Corporate Philanthropy and Auditors’ Engagement Risk.

• In Event: Corporate Governance

Abstract

There is an ongoing debate about the pros and cons of corporate philanthropy. Proponents suggest that philanthropy beneficially affects corporate reputation, profitability, and employee retention. Critics argue that corporate donations drain shareholder wealth and are a misappropriation of resources. We study how corporate philanthropy affects the external auditor’s assessment of engagement risk. Understanding how auditors perceive the riskiness of corporate giving is informative to the debate, particularly because auditors are an independent third party and have access to private company information. Using data from the Indiana University School of Philanthropy’s Million Dollar List, we find that corporate philanthropy is positively associated with audit fees. However, the effect is less pronounced among companies having higher customer awareness. The results are robust to controlling for broad measures of corporate social responsibility (CSR), controlling for future firm performance, and propensity score matching. We contribute to the literature examining the value of corporate philanthropy, the literature on CSR in accounting, as well as the auditing literature.

Authors

• Feng Guo, University of Kansas

• Stephen John Lusch, University of Kansas

• Adi Masli, University of Kansas