Non-Financial Disclosure, Assurance, and Financial Reporting Quality: Evidence from the European Banking Sector.

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Abstract

This paper examines the impact of banks’ non-financial disclosure and its quality of assurance on financial reporting quality. We use corporate social responsibility (CSR) disclosure to proxy for non-financial information and earnings quality measured by discretionary loan loss provisions (DLLPs) to proxy for financial reporting quality. Using a hand-collected dataset of European banks’ CSR disclosure and assurance practices, our empirical analyses show that banks’ CSR disclosure is negatively related with DLLPs, indicating that CSR disclosure mitigates bank managers’ incentive to manage earnings. Moreover, we find that the level and scope of assurance on CSR disclosure significantly influences financial reporting quality. Our results show that high-quality assurance, i.e. reasonable assurance and assurance on the total CSR report, is significantly negative associated with DLLPs. In contrast, low-quality assurance, i.e. limited assurance and assurance on content parts of the CSR report or on selected CSR performance indicators, is significantly positive associated with DLLPs. We posit these findings to the bank managers’ moral imperative participated by the information collection, processing and presentation of CSR disclosure. As such, low-quality assurance can indicate less socially responsible bank managers that engage only in CSR disclosure assurance for enhancing the bank’s reputation. In this case, CSR disclosure assurance is not likely to constrain earnings management using DLLPs. Further sensitivity tests reveal that the effect is determined also by Big-4 assurance provider and the use of international assurance standards. Overall, our results suggest that the quantity and quality of CSR disclosure impacts the financial reporting quality of banks.

Authors

• Janine Maniora, Technical University of Dortmund

• Nadine Georgiou, Technical University of Dortmund