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Should The Auditor Be Concerned about the Corporate Social Performance?

Sat, April 29, 7:00 to 8:20am, Hilton Miami Downtown, TBA

Abstract

How well corporations are rated on the different social performance activities play a key role on
the perception of the different stakeholders. This paper is one of the early studies that actually tackles the
auditor’s assessment of risk by examining whether or not the auditor’s risk encompassed the social
performance of their client? We rely on the widely used ratings of the Kinder, Lydenberg, and Domini
Research & Analytics (KLD) on the different corporate social performance (CSP) and how it influences
the audit risk as reflected in the audit fees charged. We find that clients rated high on the KLD concerns
(CSPC) have statistically significant positive association with audit fees after controlling for the different
governance mechanism. According to KLD Analytics such clients were found to be in compliance
violation that are concerned with environmental, governance and human rights which inevitably pose a
higher audit risk for the auditing firms. In answering the PCAOB call for auditor’s to take precautionary
steps when assessing the audit risk, we find that auditors have charged higher fees to clients with CSPC
indicating that auditor’s risk association with CSPC clients. This study recommends that the auditor
should take into account client’s social performance as it may project a future concern which may
enhance the auditor’s client risk.

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