CSR and Assurance Services: A Research Agenda
Jeffrey Cohen* Professor, EY Research Fellow Accounting Department Carroll School of Management Boston College 140 Commonwealth Ave. Chestnut Hill, MA 02467
[email protected]
Roger Simnett Professor & Academic Director, Macquarie Group Foundation Chair Centre for Social Impact and School of Accounting Australian School of Business University of New South Wales Level 2, South Wing (Rooms 2043-2051) ASB Quadrangle Building UNSW, Australia 2052
[email protected]
July 2014
*Corresponding author We would like to acknowledge the Senior Editor, Robert Knechel for his support and guidance for this forum and comments from an anonymous reviewer, Helen Brown-Liburd, Wendy Green, Jon Grenier, Andrea Romi, Sandra Waddock and Tina Zamora. Research support for the second author was provided by PWC Foundation.
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Electronic copy available at: http://ssrn.com/abstract=2463837
CSR and Assurance Services: A Research Agenda
Summary: This paper describes the current environment for assurance services for corporate social responsibility (CSR) performance. It then discusses opportunities for research, including highlighting areas that are evolving as significant research opportunities and areas of significance that have been under-researched in the past. Finally, the paper reviews the five papers in the forum and highlights how multiple methodologies may be appropriate to examine different aspects of assuring CSR reporting from both internal and external assurance perspectives.
Key words: Corporate social responsibility; CSR assurance; assurance services; assurance research.
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Electronic copy available at: http://ssrn.com/abstract=2463837
CSR and Assurance Services: A Research Agenda
INTRODUCTION The primary objectives of this special research forum are to highlight the current research, and identify future research opportunities, in the area of assurance services for CSR reports. 1 Internationally, and increasingly in the U.S., companies are now producing CSR reports that provide information to assess a company’s environmental, social and governance performance (Global Reporting Initiative (GRI) 2013). As documented by KPMG (2013), the proportion of leading companies engaging in CSR reporting continues to grow, with almost three-quarters (71 per cent) of the top 100 companies from 41 countries (N100) surveyed in 2013 producing such reports (p. 11). This figure is up from 64 per cent of N100 companies in 2011 (KPMG 2013 11). In order to improve the relevance and reliability of CSR information, there has been a growing reliance on independent assurance (Simnett, Vanstraelen and Chua 2009b; KPMG 2013). However, to date there has been a relative paucity of research to inform assurance related to CSR reporting. Compared with the financial statement audit, assurance of CSR information has unique and specific characteristics (discussed further below) which add to the potential significance and richness of this as a research area. Unlike the audits of financial statements, the accounting profession does not have a monopoly on assurance services related to CSR so audit firms must compete with other types of service providers. As KPMG notes, of the world’s largest 250 global companies (G250) which engage in CSR reporting, 59 per cent have this information externally assured, and two-thirds of these engage a major accounting firm to undertake this assurance (KPMG 2013 12). This competitive market creates research opportunities and an appropriate setting for gaining a better understanding of the market for assurance services, and factors associated with the decision to procure assurance from the different types of assurance providers. The competitive, and mainly unregulated assurance market with various types of assurance suppliers, provides an appropriate and under-researched setting to test theories about the market for assurance services. As distinct
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We are using the label of CSR reports as a catch-all of predominantly non-financial reports. These reports may also be referred to as Sustainability reports; Corporate Responsibility reports; Environmental, Social and Governance (ESG) reports; Triple Bottom Line (Social, Environmental and Financial) reports, or other similar labels. The reports may also examine a single non-financial issue such as Greenhouse gas emissions or intellectual capital.
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from the more mature financial statement audit research, research in this area can significantly contribute to practice and aid the assurance standard-setting process. The competitive nature of the market for assurance services is also expected to create market incentives to develop and offer assurance services in a cost-efficient yet effective way. The difference in content between CSR reporting and financial reporting, with the former being more likely to contain and describe a broad range of qualitative and quantitative, but not necessarily monetized information and relationships, also provides scope for exploring the effectiveness of different types of risk assessment and evidence gathering techniques. Moreover, the opportunity to properly assess the position and performance of an organization on dimensions other than financial performance is giving rise to further pressures on financial reporting and assurance, and catalyzing possibilities for research. In this overview of the forum, we outline the characteristics of this new and growing market. We also outline some of the research opportunities that exist, and the various research methods that can be used to address these opportunities, including research that can help inform the quality of the reporting and assurance services in this area. Finally, we review the five papers in the forum and the possible research opportunities that stem from their findings.
THE GROWING MARKET FOR CSR REPORTS AND RELATED ASSURANCE As noted earlier, the number of stand-alone CSR reports has grown significantly over recent years. KPMG’s (2013) survey concludes that “The high rates of corporate responsibility reporting in all regions suggest it is now standard business practice worldwide” (KPMG 2013 11). This appears to also pertain to the U.S., at least for larger firms, where 86 per cent of the largest 100 companies now engage in some form of CSR reporting (KPMG 2013 25). The report also outlined that the number of large companies voluntarily seeking assurance is increasing, with 59 per cent of the G250 and 38 per cent of the N100 currently assuring their corporate responsibility disclosures. This demonstrates that the accounting firms account for the majority of the market share for CSR assurance engagements for large international companies, but that other assurance providers still maintain a significant market proportion. The major reporting framework currently in use is the one promulgated by the GRI, which has developed detailed Sustainability (CSR) Reporting Guidelines that form the foundation of its Sustainability Reporting Framework. These guidelines have continued to be 4
refined and the most recent iteration, G4, was released early in 2013. While GRI’s mission statement does not specifically address a need for verification (independent assurance) of CSR reports, GRI does encourage the development and adoption of principles for verification, as this can enhance the quality, usefulness and credibility of information used within the reporting organization and the underlying management systems and processes. GRI also recognizes that the verification of CSR reports is at an early stage in its evolution (GRI 2013).2 The GRI G4 Guidelines organize Specific Standard Disclosures into three Categories – Economic, Environmental and Social. The Social Category is further divided into four subCategories, which are Labor Practices and Decent Work, Human Rights, Society and Product Responsibility.3 Collectively, all of these factors and issues can constitute a comprehensive CSR report, or alternatively they can be reported on independently (such as a greenhouse gas emissions report), as is commonly mandated by different regulatory or legislative requirements. For a comprehensive report, part of the challenge for the assurance provider is to ensure that all significant issues that fall under these broad categories are appropriately reported (that there is no “cherry picking” of the significant topics, or those that paint the entity in the most positive light) and that they are reported in accordance with the reporting criteria (O’Dwyer 2011). Assurance can be provided on the comprehensive report, or a specific subject matter area. With regard to assurance standards identified by the KPMG (2011) survey, the main assurance standard referred to in the assurance reports is the IAASB’s (2013) ISAE 3000 “Assurance Engagements Other than Audits and Reviews of Historical Financial Information”, or its national equivalent. This is used in nearly all instances where the assurer is from the accounting profession, and is also referred to by some assurers from outside the profession. AA1000AS, an assurance standard issued by the non-profit organization AccountAbility, is the standard referred to most frequently by assurance providers from outside the accounting profession (O’Dwyer and Owen 2005; O’Dwyer and Owen 2007; Simnett 2012). The most common publicly available single issue report is an organization’s report of their Greenhouse Gas emissions, with the main 2
In the U.S. the Sustainability Accounting Standards Board (SASB) is also developing and disseminating sustainability accounting standards that help U.S. publicly-listed companies meet their Securities and Exchange Commission (SEC) sustainability disclosure requirements. US publicly listed companies are required to disclose material sustainability issues in mandatory SEC filings, including the Form 10-K and 20-F. Currently they are in the process of developing sustainability accounting standards for more than 80 industries in 10 sectors, an objective that will take them through to 2016 (SASB 2014). 3
Within each of these categories, there are further subcategories for reporting, which are available at https://www.globalreporting.org/resourcelibrary/GRIG4-Part1-Reporting-Principles-and-Standard-Disclosures.pdf.
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assurance standard referred to being the IAASB’s (2012) ISAE 3410 “Assurance on a Greenhouse Gas Statement”, or its national equivalent.
THE INFLUENCE OF ASSURANCE ON THE EFFECTIVENESS OF CSR For individuals to rely on CSR disclosures and to make the types of decisions (e.g. investing) that these disclosures are meant to inform with a high level of confidence, it is important that these disclosures are credible. An important way of improving the credibility of CSR disclosures is to have them verified or assured (Nugent and Simnett 2007). To enhance the value of assurance, it is important that the assurer is someone who is independent of the reporting entity, has a sufficient understanding and expertise concerning the various ways of measuring and reporting CSR information, is trained and proficient in assurance and evidence gathering techniques, and has sufficient quality controls over the process to ensure that they use appropriate care and skill on each assurance engagement (Huggins, Simnett and Green 2011). It is only in these circumstances that CSR activities will be substantively effective and not mere public relations exercises, which are commonly referred to as “greenwashing” in the literature (Cho and Patten 2007; Holder-Webb, Cohen, Nath and Wood 2009). CSR information is used for external (investor and other stakeholders) and internal (management) decision-making. While there are numerous studies which show the benefit for external decision making (e.g. Dhaliwal, Zhen, Tsang, and George 2011; Dhaliwal, Radhakrishnan, Tsang and Yang 2012), the importance of the information for internal decision making should also be recognized. For example, a water shortage would have a ‘severe’ or ‘catastrophic’ impact on 40% of Fortune 100 companies (CIMA 2014). In the United States, the Risky Business report (2014) outlines that the economic risks posed by climate change to the U.S., including extreme weather effects like hurricanes and rising sea levels, jeopardize more than $1.4 trillion in coastal real estate. It is important that when CSR information is used for either internal or external decisionmaking purposes, that the decision-making is made on the basis of reliable and credible information. There are other ways of doing this that can either complement or substitute for the voluntary act of obtaining external assurance. For example, similar to financial reporting, internal controls over CSR data and information flows can increase the reliability and validity of the data. Internal audit, which can act as an internal monitor to ensure a company is in 6
compliance with all CSR related rules and regulations, can also assist this process, and increase confidence at the same time (Trotman and Trotman 2015). Corporate governance processes and elements of what Cohen, Krishnamoorthy and Wright (2004, 2008) describe as a corporate governance mosaic can either complement or substitute for external assurance.4 For example, a risk committee of the board can monitor and provide strategic advice for the CSR activities a firm is undertaking or evaluate whether to undertake certain activities (Viscelli 2013). In situations where reporting and assurance is voluntary, this provides appropriate scenarios for researching and understanding their demand and supply, and how these mechanisms interact. Finally, as Casey and Grenier (2015) point out there are numerous internal benefits to companies procuring assurance on CSR activities as this is associated with improvements in the quality and reliability of information used for strategic planning, enterprise risk management, and more effective internal management control decisions. Although there are a broad range of alternative professions that could provide assurance for CSR, little is known about the best practices for conducting a high quality assurance engagement. Thus, in this voluntary and competitive market, there will not be a demand for assurance unless the benefits to those paying are seen to exceed the costs, and the valueproposition of using assurers from either within or outside the accounting profession may be different. Practitioners from the accounting profession are well placed to deliver CSR assurance services for a number of reasons. Huggins et al. (2011) argue that the risk model used for financial statement audits, which involves understanding the entity and assessing the risk of material misstatement, and then appropriately responding to assessed risks, translates well when assuring other reporting domains. ISAE 3000 recognizes that competencies in both assurance and the related subject matter are necessary to undertake these assurance engagements. Assurance practitioners from accounting backgrounds have the assurance competencies to undertake these engagements, and are supported by a detailed code of ethics which emphasizes the importance and independence and objectivity and other core ethical concepts (IFAC 2013). While some outside the accounting profession argue that assurers from accounting backgrounds do not have the necessary subject matter knowledge to complete these engagements, the 4
An influential source of guidance on corporate governance as it relates to the environment is the International Standards Organization’s (ISO) 14000 family of standards (ISO n.d.). Of most relevance to this topic is ISO 14001 Environmental Management Systems—Requirements with guidance for use, which was issued in 2004, and is currently under revision (as at June 2014). Another relevant release from the ISO is ISO 26000, Guidance on Social Responsibility, which provides guidance on social responsibility for all types of organizations.
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accounting profession quickly points out that many of its members come from diverse backgrounds, and also has standards in place to address the need to assemble multidisciplinary teams with both the assurance and subject matter competencies necessary to complete these engagements (Huggins et al. 2011). Pflugrath, Roebuck and Simnett (2011) argue that it is much easier to acquire subject matter expertise than assurance expertise. For example, existing auditing standards address situations in which the work of an individual or an organization with expertise in a field other than accounting or auditing is used to assist the auditor in obtaining sufficient appropriate evidence (for example, refer to ISA 620, IFAC 2009). Thus, auditors are versed in using subject-matter experts, a process which they can also employ in CSR assurance engagements. Further, the risk-based assurance approach used by the auditing profession is also reflected in assurance standards commonly used by assurance practitioners from outside the accounting profession, such as ISO 14064-3 (Huggins et al. 2011). The market advantage for assurance providers from outside the profession with regards to CSR assurance engagements may be the relative importance of subject matter expertise for these engagements, and assurance providers from outside the profession commonly claim a competitive edge because of their specific skills-sets and extensive knowledge of the subject matter (Corporate Register 2008). This leads to a research question as to whether assurers trained in financial statement audit techniques possess a competitive advantage over subject-matter experts in the execution of a CSR assurance service or, alternatively, what is the most appropriate combination of subject matter and assurance expertise for an assurance team undertaking a CSR assurance engagement. More generally, the value of accountants’ unique skills (Gray 2000, 256) and the audit tradition of facilitating the provision of “high-quality, decision-making information” (Elliott 1997, 62) are highly relevant in the CSR context. Public confidence in assured CSR information may further be enhanced by the reputational capital associated with the purchase of assurance from the leading accounting firms (Simnett, Nugent and Huggins 2009a). On a practical level, the global reach of the multinational accounting firm networks allows them to offer “multidisciplinary industry specialist teams supported by global knowledge management databases and common industry-specific work programs and training” and to provide a logistically streamlined option for companies with operations in multiple jurisdictions (Carson 2009 356). Other types of assurance providers do not have this global coverage or level of 8
support (Simnett et al. 2009b). Thus, research can examine if there are differences in the quality and effectiveness of CSR assurance if it is provided by a domestic as opposed to a multinational auditing firm, and between accounting firms and other assurance providers. It could also be the case that differences in quality between different types of assurance providers is very context- and industry-specific. For example, the skills-sets required by a team conducting, a greenhouse gas (GHG) emissions assurance engagement for financial institutions, are different from those required when providing such services for oil and gas producers. The variety of types of engagements means that the required subject matter expertise varies considerably, and that a case can be made that the subject matter expertise and knowledge of other assurance providers can be invaluable for particular types of CSR assurance engagements (Huggins et al. 2011). Thus, future research can examine if differences in quality of the assurance may be context- or industry-specific. Research can also evaluate if professional and non-professional investors are able to distinguish the settings in which industry context may matter most when evaluating the credibility of the assurance report.
DEVELOPING A RESEARCH AGENDA Research related to the assurance on CSR reports is at an early stage of its evolution when compared to decades of research on financial statement audits. In general, most types of research that have been undertaken on auditing of financial statements can be undertaken with regard to assurance on CSR reports. In the following subsection, we outline examples of the different theoretical approaches and research methods that might be used to examine interesting research questions related to CSR assurance. In the next subsection, we outline differences in the nature of CSR assurance and financial statement audits. Much research in audit and assurance is aimed at evaluating and improving quality, and it is recognized that challenges exist with regard to assessing the quality of the assurance provided in CSR engagements. In the final subsection, we compare the measures commonly used for assessing the quality of financial statement audits and CSR assurance engagements.
Theoretical Approaches and Research Methods Different research methods, research approaches and associated theories can be adopted at various stages, or for different levels of analysis, when researching CSR assurance. There are 9
three main levels of analysis, the market level (local, national and international), the organizational level (including the impact of other entities such as regulators and key stakeholders interested in assurance of the organization’s CSR information), and the individual or team of assurers, reporters or decision-makers associated with a CSR assurance engagement. Table1 presents possible research issues that can be examined at different levels of analysis and by different research methodologies.
There is significant scope for new research addressing the types of research questions identified in Table 1, using the various methodologies identified. At the market level, using mainly archival research techniques, the research undertaken to date has mainly related to understanding the market (e.g. Simnett et al. 2009b; Cho, Guidry, Hageman and Patten 2012; Casey and Grenier 2015). For those organizations that have chosen to seek assurance, this includes examining the choice between accounting firm and other types of assurance providers. This setting has provided a suitable platform for examining the benefits of assurance, and the signaling effects of the type of assurance provider. A next logical step is to examine whether organizations obtain a benefit from having their CSR reports assured (Dhaliwal et al. 2011). For example, what will be the effect of assurance on CSR reports on changes in share price, types of investors on share registers, or impact on accuracy (dispersion) of analysts’ forecasts (e.g. Dhaliwal et al. 2012). At the organizational level, there are a number of research opportunities applying the theoretical frame provided by institutional theory,5 and examining how organizations construct themselves and make decisions related to assurance (O’Dwyer 2011). Thus, research opportunities exist around examining how organizations make the decision to produce and assure their CSR information, and other organizational characteristics that contribute to these decisions. Further, Ballou, Casey, Grenier, and Heitger (2012) found that some organizations that obtain assurance on CSR activities do not publicly disclose that information. A future study could look at why firms decide to not disclose (or do disclose) after they have received the assurance.
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See Cohen, Krishnamoorthy and Wright (2008) for a review of institutional theory and its relevance to auditing research.
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Legitimacy theory is also a theoretical lens used to understand organizational actions (O’Dwyer, Owen and Unerman 2011). The main premise of legitimacy theory is that an organization will take actions to manage community perceptions in order to survive. Corporations need to at least appear to be operating within the established ‘rules’ of society, that is, within the bounds of the social contract, and CSR reporting and related assurance is one strategic tool that organizations can use to influence the community’s perceptions of their legitimacy. At the individual or group decision-making level, there are numerous experimental research opportunities as to how CSR assurance is undertaken, as well as how intended users react to the assurance and the way that it is reported. In examining teams or conducting group experimental research, we recognize that members of the CSR assurance team will have to grapple with significantly different subject matter (including environmental, social, labor practices and human rights, among others) and bring to the team significantly different skills, compared to financial statement audits where auditors are usually well trained with regard to the underlying subject matter of financial position and performance as measured by generally accepted accounting standards. It may be that different types of experts are involved in a CSR assurance engagement, and research could examine factors and techniques, such as familiarization and brainstorming techniques, that may aid engagement team performance.
Differences in the Nature of CSR Assurance Compared with Financial Statement Audit As we outlined earlier, most types of research on financial statements audits can also be undertaken with regards to assurance on CSR reports. However, there are attributes of CSR engagements that are unique and, thus, worthwhile to study in their own context. These include:
The existence of a competitive (in contrast to monopolistic) market.
The diversity of the subject matter examined.
The lack of analytic rigor that arises in double-entry systems.
The relative lack of well-developed criteria.
The Existence of a Competitive Market As outlined earlier, assurance of CSR reports is a competitive market where the decision to assure is made on a cost-benefit basis. When it is determined that assurance is beneficial, there is then a choice of assurance providers, as this is a market in which the accounting profession 11
does not have a monopoly. This competitive market creates research opportunities in gaining an understanding of the market for assurance services from different providers. It also increases the market pressures to develop and evolve assurance services in a cost-efficient yet effective way. Two research questions that arise in this area are: How do fees and risk identification and evidence gathering techniques on CSR assurance engagements differ between the different types of providers? And are these associated with differences in assurance quality?
The Diversity of Subject Matter Examined Assurance of general CSR reports involves the examination of very diverse subject matters. As we can see from the range of subject matters reported under GRI G4, these are not necessarily measured in any type of common currency. The aim of CSR reports is not to monetize all these resources and relationships, but rather to report them so that the report user has the information on which to make their decision. Thus, it may be that some of the reporting areas are capable of being monetized, others of being quantified, and others of only being described. As an example, one of the research opportunities is to evaluate how to determine what are material/significant items, both for gaining confidence on the completeness of disclosure and for assurance. The technique which is widely used in practice, stakeholder analysis, can involve many things, including talking to various interested parties, and construction of issues such as importance, and likelihood of occurrence. Very little empirical research has been undertaken on the comparative advantages of a stakeholder analysis approach compared with alternative approaches to determining material items, and how these are then associated with identified risks of material misstatement and evidence collection techniques in the audit process.
The Lack of Analytic Rigor that Arises in Double-entry Systems The financial reporting framework has the advantages associated with double-entry accounting (debits equals credits), and the mathematical and systems rigor associated with this. Most of the issues involved in CSR reporting do not have this rigor. This can result in different types of risk of material misstatement, and little is known about how the assurance provider responds to this. This is an area where qualitative research can be useful in conducting interviews
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and case studies as to how assurance providers cope with this loss of seemingly objective analysis.
The Relative Lack of Well Developed Criteria As compared to financial reporting criteria, CSR reporting criteria are less well developed. Not all aspects of CSR are currently capable of being quantified, much less monetized. Thus the assurer has to have appropriate assurance techniques over not only monetized, but also both quantitative and qualitative information. For example, to date, very little development has taken place with regard to assuring narrative information. The closest we have is the IASB’s approach to management commentary, which suggests that there are benefits to establishing that there is a reasonable basis for management’s comments. This could be fleshed out further, and research could be undertaken as to how assurers would achieve this, and how it would need to be reported so that it was capable of being assured. For example, should similar assurance approaches be adopted in the CSR context as has been discussed for assessing the relevance and reliability of Management Discussion & Analysis type disclosures (Adams, Fries and Simnett 2011)?
Differences Between CSR Assurance and a Financial Statement Audit While there are many differences in how an assurance engagement is undertaken for CSR reports compared with an audit of financial statements, it is important to first recognize that there is a similarity in the risk based audit/assurance approach used. The main assurance standard used for assuring CSR reports, ISAE 3000 (IAASB 2013), parallels the financial statement audit approach, and involves, first, gaining an understanding of the entity; second, undertaking a risk assessment (at the assertion level if appropriate); and then thirdly responding to assessed risks by employing the most efficient and effective combination of tests of control and substantive testing. This approach of course needs to be customized to the subject matter. It is not clear, however, how this should be done. It is interesting that the IAASB has developed other assurance standards under the umbrella standard ISAE 3000, even though assurance of CSR reports is the area of public reporting for which this standard is most frequently used. It would be useful to gain an understanding of how assessment of risk of material misstatement, and responses to assessed risks, are adapted for CSR report information. Little is known of the areas 13
in which risks are assessed as high for different types of CSR report information, and areas where the assurer identifies misstatements and suggests changes to management with regards the CSR report in order to be in a position to issue an unqualified assurance opinion. As these assurance services are evolving, there are many research questions which could address assurance provider information search and evidence evaluation at different stages of the assurance engagement. Areas where there are differences expected from financial statement audits are amongst those areas that are most likely to benefit from further research. These include:
Risk Identification Research questions relating to risk identification include:
What are the different types of risk of material misstatement that are occurring? Relatedly, what audit procedures or interventions help the assurance provider in this identification? Does group discussion or brainstorming help? Do different types of decision aids and expert systems help?
As CSR report assurance teams are commonly multidisciplinary, what is the impact of multi-disciplinary teams? What group decision techniques can best bring these groups together?
What role will experts, both internal and external to the firm, play as part of the assurance engagement team, and how will the signing partner establish reliance on their work?
Materiality Potential research questions include:
Where there is no common unit of measurement, (for example, when the report contains financial, workplace safety (accidents, deaths), emissions, and intellectual capital information), how is materiality determined for a CSR report assurance engagement?
Are there alternative approaches to that of stakeholder engagement for determining materiality thresholds, and if so, what are their relative effectiveness?
Ability to Identify Misstatements and Fraud Potential research questions include: 14
What are the incentives for fraud associated with CSR report assurance engagements, and how will these impact the risk of material misstatement for CSR reports?
Are fraud risk indicators different or similar for CSR report assurance compared with a financial statement audit?
Evidence Collection Potential research questions include:
What control systems are in effect for internal controls over CSR reporting?
Given the difference in the nature of CSR report information which includes evidence of physical as well as financial relationships, what innovative analytical procedures are employed?
What types of substantive procedures are used in a CSR report assurance engagement and what is their relative effectiveness?
How do assurance providers evaluate the veracity of narrative and future oriented information that is commonly included in CSR reports?
Assurance Reports and Communication
Potential research questions include:
How is reasonable versus limited assurance assessed in the CSR report context?
Should key risks and areas of testing be disclosed in a CSR assurance report?
Given there are potential multiple subject matters contained in a CSR report, can mixed assurance be provided (reasonable assurance on some subject matters and limited assurance on others, and possibly no assurance on others)? How would this be reported and how would assurance report users react to such reports?
Given the evolving nature of these engagements, should recommendations be included in such reports? For each of the questions outlined above, these can be examined and tested by comparing the approach of different types of assurance providers, as well as comparing the approaches of CSR report assurance providers versus financial statement auditors.
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Examining the Quality of CSR Assurance Engagements There are many research opportunities as we try to assess the quality of CSR report assurance engagements. Many of the metrics that are used by accounting researchers are not appropriate for these assurance engagements, including measures of discretionary accruals, and there is little on restatements, although as pointed out by KPMG (2013) there are a number of areas where CSR information is restated. The first two columns of Table 2 are the common proxies used for audit quality (DeFond and Zhang 2014 101). The third column shows the extent to which these proxies are, or are not, relevant to assurance quality for CSR:
The Rise and Rise of Integrated Reporting and Associated Assurance Issues Related to CSR reporting and assurance, and perhaps the next evolution of corporate reporting and assurance, is integrated reporting. The International Integrated Reporting Council (IIRC) is a global coalition of regulators, investors, companies, standard setters, the accounting profession and NGOs, including the GRI and the International Federation of Accountants (IFAC), and the integrated reporting framework was approved in 2013 (IIRC 2013). An integrated report prepared in accordance with this framework shows how an organization’s strategy, governance, performance and prospects create value over time, combining financial and non-financial information with a forward-looking perspective that’s designed to help readers understand how an organization creates value. The non-financial component is also seen to be broader than current CSR information, as it is expected that all resources and relationships that materially impact the value-creation activities of the organization will be reported on. Assurance is not currently a requirement of the integrated reporting framework, but it does recognize that the reliability of these reports is enhanced by mechanisms such as robust internal control and reporting systems and independent, external assurance. While an integrated report may take various guises, such as a separately identifiable component of an annual report, a stand-alone integrated report, or an expanded Management Discussion and Analysis, all prepared in accordance with the integrated reporting framework, the assurance challenges are considerable. Currently, there is very little guidance or assurance standards for engagements which cover combined financial and non-financial information. For 16
example, the IAASB produces auditing standards for the audit of historical financial information and separately produces assurance standards for the assurance of non-financial information. There is also little relevant guidance on the assurance of forward looking information, or narrative style information; both important forms of reporting within an integrated report. Thus, as this form of reporting increases, and demand for assurance of such information increases, we urge researchers to explore the same issues covered earlier in regard to CSR reports with regards to integrated reporting.
OVERVIEW OF THE STUDIES IN CURRENT RESEARCH FORUM This forum presents five research studies that employ a range of perspectives and different methodologies, to explore research questions of interest from a CSR report assurance perspective. Trotman and Trotman (2015) examine how internal auditors (IA) are involved in providing internal assurance on a firm’s greenhouse gas emissions and energy usage. They employ a qualitative approach and interview a wide variety of constituents including internal auditors, senior accountants, public accounting partners and audit committee members. One interesting research question they explore is which factors promote and impede IAs from being effective at providing assurance in this area. For example, regulation and the risk management approach promotes the use of IAs, while lack of expertise impedes their use. The respondents also perceive that the role of internal audit will grow in years to come. This suggests that future research could examine how changing to a holistic ERM (Enterprise Risk Management) approach could affect IA involvement in providing assurance in this area. The authors also suggest using the theory of accountability (Tetlock 1983; Lerner and Tetlock 1999) to evaluate whether IAs will perform this task differently contingent upon whom they are primarily accountable to. Thus, if IAs perceive that they are accountable to the audit committee they may perform the task at a different level than if the IA is accountable to management. An experimental approach was used by two papers in this forum. The Cheng, Green and Ko (2015) paper integrates the strategy and assurance literature to examine how strategically relevant CSR and assurance information will affect investment decisions. What is novel in the Cheng et al. paper is that they demonstrate that the usefulness of CSR disclosures is contingent upon the alignment of these disclosures and the strategy of the firm. Further, assurance appears 17
to make a difference to investors if the assurance on CSR pertains to relevant strategic indicators. One of the takeaway messages from the Cheng et al. (2015) paper is that we should consider a contingency framework to examine the value of assurance in CSR. Further, their results are in the context of a case that represents a favorable economic context. It is left to future research to investigate whether assurance on CSR will, or will not, be considered a frivolous luxury if a company is in retrenchment mode. The second paper that uses an experimental methodology is by Brown-Liburd and Zamora (2015). In that paper, the authors employ Mercer’s (2004) voluntary disclosure framework to examine under what conditions investors will place importance on the assurance of CSR information when management is being compensated for their CSR performance. This is important because if investors demand that CSR reports are assured, then potentially more firms will begin to provide this information with the necessary assurance. Indeed, using participants who have experience in investing, Brown-Liburd and Zamora (2015) find that when companies make higher than the median industry investment in CSR, and if managers are compensated for their CSR performance, investors will put a premium on whether the reports are assured. Further, they find that as investors have more experience with CSR reports, they will value these firms more positively. This suggests the potential to reach a tipping point as more and more companies provide CSR reports with assurance, leading to a critical mass of investors demanding this from all firms. Further, the paper highlights the issues that may arise out of linking management compensation to CSR performance. Although conceptually this may be an appealing idea (Kolk and Perego 2014), the message from the results of the Brown-Liburd and Zamora paper is that investors will only look upon this link of CSR performance and compensation favorably if the CSR information is assured. Future research can investigate how compensation committees weight CSR information in determining compensation and if those committees that do place a significant weight on CSR performance will be another force catalyzing the increased incidence of CSR reports assurance. The final two papers in the forum employ an archival research approach. The Casey and Grenier (2015) paper is a direct follow up to international studies on CSR report assurance (Simnett et al. 2009b), and examines CSR report assurance in the U.S. market. The U.S. still lags behind other countries in the provision of this assurance and the authors cleverly frame this relative lack of assurance as an “enigma” that they want to shed light upon. They provide 18
evidence on what types of firms in the U.S. obtain CSR assurance and the potential effects of providing this assurance. Their results suggest that it is beneficial even in the U.S. for firms to receive CSR assurance as those firms are associated with lower cost of equity capital along with lower analyst forecast errors and dispersion. The paper also triangulates with what experimental research has found (Pflugrath et al. 2011) by documenting that this effect is most pronounced when the assurance is provided by an accounting firm. Finally, Casey and Grenier significantly extend prior research by developing a measure of CSR concerns that supplements prior research which has relied on measures of CSR strength. Interestingly, those firms with more CSR concerns choose to get assurance from lower quality providers. This finding opens the way for future research to explore the “black box” on why this choice is made as opposed to choosing higher quality providers that may signal to the public that a firm is serious about improving their CSR performance in the future Finally, the Peters and Romi (2015) paper provides archival evidence on the relationship of corporate governance mechanisms on the decision to assure CSR information in the U.S. In particular, they examine whether the presence and characteristics of environmental committees on the board of directors and a Chief Sustainability Officer (CSO) as a member of the management team, impact CSR report assurance. Thus, they extend the view that this assurance can be seen as part of a broader corporate governance mosaic (Cohen et al. 2004). This paper finds that the presence of a CSO is positively associated with CSR report assurance, and that this association increases when the CSO has prior CSR expertise. They also explore different types of assurance mechanisms, including professional accounting firms, consultants and internal auditors. Peters and Romi find that only environmental committees containing directors with related expertise influence the likelihood of adopting CSR report assurance, with expert environmental committees appearing to prefer the assurance services of professional accounting firms and consultants. The authors find that firms employing a CSO and exhibiting poor environmental performance, relative to other firms in their industry, are less likely to assure their CSR results. They also conclude that larger firms in the U.S. were significantly less likely to seek assurance, but that this result is decreasing over time. Their research also raises the question of what other corporate governance factors in the corporate governance mosaic (Cohen et al. 2004) may be useful to investigate for its effect on the potential impact of CSR assurance. For
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example, future research can explore how much the legal department is driving the decision to have assurance on CSR reports. CONCLUSION Taken together, the papers presented in the forum show the range of research methods and questions that can be explored in this relatively under-researched but potentially rich and fruitful area for future research. This area is ripe for further research because nearly every research question and research method that has been examined in financial statement audit research can be explored for CSR report assurance. The questions and methods are still highly relevant in this different context, and audit researchers may have a comparative advantage as they can investigate distinct dimensions of the market and type of engagement. Throughout this overview, we have attempted to highlight the vast research opportunities in the CSR report assurance context. This is a crucial area where auditors and auditing research can help develop a tipping point where it may be to a company’s advantage to engage in appropriate CSR behavior and to document this behavior in a report that will receive the rigorous scrutiny of quality assurance providers.
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Table 1: Possible Research Approaches in Relation to CSR Assurance Level of analysis Market level
Main Theories Agency theory Stakeholder theory Legitimacy theory
Organizational level of analysis
Institutional theory Resource dependency theory Stakeholder theory
Individual or group decision-making level
Behavioral decision theory
Research questions Market characteristics impacting the: Decision to assure. Choice of assurance provider. Quality choice. Impact of corporate governance mechanisms. Characteristics and processes within an organization associated with the decision to produce and assure their CSR information. How assurers source for and use assurance evidence. How intended users interpret and react to the assurance.
Method Archival
Ethnographic Survey Case studies Interviews Experiments Surveys Interviews
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Table 2: Examining the Quality* of CSR Assurance Engagements Proxy Category OUTPUT MEASURES Material misstatements
Commonly used proxies for financial statement audit quality Restatements, Accounting and Auditing Enforcement Releases (AAER)
Auditor communication
Going concern opinions
Financial reporting quality
Discretionary accruals, Meet/beat, Accrual quality, Conservatism
Perception-based
Market reaction, Cost of capital, Change in market share, Change in fees, PCAOB inspections
INPUT MEASURES Auditor characteristics
Big N, Industry specialization
Auditor-client contracting fees
Audit fees
Relevance for assurance quality for CSR Can observe restatements related to both the correction of errors from prior reports as well as improvements in measurement/suitable criteria. AAERs not relevant to CSR assurance engagements. Not relevant to CSR assurance engagements, although qualified reports or commentary in reports may signal quality. While these measures are not relevant, there is a range of CSR report quality which could be utilized (for example, the extent to which the GRI Guidelines are followed). All relevant to quality of CSR assurance except for PCAOB inspections. Analyzing changes in fees is only possible if such fee information is publicly available. Greater range of input measures as greater variability and open to market competition. Can examine whether the information is assured or not assured; if assured, the choice of assurance providers; and if the accounting firms are chosen, the choice of a Big N assurance provider or industry specialist. Assurance service fees specific to CSR assurance are generally not publicly observable.
*Quality measures adapted from DeFond and Zhang (2104)
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