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"Going green" is an increasingly dominant theme in business. To exhibit their "green" virtues, some companies publish separate corporate social responsibility (CSR), sustainability, reports. Similar to the debate over global climate change, the merits of CSR reporting is divided over whether its cost is value enhancing or value destroying (Goss and Roberts, 2011). Numerous studies examine the relationship between sustainability reporting and firm performance (Byus et al., 2010). Our study examines a single aspect of CSR reporting namely, how it affects the auditor's risk assessment of the company. Corporate governance is a significant component of CSR reports. In professional auditing standards, corporate governance is part of the "control environment," also known as the "tone at the top," and is a primary factor in determining the risk of material misstatement in the financial statements (AICPA, 2012, AU314.67-.80). We examine whether auditors assign lower audit risk to companies that practice CSR reporting than to those that do not.
Since auditors design and perform audit procedures whose nature, timing, and extent are responsive to the risk of material misstatement, the price of the audit encapsulates the auditors' risk assessment (AICPA, 2012, AU318.07). In this study, fiscal year-end 2010 audit fees for 120 companies that practice CSR reporting utilizing the Global Reporting Initiative (GRI) guidelines are compared to audit fees for companies in the same industries that do not issue CSR reports. The main finding is that higher audit fees are associated with companies that issue CSR reports except for companies that choose to have an independent third party verify the information content in the CSR report. In those circumstances, audit fees for CSR reports are lower. The remainder of this paper proceeds as follows: A discussion of the internal control environment and the GRI guidelines, followed by a discussion of the risk mitigation hypothesis and three competing explanations for die association between CSR reporting and audit fees. The methodology is described and the results of estimating three regression models are then presented. The last section of the paper offers conclusions and implications for management.
Two Frameworks
The Committee of Sponsoring Organizations of the Treadway Commission (COSO) issued a report entitled, Internal Control - Integrated Framework, in 1992 (amended in 1994). The COSO report has served as a guide...