Could a Client's Social Responsibility Lead to an Auditor's Social Irresponsibility?

• In Event: Breakfast with Research Roundtable Forum Session
  In Paper Session: Roundtable 1: Auditing

Abstract

Within a firm, managerial focus on corporate social responsibility (CSR) can lead to investment inefficiencies and reduced financial reporting quality (Bhandari and Javakhadze 2017; Barton et al. 2014). Externally, perceptions of CSR involvement have been shown to impact investor judgments (e.g., Elliott et al. 2014). However, extant research has not examined whether auditors are influenced by the extent of a client’s CSR activities when forming professional judgments. Using affect as information theory and the halo effect, we expect that auditors will be positively (negatively) biased when assessing the risks associated for a firm with strong (weak) CSR performance. More specifically, strong social responsibility is expected to result in lower perceived risks of material misstatement despite the presence of additional risk cues. Further, the inclusion of a firm’s tax-paying behavior as a component of CSR leads us to predict that auditors will assess the risk of material misstatement lower for firms that pay a higher percentage of income taxes (Davis et al. 2016). We propose a 2x2 between participants experimental design utilizing senior auditors and manipulating CSR (strong/weak) and tax aggressiveness (high/low) using detailed firm information to determine the impact on auditor judgments, namely the perceived risk of material misstatements for key accounts.

Authors

• Michael N. Killey, University of Michigan Dearborn

• Stephanie Walton, University of South Florida