Master Thesis Proposal
The effect of CSR on audit opinion
MSc in Accounting & Financial Management
Academic Year 2021-2022
Shuangqi Wu 520417
The effect of CSR reporting and activities on audit opinion
Florian Elsinger, Deparment of Accounting & Control
1 March 2022
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Introduction
With the emergence of Corporate Social Responsibility (CSR) and the increase of its
importance in the recent years, organizations have been feeling pressure from their
stakeholders to incorporate CSR into their strategies. Corporate Social Responsibility can be
defined as “a concept whereby companies decide voluntarily to contribute to a better society
and a cleaner environment” (Commission of European Communities, 2001, p4). While some
organizations have been practicing CSR since the 1980s, it was the shift to the stakeholder
view and globalization that had really brought CSR to the organizations’ attention.
The shift to the stakeholder view entails that the organization is not only being held
accountable for increasing its shareholder value but also for its non-financial performance in
environmental, ethical, and human development. This responsibility put on the organizations
also implies an increase in necessity to report on these non-financial performances in order to
meet the public’s demands for transparency that accompanies the stakeholder view (Del
Maso et al., 2019). Studies have also confirmed that stakeholders view CSR reporting as
informative (Cormier et al., 2011; Clarkson et al., 2013; Griffin & Sun, 2013).
Together with the public’s interest and focus on organization’s CSR practices, the
attention from accountants and auditors to these practices has also increased. This is due to
the link between non-financial performances and the firm’s investment decisions that impact
a firm’s financial/operating risks and the necessity for external judgement on the credibility
of the CSR report (Chen et al., 2012). With the creation of the International Sustainability
Standard Board (ISSB) in 2021, it is natural that CSR/ESG (environmental, social, and
corporate governance) reporting will become a more frequent component that is included in
the control performed by auditors. As CSR/ESG (reporting) is a relatively new feature and
auditors are believed to play an important role in its evaluation, studies on CSR reporting and
audit related factors have been increasing in the recent years.
Forming an audit opinion is done by auditors whereby the financial statements of an
organization are assessed on material misstatements (ACCA, n.d.). Based on the assessment
the auditors can give four types of audit opinions: unqualified opinion, qualified opinion,
disclaimer of opinion, and adverse opinion, with an unqualified opinion being the report that
most organizations expect to receive. An unqualified opinion indicates that the auditors are
confident that the financial statements do not include any material misstatements i.e., the
stakeholders’ decision making will not be impacted by the information in the financial
statements (Karadjova et al., 2020). Audit opinions and reports indicate the credibility of a
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company’s financial statements and can be used by stakeholders to decide whether to sell or
acquire shares of an audited company (Adebayo, 2011; Robu & Robu, 2015).
Numerous studies have researched the link between CSR and earnings management,
going-concern issues, and audit fee in order to make a conclusion on the effect of CSR
(reporting) on the audit. According to Kim and Kim (2013), a good CSR should decrease the
company’s audit risk as it is linked to increased internal control and therefore should lead to a
lower audit fee. However, the opposite effect was found in the results, showing a positive
effect between audit fees and CSR. The authors explained this effect by arguing that audit
fees are not based on the internal control/accounting and high performing organizations have
higher financial requirements (leading to a higher audit fee). A study by Chen et al., (2012)
tested the same theory and found that both audit fees and issuing going concern opinions are
linked to CSR performance. The more superior the CSR performance, the lower the audit fee
charged and the lower the chance of receiving a going concern opinion from the auditors
which gives support to the argument that CSR performance is negatively associated with
perceived audit risk (complementary theory). In contrast, Carey et al., (2017) found a positive
relationship between voluntary CSR reporting, earnings management, and audit fees, stating
that the high audit fees may be related to a higher perceived audit risk (audit-risk theory) as
companies that commit to voluntary CSR reporting are more often to be found to engage in
earnings management. Other studies that have looked into the relation of CSR and
management’s decision to perform earnings management also found a link between these two
variables, but the direction remains doubtful (Atkins, 2006; Scholtens & Kang, 2013).
On the user’s side of the financial statements and CSR reports are the investors and
other stakeholders. Researchers have explored how CSR is perceived by investors and
whether CSR reporting can be used as a strategy. As CSR reporting gives a broader
perspective of the company’s activities, it can be used to signal its trustworthiness to the
company’s investors (Chen et al., 2016; Peifer & Newman, 2020). Studies show that CSR
reporting indeed affects the investor’s trust as share value declined less drastically when an
organization that engages in high-profile misconduct had reported on its CSR activities
before. Moreover, stakeholders evaluate firms’ CSR based on transparency and information
quantity as the quality of CSR reports are hard determine (Pérez, 2015). These results imply
that CSR reporting could also be misused by organization for reputation management which
is verified by several studies. Firms operating in a “sin” industry (tobacco, firearm) use CSR
reporting as a strategy to distract the stakeholders from their disputable ventures (Grougiou et
al., 2016). Furthermore, organizations that are engaging in earnings management are more
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likely to voluntarily disclose on CSR activities (Carey et al., 2017). Due to the finding that
companies (mis)use the reports to signal trustworthiness to the outside world and the
suggestion that stakeholders are indeed influenced by the company’s CSR reporting, it is
important for the research and the stakeholders to study the link between CSR reporting
(quality) and audit opinion as auditors are the agents that assess the credibility of the (non)financial statements which allows stakeholders to improve their decision-making.
Some of the researchers have tried to conclude on what the role of external assurance
on CSR reporting credibility is as without credibility and have found a positive link between
assurance and perceived CSR reporting credibility (Hodge et al., 2009; Ball et al., 2011;
Pflugrath et al., 2011, Chen et al., 2016). Ball et al., (2011) investigated the association
between credibility of the disclosure of non-financial information (CSR) and audit fees,
finding that higher audit fees is related to management forecasts (voluntary information) that
are more accurate, more informative, and hence more credible to investors. Chen et al.,
(2016) building on the results of Ball et al., found that higher audit fees are positively linked
to the chances of companies issuing a stand-alone CSR report indicating that the commitment
to verification of the financial statements (proxied by audit fees) could also increase the
credibility of the company’s non-financial reporting as management is only believed to be
willing to issue an CSR report when it is sufficiently credible. While these results all find
similar results and indicate that external assurance lends perceived credibility to CSR
reporting, a direct link between external assurance and actual credibility is missing. This gap
can be closed by examining the link between CSR report quality and audit opinion which is
the auditor’s rating of the credibility of an organization’s statements.
The importance of this research can be explained by the fact that audit opinion has a
significant impact on the (potential) investors and thereby also the future of the firm.
Therefore, the audit opinion should only be based on the credibility of the (non)-financial
reports. By investigating the link between the audit opinion and CSR report quality, a more
solid conclusion can be made regarding whether or not investors can use the auditor’s opinion
of the financial statements to assess non-financial information disclosed. To study this link, a
comparison of received audit opinion will be made between companies with CSR reporting
and without. Within the companies that report on CSR, distinction is made in levels of CSR
reporting quality. I hypothesize that companies that report on CSR will more often receive an
unqualified audit opinion and that this effect will be larger for companies that have a higher
CSR reporting quality in comparison to companies that have a lower CSR reporting quality.
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The remainder of this paper is organized as follows: in the next section, I will review
the literature relevant for this subject and develop the hypotheses followed by the data
collection and research design where I will discuss the methodologies, test, and the
measurement of the variables.
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Literature review and hypothesis development
In this section, I will discuss the main findings of the relevant literature on the subject
and how that leads to the development of the hypotheses.
The concept and the evolution of CSR (reporting)
Although some aspects of corporate social responsibility (hereafter CSR) have already
existed in the Roman Laws and the concept of CSR originated from the time around the
World War II, it has only been gaining significantly more attention from the public,
organizations, and the research in the last two decades (Lee & Carroll, 2011; Agudelo et al.,
2019). Commission of European Communities (2001, p4) defines CSR as “a concept
whereby companies decide voluntarily to contribute to a better society and a cleaner
environment”. Through an analysis of 37 CSR definitions, Dahlsrud (2006) made a
distinction between different types of dimensions within CSR that are used consistently in the
various available definitions of CSR.
1. The environmental dimension
2. The social dimension
3. The economic dimension
4. The stakeholder dimension
5. The voluntariness dimension
Bowen (1953) was one of the pioneers in the research of the CSR that we know in the
modern era. Realizing the power that the large corporations had at that time (and now),
Bowen expected the actions of corporations to affect the society and claimed that it was
necessary for the corporations to start putting focus on what the impact of their decisionmaking and actions could be on the society. Calling it the social responsibilities, Bowen
suggested that corporations should make decisions which are in line with the objectives and
values of the society. Following Bowen, more researchers and authors became interested in
corporate actions and its impact on the society.
With scandals and accidents happening such as the oil spill in Santa Barbara, the
Energy Crisis in the 1970s, the recent Enron scandal alongside the emergence of
multinationals and globalization, CSR has become more crucial than ever (Lee & Carroll,
2011; Agudelo, 2019). Related but distinct from CSR, the past two decades have also marked
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the shift from the shareholder view of the firm to the stakeholder view of the firm which
states that corporations should act in the interests of agents other than merely their
shareholders (Magill et al, 2015; Freeman & Dmytriyev, 2017; Del Maso et al, 2020). In line
with the Bowen and other researchers’ view, the stakeholder view of the firm suggests that a
(relatively) large corporation that is leading in its sector can have a considerable impact on its
employees, consumers and thus also the society. As a result, firms should be responsible for
activities other than increasing the shareholder value i.e., human development, ethical and
environmental activities. In order to provide transparency that comes with the shift to the
stakeholder view, reporting on CSR activities by firms has become more frequent in the past
twenty years. Through a survey, KPMG (2017) concluded that of the 250 largest companies
worldwide, 93% reports on CSR activities with an increase of 10% in the past decade.
Although CSR has gained significantly more importance in the society, the purpose of it is
still doubted by some as they argue that organizations are solely engaging in CSR activities
due to the pressure received from the society and that these activities are not favorable for the
economy (Salls, 2004). On the other side, proponents of CSR claim that it improves the
communication between the organizations and its stakeholders and therefore creates value for
the organizations (Alcaniz et al., 2010; Goh-Jeevan & Loh, 2011; Hur et al., 2014). This
latter view fits the most used integrated approach of CSR where organizations are redefining
the purpose of the business in combination with CSR activities (Post et al., 2002).
CSR reporting and its use
Various researchers have found that voluntary CSR reporting is seen as useful by
stakeholders (Clarkson et al., 2013; Christensen, 2016; Chen et al, 2016). From a theoretical
perspective, research also indicate that CSR reporting can play a role in increasing the
organization’s reputation. In a review of 77 articles done by Pérez (2015), the author found
information quantity/transparency to be positively linked to the CSR reporting-reputation; the
quantity of information reported by the organization influences its reputation. This link is
mainly justified by two theories that are based on how organizations can use CSR reporting
to improve the relationship with the stakeholders (institutional/legitimacy theory) and the role
of information provision through CSR reporting to counter agency problems (agency theory).
These two theories are overlapping theories according to Gray et al., (1995) where both are
aiming to explain the interactions between the organizations and society. The Legitimacy
theory’s focus is on the coherency between the organization’s value and the society’s value
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while the Stakeholder’s theory’s focus is on the effect of the relationship between the
organization’s stakeholders and the organization itself. By engaging on CSR activities and
reporting on them, organizations are able to provide transparency to show the society the
coherence of its value and thereby strengthening the relationship with its stakeholders (Chen
& Roberts, 2010). Based on these theories, CSR reporting naturally leads to a better
reputation through information quantity (Pérez, 2015). The author concluded that the effect of
the quality of information on the organization’s reputation is far less researched and less
clear.
Clarkson et al (2013) researched how additional voluntary environmental disclosures is
perceived by the investors and found that environmental disclosures which CSR reporting
partly consists of, are perceived to be related to future performances by the investors and
therefore affect their decision making. In particular, the authors state that the voluntary
disclosed information is used to estimate the firm’s future value and could influence the
future stock price. In a study conducted by Christensen (2016), it was found that firms that
engage in CSR reporting are less inclined to take part in future misconduct (bribery,
kickbacks) which implies that CSR reporting aids firms in improving their behavior. In
addition to that, however, the results also show that even if the firm had engaged in highprofile misconduct, previously issued CSR reports influenced the perception of the
stakeholders/investors in such way that the stock price decreased less drastically, suggesting
that CSR reporting protects the firm to a certain extent regardless of its behavior.
The results of the discussed research indicate that while CSR reporting can positively
influence a firm’s behavior, it could also be abused by firms to give external parties an image
of trustworthiness as research and theory show that investors and other stakeholders tend to
be influenced by the fact that a company engages in CSR reporting and no by the quality of
such report. The CSR scandal of Volkswagen in 2015 is a prominent example of how
organizations can abuse CSR reporting to increase their brand reputation. In its “Strategy
2018” report, Volkswagen claimed that the company aimed to minimize harmful emission
and support fuel efficiency in the design of its cars. In 2015, it became clear that Volkswagen
had installed software that made it possible for the controlled vehicle to conceal the actual
emission of nitrogen oxide.
As CSR reporting can be (mis)used by organizations to signal trustworthiness to its
stakeholders and even the effect of high-profile misconduct is somewhat mitigated by issuing
a CSR report, it is natural that researchers are looking into the credibility of these reports. As
these reports often have an impact on the financial statements of an organizations and with
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the emergence of CSR regulations, society has begun to look at auditors and their role in its
evaluation.
The purpose of audit (opinion)
Forming an audit opinion is done by auditors whereby the financial statements of an
organization are assessed on material misstatements and has the purpose to offer stakeholders
of the firm an objective and independent statement on the information released. (ACCA,
n.d.). Using the audit opinion, stakeholders are able to make decisions regarding the sale or
acquisition of the stocks of the audited firm. In a sense, auditors/auditing firms are the bridge
between the firm and its stakeholder that should decrease the information asymmetry existing
(Robu & Robu, 2015). Based on the assessment the auditors can give four types of audit
opinions: unqualified opinion, qualified opinion, disclaimer of opinion, and adverse opinion,
with an unqualified opinion being the report that most organizations expect to receive. An
unqualified opinion indicates that the auditors are confident that the financial statements do
not include any material misstatements i.e., the stakeholders’ decision making will not be
impacted by the information in the financial statements. A qualified opinion is given when
the auditors are not confident about certain processes or transactions while a disclaimer of
opinion means that the auditors do not intend to give any opinion at all (often because they
are not able to conduct a proper audit). An adverse opinion, being the most serious one, is
given when the auditors have identified material misstatements in the financial statements
(Karadjova et al., 2020). Özcan (2016) investigated the impact financial and non-financial
factors on audit opinion and has identified profitability ratios, ROA, ROE, and profit margins
as variables that allow auditors to issue audit opinions correctly while research on the effect
of CSR (reporting) on audit related factors can be divided in two streams: the complementary
theory and the audit-risk theory.
Audit risk theory
Complementary theory
The credibility of CSR reports
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Many studies have investigated the relationship between CSR reporting and factors as
audit fees, going concern and corporate governance intending to make a statement regarding
the credibility of CSR reporting. While examining the link between audit fees and CSR
reports, Chen et al (2016) discovered that the willingness of an organization to issue a
standalone CSR report increased with the amount of audit fees it paid, suggesting that
companies are more willing to report on CSR activities when their financial statements are
being reviewed by an external party. This finding is explained by the author as follows: as
external party validation confirms the trustworthiness of the financial statements but also
increases the perceived credibility of the non-financial reporting, firms are more willing to
issue a stand-alone CSR report so they can achieve that credibility. Despite the attempt to
report on the credibility of CSR reporting, the authors concluded that these results could only
be used to say something about the perceived credibility of CSR reports. The finding, in fact,
confirms the statement of previous studies that the stakeholders’ perception of the
organization is influenced by the issuance of a CSR report (Clarkson et al., 2013;
Christensen, 2016).
Chan et al (2014) studied the link between CSR reporting and corporate governance by
examining annual reports of 222 listed companies and found that firms that report on CSR are
larger in size and have better corporate governance ratings thereby suggesting that these firms
are more likely to provide more credible information. A direct conclusion was however not
made, and authors have indicated that in the future, research could be done in whether the
CSR reports included factual information or were only used to help managing the firm’s
reputation. Another study by Chen et al (2012) where the researchers investigated the link
between audit fees, going concern opinions and CSR performance, it was concluded that
companies with superior CSR performance were charged a lower audit fee and were also less
likely to receive a going-concern opinion. In contrast, companies that have high CSR
concerns were charged a higher audit fee, suggesting that CSR performance is to an extent
used by auditors to assess the audit risk of the company. Furthermore, both auditors and the
company itself associate superior CSR performance with lower future litigation risk. As the
authors could only conclude on how superior CSR performance is perceived by auditors
without further indication of the credibility of the CSR reports, the question arises whether
the auditors are influenced in the same way by CSR reports/performance as the stakeholders
are.
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With the lack of research on the credibility of CSR reports, the finding that companies
use the reports to signal trustworthiness to the outside world, and the suggestion that
stakeholders are influenced by the quantity and transparency of the company’s reporting, it
was surprising to find that few studies mention the link between audit opinion and CSR
reporting (quality). Studying this could help the research take a step in the right direction in
making a statement on CSR reporting credibility as auditing firms are an external party that
are used to provide information on the credibility of the company’s (non-)financial reports.
Furthermore, it is necessary to research the impact of CSR reporting on auditors as it would
influence the audit quality (and the stakeholders) negatively if auditors were indeed
influenced by the reporting in the same way as the stakeholders are.
In sum, based on the (lack of) prior research on CSR reporting credibility and the
purpose of auditors/audit firms, I hypothesize the following:
H1A: Audit firms that engage in CSR reporting are more likely to receive an unqualified
opinion.
H1B: Comparing the quality of the CSR reports, companies with a higher CSR reporting
quality will be more likely to receive an unqualified than companies with a lower CSR
reporting quality.
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Research design and data
As there is a lack of studies that investigate the influence of CSR reporting quality
opposed to quantity, prior research has suggested to investigate the quality of CSR reporting
to make a statement regarding the credibility of the CSR reporting (Chan et al., 2014; Chen et
al., 2016).
The main data used for this study will be retrieved from Audit Analytics, using the
Europe Audit Opinions Database. This database includes information on public listed
companies on the European stock exchanges (EEA, UK and Switzerland). Furthermore, data
on CSR reporting quality will be obtained through the CSR Sustainability Monitor (CSR-S
Monitor) which evaluates the non-financial/CSR reports published by the world’s largest
companies and scores these companies on 11 most common areas used to report on CSR. In
the assessment of these reports, the creators of the CSR-S Monitor have also considered the
integrity assurance by looking at the accuracy and completeness of the reported information.
This is in line with the results of Lock and Seele (2017) where the authors aimed to develop a
scale on which credibility of CSR reports can be assessed. The data will be analyzed using
SPSS, a statistical analysis software.
To test the first hypothesis, dummy codes will be given to companies receiving an
unqualified audit opinion and to companies that engage in CSR reporting. A one-way
ANOVA will then be performed to determine whether there is a significant difference on
receiving an unqualified audit opinion between the group of companies that engage in CSR
reporting and the group that does not. To test the second hypothesis, the data obtained from
CSR-S-Monitor will also be coded into dummies. A one-way ANOVA will be performed to
determine if the difference on receiving an unqualified opinion is higher for companies with
higher quality CSR reporting in comparison to lower quality CSR reporting.
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