis extends prior research by examining predictors of non-income-related misreporting alongside income-related misstatements. The dataset mitigates common challenges in fraud and restatement prediction, including selection bias and severe class imbalance, and provides novel evidence on predictors of accepted versus waived material audit adjustments reflected in modified audit opinions.
PurposeAuditors play a crucial role in a company's initial public offering (IPO). This study aims to examine whether IPO audit quality, as reflected in regulatory scrutiny of IPO registration statements, differs between Big 4 and Second-Tier auditors in small and mid-sized IPOs.Design/methodology/approachAs every registration statement must be reviewed by the Securities and Exchange Commission (SEC), the authors use the receipt of and responses to accounting-related SEC comments on the registration statement (i.e. "accounting comments") as measures of IPO audit quality. The authors examine the number and types of accounting comments on the registration statement and the effectiveness of firms' accounting comment remediation.FindingsThe authors find that Big 4 clients receive significantly fewer initial accounting comments than clients of Second-Tier auditors. They also address these comments in significantly fewer days, over fewer comment rounds, and are more likely to resolve them within a single round. Collectively, the results suggest that IPOs audited by Big 4 firms exhibit stronger initial compliance with SEC reporting standards and greater effectiveness in remediating accounting-related issues when they are raised.Originality/valueTo the best of the authors' knowledge, this study is the first to examine whether auditor type is associated with the outcomes of the SEC's registration statement review process. These insights contribute to the literature on audit quality in the IPO setting by examining IPO audits through SEC comment letters and highlighting the implications of auditor type for SEC review outcomes. These insights will be valuable to key IPO stakeholders, including management, boards, audit committees, underwriters, venture capital investors and regulators.
PurposeThis study aims to examine whether and how the quality of internal control over financial reporting (ICFR) affects banks' operational efficiency.Design/methodology/approachFirst, the authors use a two-stage, nonoriented, variable-returns-to-scale slack-based data envelopment analysis model to calculate banks' operational efficiency. Second, the authors use cross-sectional Tobit and ordinary least squares regressions to test the hypotheses. Third, the authors use propensity score matching and entropy balancing to control for omitted variables and model misspecification and use the Heckman two-stage treatment-effect model to address self-selection bias. Finally, the authors conduct a structural equation model to identify how ICFR affects banks' operational efficiency.FindingsThe results corroborate that banks' operational efficiency is negatively associated with ineffective ICFR. This negative association is more pronounced when internal control weaknesses relate to revenues, restatements or fraud and when banks have higher human capital, lower board independence and lower free cash flows. Moreover, banks improve operational efficiency by remedying material weaknesses in their ICFR. The findings remain robust across various analyses, including change analyses, alternative measures of ineffective ICFR and operational efficiency, additional control variables and the exclusion of banks during financial crises, COVID-19 and those not under Federal Deposit Insurance Corporation Improvement Act.Practical implicationsThe findings inform managers and regulators that effective ICFR complements other bank regulations and boosts banks' operational efficiency.Originality/valueThe research shows that effective ICFR is a key driver of banks' operational efficiency, contributing to ongoing debates and mixed evidence.
PurposeAudit regulations suggest that auditors consider insider trading as part of their assessment of and response to the risk of material misstatement as insider trading provides information about audit-relevant outcomes such as weak internal controls and fraud. The authors investigate whether audit fees reflect the increased risk revealed and more audit effort induced by insider selling.Design/methodology/approachThis study uses empirical analysis with OLS.FindingsThe authors find that relative to companies with net insider buying, audit fees are higher among companies with net insider selling, especially when the insiders are officers. In addition, the authors find more audit effort is needed when a large, accelerated filer changes to a net insider seller. We further find that the value of total insider purchase is negatively related to audit fees among companies of net insider buying.Originality/valueCollectively, the findings suggest that auditors' risk assessments and effort are sensitive to information reflected in insider trading, consistent with regulatory recommendations for auditors to consider nontraditional risk characteristics.
PurposeThis study aims to investigate the relationship between the prior audit experience of Chief Financial Officers (CFOs) and corporate internal control quality, specifically how the professional background enhances their expertise in internal control. This expertise may enhance their effectiveness in overseeing and maintaining robust internal control systems. Design/methodology/approachUsing a sample of Chinese A-share listed firms from 2012 to 2020, this study examines the association between former-auditor CFOs and internal control quality. To ensure the robustness of this study’s conclusion, the authors use a Difference-in-Differences design, propensity score matching, entropy balancing, instrumental variable estimation and alternative fixed-effects specifications. FindingsThis study found that CFOs with prior audit experience are associated with improved internal control quality. This association is more pronounced when the CFO has senior-level audit experience, more recent tenure at an accounting firm, prior experience at an international Big 4 or a domestic Top 10 accounting firm or when the firm operates in a highly digitalized environment. Aligned with the COSO Framework (2013), path analysis reveals two key channels: improved risk assessment and strengthened internal supervision. Furthermore, former-auditor CFOs contribute to more reliable financial reporting, greater accounting conservatism and reduced corporate default risk. Originality/valueThese findings expand the literature on the benefits of accounting firm experience and clarify the underlying mechanisms. Additionally, this study provides a plausible explanation for the increasing preference for appointing CFOs with audit experience.
PurposeThe purpose of this study is to examine whether the average continuing professional education (CPE) hours per Certified Public Accountant (CPA) in accounting firms’ audit departments affects audit quality. This paper aims to identify which segments of the audit market benefit most from enhanced professional education. Design/methodology/approachThis study analyzes publicly disclosed information on the average CPE hours per CPA in accounting firms’ audit departments to examine the role of CPE in audit quality, especially in non-Big 4 auditors. The data on CPE hours is manually collected from auditors’ annual transparency reports. The sample consists of 12,884 firm-year observations from both Korean public and private firms between 2017 and 2020. FindingsThis study finds that increasing CPE hours improves audit quality, with the positive effect being more pronounced in firms audited by non-Big 4 auditors. This suggests that non-Big 4 auditors provide higher-quality audits when they acquire more training hours, compared to Big 4 auditors. In addition, the effect of CPE is stronger when non-Big 4 auditors serve private firms and when they are industry non-specialists. The results remain robust across alternative measures of audit quality and CPE, as well as alternative model specifications (e.g. propensity score matching, change analysis and models with auditor or firm fixed effects) to address potential endogeneity concerns. Practical implicationsThe findings that increasing CPE hours enhance the quality of audits conducted by non-Big 4 auditors and industry non-specialists have important implications to regulators, practitioners, and academics. This paper provides evidence on which segments of the audit market benefit most from the competence gained through CPE that is crucial for enhancing audit quality. Originality/valueThis study provides large-sample empirical evidence that directly examines the differing effect of CPE hours on audit quality between Big 4 and non-Big 4 auditors. It also contributes to the literature on the role of CPE by enhancing our understanding of which segments of the audit market benefit most from highly educated auditors.
PurposeThis study aims to investigate how a firm’s engagement in foreign direct investments (FDIs) affects the firm’s audit outcomes. Design/methodology/approachUsing project-level FDI information from Orbis provided by the Bureau van Dijk, the authors use OLS and probit regressions in their empirical analyses. They also undertake instrumental variable regressions using natural disaster shocks in destination countries, identified using the EM-DAT database administered by the Center for Research on the Epidemiology of Disasters, to address potential endogeneity issues and establish causal inferences. FindingsThe authors find that firms that announce FDI, engage in a larger number of FDI projects, or undertake more intensive FDI engagements incur higher audit fees. The authors also find that FDI-active firms exhibit a higher likelihood of receiving going-concern audit opinions when they engage in FDI activities or their FDI engagements are more intensive. These findings suggest that auditors recognize elevated audit risks arising from the complexity and uncertainty associated with FDI activities. Further analysis indicates that country-level corruption influences how FDI engagement affects auditors’ risk assessments, highlighting the role of both project attributes and host country attributes. Originality/valueThe findings of this study suggest that not only does a firm’s FDI facilitate the firm’s strategic business objectives but FDI also has significant implications for its financial reporting environment and audit outcomes.
PurposeThis paper aims to examine the effect of compliance to mandatory corporate social responsibility (CSR) on audit fees in the Indian setting. Design/methodology/approachThe sample consists of 1,291 Indian-listed firms that were mandated by Clause 135 of the Companies Act 2013 to spend 2% of their average three-year profits before tax as CSR expenditure. The period of the study is from 2015 to 2019. The authors use a fixed-effect regression model. In addition, the authors also use the Heckman Selection Model, controlling for potential self-selection, a difference-in-differences and the regression discontinuity design analysis. FindingsThe authors find that firms complying with mandatory CSR regulation had to incur high audit fees, and the effect is more pronounced for firms that did not have CSR activities before the mandatory CSR regulation. In addition, the authors also find that audit fees are higher for firms with higher levels of operating, business and financial reporting risks. Thus, the result supports the notion that auditors associate higher inherent risk with audit risk for firms that are forced to engage in CSR activities. Practical implicationsThe findings are potentially informative to regulators and policymakers in India and in other jurisdictions that may be considering mandating CSR. Originality/valueTo the best of the authors’ knowledge, this is the first work that looks at how auditors react to the firm’s compliance with mandatory CSR policies. The authors show that for an auditor, CSR compliance is an aspect of audit risk and it has not been explored in the extant literature, as a regulatory intervention in the form of mandatory CSR spending is unique (first of its kind) in the Indian setting. Prior work focuses on CSR disclosure; however, the setup allows us to examine CSR spending mandated by regulation. Moreover, the authors also add to the literature on audit fee determinants.
