Does Sustainability Information Affect Accountants’ Assessment of Client Business Risk?

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Abstract

Today’s global businesses are increasingly reporting on more than just financial information. Climate change, population growth, scarce natural resources and the focus on carbon footprint of industry are all driving a move towards integrating Corporate Social Responsibility (CSR) into financial reporting. Motivated by a desire for inproved corporate reputations through increased transparency, the number of companies reporting on sustainability in some form has risen. Studies show that companies who profess to be more sustainable as evidenced by engaging in activities that reduce their environmental footprint and improve their social impact are rewarded by higher market returns and higher consumer demand. The CEO letter often includes voluntary CSR disclosure, thus including the information in the annual report but as part of an unaudited component. Because prior literature supports the notion that certain types of rhetoric can influence perceptions and judgments in decision making, it is plausible that sustainability rhetoric may also influence certain accounting judgments. Given the connection between sustainability and ethical behavior, where companies perceived as better corporate citizens are considered more ethical and trustworthy, perceptions generated by unsubstantiated sustainability rhetoric might be expected to influence objectivity in assessments of client risk and investment potential . As the amount of voluntary rhetoric used to demonstrate a commitment to sustainability continues to increase in annual reports, the examination of this question appears warranted. This study uses a controlled experiment to examine whether information about a client’s commitment to sustainability impacts accounting professionals’ judgment of client risk. The results suggest that, while accountants with less than five years of experience may be influenced by such rhetoric, most accounting professionals are not, perhaps reflecting a higher level of skepticism and objectivity among those with more experience. This study contributes to research by broadening the discussion on the effect of rhetoric on decision-making and the influence of information about CSR on assessments about client risk by accounting professionals.

Authors

• Tracy Nelson Reed, Appalachian State University

• Tammy K Kowalczyk, Appalachian State University

• Rebecca Hutchins, Appalachian State University

• Gerald L. Hutchins, Appalachian State University - Political Science Department