What does corporate sustainability reporting imply to auditors? Evidence from going-concern opinions and discretionary accruals

Purpose - This study aims to address the unanswered question of whether corporate sustainability has an impact on auditors’ overall judgment and to provide incremental evidence that corporate sustainability reporting has significant effect on financial auditors’ judgment. Design/methodology/approach - Following prior research, the authors, respectively, apply auditors’ decisions on going-concern opinions and three discretionary accrual measures as proxies for auditor conservatism over financial risk and financial reporting risk. The authors collect corporate sustainability reporting and sustainability assurance data of U.S. firms from the global reporting initiative (GRI) database to construct and measure firms’ sustainability reporting activities. Findings - The authors find that nonreporting firms are more likely to receive going-concern opinions than the reporting firms. In addition, reporting firms have a larger scale of discretionary accruals than their nonreporting counterparts. The authors also obtain consistent findings that sustainability assurance or accounting assurance providers strengthen the effect of sustainability reporting on auditors’ judgment. Research limitations/implications - First, using discretionary accruals as measures of auditor conservatism is controversial, as accruals are the joint product by auditors and clients. Second, binary variables as a measure of sustainability reporting activities limit the inference. Lastly, the findings based on limited samples may weaken the external validity. Practical implications - The findings imply that firms engaging in sustainability activities are lower in financial or financial reporting risk. Firms can influence audit practitioners’ overall judgment through sustainability reports. Sustainability commitments and reporting have become a part of firms’ risk management. Social implications - The findings imply that sustainability reporting could become an integrated part of regulated corporate disclosure. Sustainability assurance reduces social costs by lending credibility to sustainability reports. Originality/value - This paper provides incremental evidence that sustainability reports provide useful information and signals that influence auditors’ professional judgment. The findings also suggest that sustainability assurance strengthens auditors’ confidence in using sustainability information, thus amplifying the effect of sustainability reporting on auditors’ judgment.