Corporate social responsibility and non-audit service fees

ABSTRACT

In this study, we examine the association between corporate social responsibility (CSR) and the purchase of non-audit service (NAS). Due to the information asymmetry between stakeholders and managers, stakeholders are generally concerned about auditor’s independence and the firms’ reporting quality. We argue that firms engaging in CSR are more concerned about meeting stakeholder expectations and protecting their reputation of being socially responsible; therefore, they tend to purchase less NAS due to the concern of impaired audit quality. Consistent with our argument, we find that firms with higher CSR ratings incur lower NAS fees. We also document that the negative association of CSR-NAS fees is stronger for firms facing greater stakeholder demand, those with more reputation concerns, and those subject to higher litigation risk.

KEYWORDS:

• Corporate social responsibility (CSR)
• non-audit services (NAS) fees
• stakeholder theory
• firm reputation

Notes

¹ KPMG’s 2011 survey suggests that only 44 percent of the world’s 250 largest companies included corporate responsibility in reporting data in their annual financial reports, while the number significantly increased to 78 percent in KPMG’s 2017 survey (KPMG 2017).

² Chatterji, Levine, and Toffel (2009) contend that KLD’s social ratings are among the most influential and the most widely accepted CSR measures by academics.

³ Note that studies using output-based proxies of audit quality (e.g. accrual quality) find that NAS does not necessarily impair audit quality; however, most studies that examine perception-based proxies conclude that NAS impairs audit quality. As indicated by DeFond and Zhang (2014), perception-based proxies may be more powerful in detecting audit quality dimensions not captured by output-based proxies.

⁴ As discussed earlier, the provision of NAS impairs the perceived audit quality (DeFond and Zhang 2014), which is even more important in stakeholder management.

⁵ We also perform additional analysis by including the size of audit committee as an additional control for corporate governance. Our results (untabulated) remain unchanged.

⁶ Because the natural logarithm of 0 is undefined, we define ATENURE as the natural log of (1 + auditor tenure).

⁷ Our results (untabulated) remain unchanged with standard errors clustering at the firm level.

⁸ Verschoor and Murphy (2002) are the first to investigate the financial performance of the companies on the BCC list. Since then, the BCC list has been used extensively in accounting and business research (Laksmana and Yang 2009).

⁹ The results for the firms in the top 50 of the BCC list remain unchanged.

¹⁰ The SEC (2003) separated the fees that were previously disclosed in one category (‘other fees’) into three categories for the years ending after 15 December 2003, but many companies chose to adopt the disclosure early and included information for 2001 and 2002 (Maydew and Shackelford 2005). To control for the potential influence of the non-early adopters in the pre-2003 period, we verify our findings by including an indicator variable that equals 1 for the observations that report positive other fees but zero tax fees and audit-related fees in the pre-2003 period. Our results (untabulated) remain unchanged with the inclusion of the additional control variable.

¹¹ The blue state indicator is defined based on the 2008 presidential election results.

¹² We control for industry-fixed effects rather than firm-fixed effects in the 2SLS regressions because firms rarely change their headquartering state and the blue state dummies are very stable over time.

¹³ The R-squared is higher in the second-stage regressions, possibly due to different model specifications (i.e. industry fixed effects) and different values of CSR (i.e. fitted value of CSR) being incorporated in the second-stage regressions.

Additional information

Funding

Author Chia-Ling Lee has received Research Grant from the Ministry of Science and Technology of Taiwan and declared that she has no conflict of interest;Ministry of Science and Technology, Taiwan [107-2410-H-004-036]