Abnormal CSR Performance and Auditor Litigation Risk

• In Event: Continental Breakfast & Research and Education Forum
  In Paper Session: Table 7: Corporate Social Responsibility Reporting

Abstract

Recent studies provide evidence that CSR conscious firms are less likely to engage in high-profile corporate misconduct (Christensen 2016) and be subject to SEC investigations (Kim, Park, and Weir 2012), suggesting that auditor litigation risk may be lower for better CSR performers. However, we argue that the association between CSR performance and auditor litigation risk may not be linear for two reasons. First, for a given level of audit risk, the lower the perceived risk of material misstatement, the higher the detection risk. Second, ceteris paribus, an incorrectly assessed low audit risk acceptable for abnormally high CSR performance would also increase auditor detection risk. Using a matched sample analysis for the period of 2004 to 2013, this study finds that the propensity for auditors to be sued first decreases as CSR performance improves, but then increases with abnormally high CSR performance after its optimal point. Further analysis indicates that the effect of CSR performance on financial reporting risk and the propensity for auditors to issue going-concern opinions also exhibits a convex pattern, suggesting that auditor litigation risk stems from both the financial reporting risk channel and client business risk channel. This study has implication for regulators, researchers, and professionals.

Author

• Li Zheng Brooks, Washington State University