What has changed with how listed firms* report to their stakeholders?
Today, firms are responsible for an array of activities such as preventing environmental externalities, producing safe and healthy products, ensuring the human development of their employees, contributing to government spending by paying taxes, and finding suppliers that respect regulations and ethical principles; in other words, firms are responsible for more than just maximizing shareholder value.
Therefore, shareholders and stakeholders are more and more concerned with firms’ corporate social responsibility (CSR) and demand information about CSR performance. Because of this demand for non-financial information, more and more firms issue CSR reports**, on top of traditional financial reports. Assurance providers frequently examine these reports to verify their content and enhance their credibility. Audit firms such as the Big 4 accounting firms (E&Y, KPMG, PwC and Deloitte) and CSR assurance specialists (for instance, Lloyd’s, Veritas, DNV) now provide CSR assurance*** services for sustainability reports.
What is the problem?
The key question we have investigated is: Should firms that issue assured CSR reports use the financial audit firm that audits their financial statements to provide CSR assurance for CSR reports? Alternatively, should firms hire a different CSR assurance provider than their financial auditor?
What researchers say
We analyzed more than 28,000 cases from 55 countries and found that audit firms that also provides CSR assurance to their client:
- Obtain more information about CSR risks for a company that is relevant to financial statements, because financial audit teams benefit from information about the CSR risks obtained by CSR assurance teams
- Deliver better audit quality, with fewer errors in assessing ongoing concern risk
- Have clients that integrate CSR risks into their financial statements by booking provisions for environmental and litigation risks
- Are not more expensive for the client than a combination of an audit firm and a different CSR assurance provider
* A listed firm is a company whose stock trades on a stock exchange.
** According to the Global Reporting Initiative, a CSR report is a "sustainability report is a report published by a company or organization about the economic, environmental and social impacts caused by its everyday activities."
*** A CSR assurance is a process which examines the veracity and completeness of a CSR report.
