Audited Financial Reporting and Voluntary Disclosure of Corporate Social

Responsibility (CSR) Reports

Long Chen
School of Business
George Mason University
E-mail: lchenk@gmu.edu

Bin Srinidhi
Department of Accounting
The University of Texas at Arlington
E-mail: srinidhi@uta.edu

Albert Tsang
Schulich School of Business
York University
E-mail: hiuleong2@yahoo.com

Wei Yu
Department of Economics
City University of New York- Hunter College
E-mail: wy109@hunter.cuny.edu

September 29, 2015

We thank Yue Li (the editor), two anonymous referees, Zhiyan Cao, Joseph Carcello, Keith Jones, Kathryn Kadous,
Roger Simnett, Gnanakumar Visvanathan, and the seminar participants at City University of Hong Kong, George
Mason University, National University of Singapore, Singapore Management University, Sun Yet-sen University, the
2011 Academic Conference on Social Responsibility at the University of Washington- Tacoma, the 2012 AAA
Auditing Section Mid-year Conference, the 2012 AAA Annual Meeting, and the 2015 AAA Management Accounting
Section Mid-year Conference for their helpful comments. Earlier version of this paper was circulated under the title
Corporate Social Responsibility (CSR) and Audit Fees: A Dual Perspective of CSR Performance and CSR Reporting.

Electronic copy available at: http://ssrn.com/abstract=2666872

 Audited Financial Reporting and Voluntary Disclosure of Corporate Social
Responsibility (CSR) Reports

Abstract

Prior studies show that corporate social responsibility (CSR) reporting is informative to investors
but lacks credibility. This study examines whether a commitment to audits of financial outcomes,
proxied by audit fees, is associated with greater CSR reporting credibility. We find that audit fees
are positively associated with the likelihood of standalone CSR report issuance, and this positive
association becomes stronger when managers perceive a greater need for credibility, i.e., when
CSR reports are longer or issued with external assurance, when firms have strong CSR concerns,
and when reports are issued sporadically. Corroborating our results, we find that CSR reports
issued by firms committing to high audit fees accelerate the incorporation of future earnings
information into current stock price. Taken together, our findings suggest that a commitment to
higher financial reporting quality has the potential to bring positive externality to firms non-
financial disclosures and ultimately affects the issuance of CSR reports.

Keywords: Corporate social responsibility, CSR disclosure, Complementarity, Audited financial

reporting, Audit fees.

Electronic copy available at: http://ssrn.com/abstract=2666872

 I. INTRODUCTION

Prior studies suggest that the disclosure of non-financial information, such as corporate social

responsibility (CSR) reporting, is informative to investors (Griffin and Sun 2013, Clarkson et al.

2013, Dhaliwal et al. 2011, 2012, and 2014).1 In particular, voluntary non-financial disclosures

such as CSR reports can provide broader, longer-horizon information than financial disclosures

(Ramanna 2013). Lys et al. (2015) show that managers use CSR reporting to signal future financial

performance to investors. 2 Christensen (2015) shows that CSR reporting affects investors

perceptions of management intent even in cases of high-profile misconduct. In other words, CSR

reporting is a valuable way for managers to signal their trustworthiness and communicate private

information on their firms future prospects to investors. However, such reporting needs to be

credible to be an effective signal of managerial trustworthiness or future performance. The

credibility of CSR reporting is suspect because firms can voluntarily disclose environmental and

social information in a strategic fashion (Li et al. 1997). Moreover, getting a CSR report (which

usually does not follow generally accepted standards) verified by high-quality external auditors to

render it more credible is a less common but costly exercise for the U.S. companies. As a result,

managers face the challenge of how to efficiently enhance the credibility of their firms voluntary

non-financial disclosures (Cohen and Simnett 2015).3

Ball et al. (2012) argue that a commitment to the independent verification of financial

outcomes increases the credibility of managers voluntary disclosure of private information to

investors. They focus on management forecasts, which are the voluntary disclosure of private

1
In the extant studies, the term CSR report is used interchangeably with corporate accountability report,
sustainability report, corporate citizenship report, and environmental or social disclosure.
2
Managers also use non-financial information to make internal decisions (Cohen and Simnett 2015), and regulators
and the public use it to evaluate the effects of firms business activities (Bewley and Li 2000).
3
Theory suggests that, in equilibrium, unverifiable disclosures are considered to be untruthful and uninformative (Crawford
and Sobel 1982).

financial information. We expand the confirmatory role of auditing in Ball et al. (2012), and argue

that such a commitment can also signal the credibility of voluntary non-financial CSR disclosures.4

Anecdotal evidence confirms that auditors recognize the implications of their audits for CSR

activities and reporting. For example, at the 2011 Environmental, Social, and Governance

conference, KPMG Managing Director Eric Israel noted that, along with the importance accorded

to ESG by investors, regulators, capital markets, and the public, auditors too have begun to

recognize the implications of CSR activity in their audits.

This study examines whether firms commitment to independent financial statement

verification generates positive externality for their voluntary non-financial CSR reporting by

increasing the latters credibility. Managers will issue CSR reports only if those reports are

sufficiently credible to provide benefits that more than offset their issuance costs. Therefore, the

greater the perceived credibility of a CSR report, the greater the likelihood of it being issued. To

address this question, first, we examine whether a commitment to financial statement verification

(measured by audit fees) is associated with the issuance and properties of voluntary CSR reporting.

Second, we examine whether higher audit fees make CSR reports more informative to investors

and, by implication, whether CSR reporting helps to improve the incorporation of future earnings

information into the current stock price.

Using a sample of 12,429 firm-year observations from 2000-2008 consisting of 731

voluntarily issued standalone CSR reports, we find audit fees to be positively associated with the

likelihood of CSR reports issuance. We complement this result by identifying the contexts in

which managers desire greater credibility. Such contexts include those in which the credibility gap

is high, such as when CSR reports are long and the firms issuing them have strong CSR concerns.

4
Admittedly, the confirmatory role of audited financial statements may not hold as strongly for non-financial
disclosures as they do for financial disclosures.

The degree of credibility could also be lower when a firm issues CSR reports sporadically because

doing so indicates that issuance is a strategic choice by managers. In contrast, CSR assurance by

a third party signifies a greater desire on the part of managers to improve reporting credibility. If

our supposition that auditing can bridge the credibility gap is valid, then a greater demand for

auditing should result in greater managerial striving to reduce that gap. Consistent with our

prediction, we find a stronger positive association between CSR reports and audit fees when CSR

reports are longer, issued with external assurance, issued by firms with strong CSR concerns, or

issued by firms sporadically. In addition, we also find both audit fees and excess audit fees5 to be

higher for such CSR reports. Further, we find that CSR report issuance by firms with higher audit

fees accelerates the incorporation of future earnings information into the current stock price,

suggesting that CSR reports issued by firms committing to higher financial reporting quality

provide more effective and credible signals to investors about firms future performance.

Taken together, these findings are consistent with the argument that committing more

resources to higher quality audits improves the credibility of voluntary CSR reports and renders

those reports more informative to investors. To enhance confidence in our findings, we further

conduct several robustness tests. Specifically, our results hold when we control for a simultaneous

relation between financial statement verification and CSR reporting using both two-stage least-

squares (2SLS) and three-stage least-squares (3SLS) specifications and when we control for serial-

correlation from unobserved firm-specific factors using a cross-sectional test of firm-average

effects. The results further hold when we incorporate unobserved time-invariant firm-specific

heterogeneity using firm-fixed effects and when we control for sample selection bias using the

Heckman two-stage model.

5
An excess audit fee is the residual of the regression of audit fees on firm-level determinants identified by prior studies.

 This study contributes to the literature in both the accounting and management areas. First,

prior studies provide evidence on the complementary role of mandatory disclosure quality in the

value relevance of voluntarily disclosed financial information. For example, Lennox and Park

(2006) find a positive association between earnings informativeness (the earnings response

coefficient) and the likelihood of management forecasts. Their results suggest that firms are more

likely to provide management forecasts voluntarily if their forecasts are perceived to be

informative. Similarly, Ball et al. (2012) find a positive association between a commitment to

financial reporting verification and the specificity, frequency, horizon, and accuracy of

management forecasts. They attribute their findings to the complementary role that audited

financial reporting plays in signaling the truthful disclosure of private financial information.6 Lys

et al. (2015) show that firms undertake more CSR activities in the current period when they

anticipate better future financial performance, implying that managers can credibly signal their

private foresight information by undertaking CSR, thereby increasing the need for credibility in

CSR reporting. Our study contributes to the financial accounting literature by demonstrating the

confirmatory role of financial reporting quality in another important type of voluntary disclosures:

standalone CSR reports.

Second, prior studies argue that meeting the information demand from either internal or

external decision-making through voluntary CSR reporting depends on the perceived reliability

and credibility of the CSR information (Cohen and Simnett 2015). Consistent with this argument,

studies show that CSR reports issued by firms with superior CSR performance (Dhaliwal et al.

2011) or issued in countries with a greater stakeholder-orientation (Dhaliwal et al. 2012) tend to

6
More specifically, they rely on the confirmatory role that audited financial information plays in improving the accuracy of
forecasts. The ex ante credibility of a forecast can be signaled by managers because if there is ex-post divergence between
that forecast and the financial statement numbers, both the managers and auditors are likely to pay a price (signaling cost) in
terms of reduced reputation and possible litigation.

exert a stronger effect on investors decision-making.7 By examining how the usefulness of CSR

reports varies with firms commitment to higher financial reporting quality, our study contributes

to the CSR literature by identifying an additional complementary institution through which CSR

report users can assess the usefulness of CSR information.

Finally, researchers have long been interested in the determinants of companies decisions

to make non-financial disclosures such as CSR reporting and the factors that affect the credibility

and consequences of such disclosures (see Anderson and Frankle 1980, Ingram and Frazier 1980,

Wiseman 1982 for early evidence). Our study adds to this literature by identifying one mechanism

by which firms can reduce users concerns over the credibility of their CSR reporting. Given that

the external assurance of such reporting (i.e., another mechanism that firms can use to improve the

credibility of CSR disclosures) remains a relatively uncommon practice for most CSR reporting

firms in the U.S.,8 we believe that the study also contributes to the management literature on

corporate sustainability by illustrating the importance of independent financial reporting

verification to corporate managers in their attempts to use CSR reporting to communicate their

environmental and social strategies, and the effects thereof, to outsiders.

The remainder of this paper is organized as follows. Section II reviews the relevant

literature and develops hypotheses. Section III describes our data, sample selection, and research

method. We present our empirical results in Section IV, and conclude the paper in Section V.

II. LITERATURE REVIEW AND HYPOTHESIS DEVELOPMENT

7
This evidence is consistent with Ramanna (2013), who suggests that the usefulness of CSR reporting varies with the
complementary institutions that support such reporting.
8
Prior studies argue that partly because of the relatively immature CSR report assurance service in the U.S. and/or
because of U.S. attestation standards restricting the auditing profession from providing such assurance, very few CSR
reports issued in the U.S. are assured by an external party (Perego and Kolk 2012, Simnett et al. 2009). Consistent
with these arguments, Simnett et al. (2009) and Dhaliwal et al. (2012) report that the percentage of CSR reports issued
with third-party assurance in the U.S. is only 6 percent and 5 percent, respectively, compared with a global average
of about 30 percent.

 Standalone CSR reporting is a form of voluntary corporate non-financial disclosure that

has significant consequences for the issuing firms. Positive CSR information can signal a high

degree of managerial integrity, managements responsibility toward all stakeholders, and reduced

operating and default risks (Hoi et al. 2013, Deng et al. 2013). Good CSR performance and CSR

reporting can help firms to build a reputation for being socially responsible, which can in turn

benefit those firms through competitive advantages in the labor, product, and capital markets

(Ioannou and Serafeim 2014, Deng et al. 2013, Choi and Wang 2009). In addition, providing CSR

reporting not only can increase transparency of the social and environmental impacts of companies,

but also can change internal management practices by creating incentives for companies to better

manage their relationship with employees, investors, customers, suppliers, regulators, and civil

society (Ioannou and Serafeim 2014).9

In recent years, regulators around the world have increasingly begun to recognize the

importance of CSR reporting by firms. For example, in 2004, Germany passed the Accounting

Law Reform Act, which mandates the inclusion and regular auditing of key CSR performance

indicators (such as environmental and employee indicators) in annual reports (Helm et al. 2011).

In 2010, Canada mandated CSR disclosure to promote better and timelier CSR information (SRI

Monitor 2010). In 2014, the U.S. established the Sustainability Accounting Standards Board

(SASB) to develop and disseminate sustainability accounting standards for publicly listed

companies (SASB 2014).

In addition to such regulatory pressure, firms throughout the world have themselves begun

to recognize the value of CSR reporting. In a KPMG International (2013) survey of corporate

responsibility reporting, for instance, Mr. Yvo de Boer, the global chairman of KPMGs climate

9
In the same vein, Garz and Volk (2007) suggest that the process of preparing CSR reporting is among the most
important catalysts for organizational change, contributing to the accumulation of knowledge, questioning of
processes, and the establishment of suitable structures and practices.

change and sustainability services, states: I believe that the debate on whether companies should

report on corporate responsibility (CR) or not is dead and buried. As this survey finds, CR reporting

appears to be standard business practice the world over even in those geographic regions and

industry sectors that only two years ago lagged behind. As a result, an increasing number of firms

around the world have begun to voluntarily initiate standalone CSR reports in recent years to

communicate their initiatives and performance within CSR domains such as environmental

preservation, human rights protection, employee welfare improvements, and community and

societal contributions (Simnett et al. 2009).10

Prior studies examining the link between voluntary CSR disclosure and firm value

generally find a positive association between them. For example, early evidence from Anderson

and Frankle (1980) shows that the market attributes positive value to firms social disclosures.

Blacconiere and Northcutt (1997) find that chemical firms with more extensive environmental

disclosures display a weaker negative reaction to environmental regulation than do other firms.

Recent work more directly related to this line of research includes that of Dhaliwal et al. (2011,

2012, and 2014), Griffin and Sun (2013), and Clarkson et al. (2013). Clarkson et al. (2013) and

Griffin and Sun (2013) find voluntary environmental disclosures to be incrementally informative

to investors. Matsumura et al. (2013) demonstrates that capital markets reward firms that disclose

carbon emissions information. Recent studies also show a positive association between the quality

of management decision-making and CSR reporting. For example, Christensen (2015) finds that

firms that report on CSR are less likely to engage in high-profile misconduct and, further, that

when such misconduct does occurs such firms suffer fewer negative consequences than firms that

10
As of mid-2011, over 33,000 CSR reports had been issued by firms and organizations around the world (according
to Corporateregister.com, an archival database of such non-financial reports). The increase in standalone CSR
disclosure issuance is also substantial. For example, the percentage of Fortune Global 250 companies issuing CSR
reports increased from half in 2005 to nearly 80 percent in 2008 (International Survey of Corporate Responsibility
Reporting by KPMG Global Sustainability Services and the University of Amsterdam).

do not report on CSR. In effect, CSR reporting influences investors perceptions of managerial

intent, and, conversely, managers can use credible CSR reporting to influence the perceptions of

investors.

However, with the exception of a few types of environmental disclosure mandated by

law,11 voluntarily disclosed standalone CSR reports in the U.S. are currently subject to very limited

regulatory guidance and oversight. As a result, one major concern about such reports is their lack of

credibility and/or potential for opportunism (Holder-Webb et al. 2009, Simnett et al. 2009, Ingram

and Frazier 1980, Hobson and Kachelmeier 2005, Muslu et al. 2014). Consistent with this concern,

some studies contend that CSR reporting may be driven by managers self-interest (Kim et al.

2012, Ramanna 2013) or issued for strategic reasons (Bewley and Li 2015). 12 In addition, other

studies also argue that managers can use CSR reporting as a symbolic action or to achieve green-

washing (Hemingway and Maclagan 2004, Weaver et al. 1999).

We propose two arguments for why managers could credibly signal their commitment to

CSR reporting through the expenditure committed on auditing. First, Ball et al. (2012) suggest that

auditing provides a mechanism through which managers can signal the truthfulness of their

voluntary disclosures to external users. Their rationale is that financial statements provide

confirmation (or disconfirmation) of the voluntary forecasts issued by firms ex post. If such

confirmation is not forthcoming, managers lose credibility and reputation and may even face

litigation. Managers thus expend resources on auditing ex ante to minimize the potential cost of

divergence between forecasts and actual performance. In a similar vein, if CSR reports and

11
In the U.S., CSR reporting is mandated in only a few specific settings, e.g., the mandatory disclosure of carbon
emissions information required by the Environmental Protection Agency since 2009 and by the California Air Resources
Board since 2010.
12
For example, previous studies show that firms with poor CSR performance tend to disclose more CSR-related
information in response to social and political pressure (Cho and Patten 2007, Patten 2002, Wiseman 1982, Hughes
et al. 2001, Cho et al. 2012).

10

financial disclosures do not converge, investors may infer that managers are making misleading

and confusing disclosures, thus resulting in a loss of reputation and credibility for those managers.

To minimize this possibility, managers are likely to spend resources on auditing to ensure that the

firms system for producing both financial and non-financial information is reliable. Stated

differently, managers can signal the reliability of their CSR disclosures by devoting more resources

to auditing.

A second line of argument is that a firm that devotes effort to building credibility through

the voluntary disclosure of financial information is likely to demonstrate its commitment to doing

so to both shareholders and other stakeholders for two reasons. First, the information system used

to produce financial reports is the same as that used to produce other types of disclosure such as

CSR reports. A commitment to transparency toward shareholders through a superior information

system exerts positive externality on the quality of CSR reports. Second, managers with a high

degree of integrity and an overall commitment to quality are unlikely to limit their transparency

efforts to only one set of stakeholders. In other words, managerial effort toward a commitment to

one set of stakeholder reflects their commitment toward other stakeholders in general. Consistent

with this view, several prior studies show positive associations among managers commitments to

different stakeholder groups. For example, Qian et al. (2014) find a positive association between

corporate financial transparency and corporate philanthropic giving. They conclude that the effort

expended to build a good image and accumulate moral capital is likely driven by firms desire to

demonstrate responsibility to shareholders and other stakeholders alike. Similarly, Hemingway

and Maclagan (2004) argue that a responsible firm should be publicly accountable for both its

financial performance and social performance. Consistent with this argument, Atkins (2006)

claims that providing transparent financial reporting to investors is one way for firms to indicate

social responsibility. Further supporting the argument, Kim et al. (2012) argue and find that firms

11

that are socially responsible to their stakeholders are also likely to provide high-quality financial

information to their shareholders.

Based on both of the foregoing arguments, we hypothesize that a commitment to a higher

level of financial reporting quality, proxied by audit fees, signals more credible CSR reporting,

which in turn affects the decision to issue a CSR report. Stated formally, 13 we have the two

following hypotheses (both in alternative form).

Hypothesis 1: Firms committing more resources to the voluntary issuance of standalone CSR
reports also commit more resources to the independent verification of their financial
reporting.

Hypothesis 2: Firms propensity to issue standalone CSR reports increases with their level of
commitment to the independent verification of their financial reporting.

III. DATA, SAMPLE, AND METHODOLOGY

Empirical Models and Variable Definitions

We test Hypothesis 1 by regressing audit fees, our proxy for firms commitment to the

independent verification of financial reporting (LNFEE, the natural log of audit fees in thousands

of dollars), 14 on CSR reporting (CSR_REPORT, an indicator variable that takes a value of 1 if a

firm issues a CSR report in a given year, and 0 otherwise) after controlling for other determinants

of audit fees as identified by prior studies.

We draw on Simunic (1980), Craswell et al. (1995), Ashbaugh et al. (2003), Whisenant et

al. (2003), and Hay et al. (2006) to identify common explanatory variables for audit fees. They

include auditor quality (BIG4), audit complexity proxied by the market value of equity (LNMVE),

13
To the extent that the audit services supplied to companies may not be devoted to enhancing the truthfulness of
voluntary disclosures, Hypothesis 1 is implicitly a joint test of (1) whether audit fees are used to signal truthful CSR
disclosures and (2) whether standalone CSR reporting outcomes can be confirmed by audited financial statement
outcomes. We are grateful to an anonymous reviewer for pointing this out.
14
Untabulated results using an alternative audit fee measure that scales audit fees by total assets are consistent with
and even stronger than those reported in the main tables.

12

a merger or acquisition indicator (MERGER), accounts receivable and inventory (ARINV), a loss

indicator (LOSS), a special item indicator (SPI), sales growth (SALEGR), number of business

segments (SEGMENT), pension plan availability (PENSION), December 31 fiscal-year-end

indicator (FYE), firm age (LNAGE), auditor tenure (LNTENURE), reporting lag (LNREPLAG),

return volatility (VOL), going concern issuance (GC), restatement (RESTATE), debt or equity

issuance (FINANCE), leverage (LEV), market-to-book ratio (MTB), return on assets (ROA),

foreign sales (FORGN), and company litigation (LITIGATION).

In addition, we also control for earnings quality, measured by discretionary accruals (DAC)

and real activity management (RAM), as prior studies show that socially responsible firms are

likely to behave in a more responsible manner to constrain earnings management (Kim et al. 2012).

A lower degree of earnings management reduces the inherent risk of client firms, which in turn

normally leads to lower audit fees. Following Kim et al. (2012), we compute DAC using the cross-

sectional modified Jones model, controlling for current year performance (ROA) and real earnings

management (RAM). RAM is measured by (AB_CFO - AB_PROD + AB_EXP), where AB_CFO,

AB_PROD, and AB_EXP are abnormal cash flows from operations, abnormal production costs,

and an abnormal level of discretionary expenses, respectively. LITIGATION is an indicator

variable of litigation against a firm for any alleged cause, as firms issuing CSR reports can face a

higher litigation risk and thus pay higher audit fees. In addition to controlling for litigation risk,

we also control for firms CSR performance (CSR_PERF) or concerns (CSR_CONC) to capture

audit risks not fully captured by the other control variables. Finally, both industry and year fixed

effects are included in our model.15

Appendix II provides detailed descriptions of the variables. In both Equations (1) and (2), we follow the extant
15

auditing literature in measuring both the dependent and independent variables of the audit fee model in the same year.
Given that audit fees may be determined at the beginning of a year, we also use subsequent year audit fees and the
CSR reporting indicator as alternative dependent variables in Equations (1) and (2), respectively, and our results do
not change qualitatively. We thank an anonymous reviewer for recommending these additional tests.

13

 Our regression model is specified as follows.

LNFEE=a0+a1 BIG4 +a2 MERGER+a3 ARINV+a4 LOSS +a5 SPI+ a6 SALEGR

+a7 SEGMENT+a8 PENSION+a9 FYE+a10 LNAGE+a11 LNTENURE+a12 LNREPLAG
+ a13 VOL+a14 GC+a15 RESTATE+a16 RAM+a17 DAC+a18 FINANCE+a19 LNMVE
+ a20 LEV+a21 MTB+a22 ROA+a23 FORGN+a24 LITIGATION +a25 CSR_PERF (or
CSR_CONC) + a26 CSR_REPORT+ Year Indicators+ Industry Indicators +
Equation (1)

Following previous studies, we expect to find higher audit fees for firms audited by a Big

4 auditor, firms with greater audit complexities (a larger size, more mergers and acquisitions and

new debt/equity issuance in the subsequent year, a lower market-to-book ratio, a larger foreign

sales percentage, more business segments, a larger pension plan amount, or a restatement), greater

financial risk (higher leverage, lower ROA, a loss, more special items, greater stock return

volatility, or litigation), greater inherent risk (larger amount of inventory and receivables), more

earnings management (both accruals and real activity manipulations), and engagement attributes

(a fiscal year-end on December 31, a larger gap between the fiscal year-end and earnings

announcement date, or the receipt of a going concern opinion).16

We test Hypothesis 2 by regressing the CSR reporting variable on either total audit fees

(LNFEE) or excess audit fees (EX_FEE) after controlling for the other determinants of CSR

reporting. We predict a positive coefficient on audit fees under the premise that committing to

higher financial reporting quality is positively associated with the incentive to voluntarily engage

in CSR reporting. In particular, we estimate the following multivariate regression.

CSR_REPORT=0+ 1 DAC+ 2 FINANCE+ 3 LNMVE+ 4 LEV+ 5 MTB

+ 6 ROA+7 FORGN+8 LITIGATION +9 CSR_PERF +10 COMPETITION
+11 LIQUIDITY +12 CIG +13 CSR_COMM +14LNFEE (or EX_FEE)
+Year Indicators +Industry Indicators +,
Equation (2)

16
Given the mixed results in other studies, we do not predict the signs for the coefficients of sales growth, firm age,
or audit tenure. An untabulated robustness test indicates that controlling for R&D expenditure as an indicator of future
risks does not qualitatively change our results.

14

where excess audit fees (EX_FEE) constitute the residual from the regression of LNFEE on all of

the firm-level audit fee determinants included in Equation (1) after excluding the CSR reporting

variable (CSR_REPORT). Following prior studies (e.g., Dhaliwal et al. 2011), we identify other

control variables to predict the issuance of CSR reports, including determinants that are either

common to audit fees and CSR reporting (i.e., DAC, FINANCE, LNMVE, LEV, MTB, ROA,

FORGN, LITIGATION, and CSR_PERF) or specific to CSR reporting (i.e., an industry

competition index, COMPETITION; share liquidity, LIQUIDITY, and an indicator for

management forecasts, CIG). Finally, we also control for CSR_COMM, an indicator variable that

is equal to 1 if the firm has a CSR committee in place, and 0 otherwise (Peters and Romi 2013).

Data and Sample Selection Procedure

The CSR reporting data used in this study are similar to those used by Dhaliwal et al.

(2011). They include all standalone CSR reports voluntarily issued by U.S. firms during the 2000-

2008 period and collected from various sources, including (1) CSR Newswire, (2)

CorporateRegister.com, (3) Internet searches, and (4) company websites. We measure firms CSR

performance (or CSR concerns) using the four major CSR categories in the KLD database, which

directly reflect the needs of four major primary stakeholder groups: the environment, employee

relations, product (customers), and community (Hillman and Keim 2001, Waddock and Graves

1997, Berman et al. 1999, Choi and Wang 2009).17,18 Following prior CSR studies (Waddock and

17
KLD Research and Analytics, Inc. (KLD) is a financial advisor that carries out the social screening of North
American firms via its reports and socially screened mutual funds. In 2001 and 2002, KLD expanded its coverage to
include the largest 1,000 U.S. companies based on market capitalization, and, since 2003, it has covered the largest
3,000 U.S. companies. Because of its accuracy and objectivity, the KLD database is used widely in the academic
literature (e.g., Hillman and Keim 2001, Sharfman and Fernando 2008, Chatterji et al. 2009, Dhaliwal et al. 2011,
Kim et al., 2012).
18
We exclude the corporate governance category in measuring firms CSR performance because it is often perceived
as a distinct construct from the other CSR rating categories (Kim et al. 2012). We also drop the diversity category
because it is unclear whether diversity is related to employees or corporate governance. However, the inclusion of
either or both of these categories in measuring CSR performance/concerns does not change the results.

15

Graves 1997, Chatterji et al. 2009, Kim et al. 2012), we also construct an aggregate CSR

performance score by subtracting the total CSR concern score from the total CSR strength score,

and denote it as CSR_PERF. A greater difference between CSR strength and CSR concerns

indicates superior CSR performance.19 We provide further details on the subcategories of these

four CSR categories in Appendix I.

Our initial sample consists of 18,575 firm-year observations with non-missing KLD scores

associated with 4,176 firms spanning the 2000-2008 period. We further exclude 3,135 firm years

in the financial industry for two reasons. First, two CSR dimensions, environment and product, are

not applicable to that industry. Second, the finance industry is regulated differently from other

industries, which may affect a firms reporting incentives. We match hand-collected standalone

CSR report data to the KLD sample. Next, the combined CSR performance and report data are

merged with the Audit Analytics, Compustat, and CRSP databases to obtain auditing, financial

statement, and stock return data, respectively. We delete 3,011 firm years that lack the necessary

audit fee, stock return, or financial statement data, leaving 12,429 observations in the final sample.

Together, these firms issued a total of 731 standalone CSR reports during the sample period.

Sample Description

Descriptive statistics

Table 1 presents the descriptive statistics of our final sample. The mean (median) value of

audit fees (FEE) is $2.23 million ($1.18 million), and the mean (median) value of the market value

of equity (MVE) is $5.1 billion ($13.8 billion). About 92.5% of the samples firm-year observations

were audited by a Big 4 auditor (BIG4), 29.8% are characterized by merger or acquisition activities

19
In an additional test, we also employ a different measure of CSR performance obtained from the ASSET4 database,
which is another major well-known data source of CSR performance scores used in extant studies (e.g., Lys et al.
2015), and find our main inference on the relation between CSR reports and audit fees to remain unchanged.

16

(MERGER), nearly 20% issued debt or equity in the current or subsequent year (FINANCE), and

about 8.3% were litigated against for some alleged cause in a given year. The mean (median) return

on assets (ROA) is 3.5% (5.3%), and about 21% of the firm years reported a loss. The mean (median)

auditor tenure (TENURE) is 10.9 (8) years, and the mean (median) firm age (AGE) is about 22.7

(16) years. Around 0.6% of the firm years received going concern opinions (GC). Among our key

variables of interest, CSR_PERF (CSR_CONC) ranges from -2 to 1 (0 to 3) interdeciles, with an

average of -0.464 (1.069), indicating that, on average, the rated CSR concerns of our sample firms

slightly outweigh their rated CSR strength. CSR_REPORT has a mean of 0.059, suggesting that,

on average, only 5.9% of observations issued standalone CSR reports during the sample period.

[Insert Table 1 about here]

Yearly distribution of CSR performance and CSR reporting variables

Table 2 illustrates the annual distribution of the CSR reporting and CSR performance

variables. Columns (2) and (3) of Panel A report the yearly breakdowns of the mean values of

CSR_PERF and CSR_CONC, respectively. In Columns (4)-(6), we report the total number of CSR

reports issued in each year (# of Reports), the percentage of observations with CSR_REPORT = 1

(% of Reports), and the average number of pages in the CSR reports (# of Pages). Figure 1 plots

the corresponding time trends of CSR performance, CSR concerns, and CSR reporting, from which

we observe that the trend of the CSR report percentage is more similar to CSR concerns than to

CSR performance.20 These trends provide preliminary evidence showing that CSR reporting is

more representative of the response to stakeholder CSR concerns than to CSR performance. They

also provide support for the importance of controlling CSR performance/concerns when examining

20
We inflate the percentage of CSR_REPORT = 1 by 10 (Figure 1) to show this variable on the same scale as that of
CSR_PERF and CSR_CONC.

17

the relation between a commitment to audited financial reporting and the voluntary issuance of a

CSR report.

In Panel B, we further tabulate the yearly distribution of the CSR reporting properties,

namely, (1) the number and percentage of CSR reporting firms with a higher-than-industry-median

level of CSR concerns (CSRRPT_HICONC = 1), (2) the number and percentage of firms issuing

CSR reports with a higher-than-the-industry-median number of pages (HIPAGE = 1), (3) the

number and percentage of firms issuing CSR reports backed up by assurance (ASSURANCE = 1),

and (4) the number and percentage of firms issuing CSR reports in a sporadic manner (SPORADIC

= 1, i.e., firms that did not issue CSR reports every year since their first CSR report). Compared

with the early 2000s, slightly more firms have issued CSR reports sporadically in recent years.

However, there was no obvious trend for the other three CSR reporting properties over time. The

distribution also reveals that CSR reports are more likely to be issued by firms with strong CSR

concerns rather than strong CSR performance.

[Insert Table 2 and Figure 1 about here]

Correlation matrix

Table 3 presents the Spearman/Pearson correlation matrix for the main variables used in

the audit fee model (Equation 1). The log of audit fees (LNFEE) is significantly and positively

correlated with CSR report issuance (CSR_REPORT), providing preliminary support for the

supposition that CSR reporting is positively associated with a commitment to independent

verification of financial statements. Consistent with studies on the determinants of audit fees, most

of the control variables included in Equation 1 are significantly correlated with LNFEE. The

exceptions are ROA, GC, and RESTATE, which are insignificant at the 0.10 level. In addition,

consistent with the observations of Figure 1 and Panel B of Table 1, the correlations between

CSR_REPORT and CSR_CONC are strong and significant, with a Spearman (Pearson) coefficient

18

of 0.27 (0.37), whereas those between CSR_REPORT and CSR_PERF are insignificant. These

results lend further support to the existence of a strong managerial incentive to enhance the

credibility of CSR reports in an attempt to manage increasing stakeholder concerns through CSR

reporting.

[Insert Table 3 about here]

IV. EMPIRICAL RESULTS

Voluntary CSR Report Issuance and Commitment to Audit Fees

Table 4 reports the results of Equation 1 estimated using ordinary least-squares (OLS)

regression. In all of the models, we consistently find a positive and significant association between

voluntary CSR report issuance (CSR_REPORT) and audit fees (LNFEE). These findings provide

strong support for Hypothesis 1, suggesting that the act of voluntary CSR report issuance is

associated with a greater commitment to the independent verification of financial statements.21

[Insert Table 4 about here]

Properties of CSR Reporting and Commitment to Audit Fees

Consistent with the wide discretion that managers have over the issuance of CSR reports,

the statistics reported in Panel B of Table 2 show substantial variations in each of the CSR

reporting property variables. To provide a better understanding of the relation between CSR

reporting and a commitment to higher quality auditing, we further examine the extent to which the

commitment of firm resources to voluntary CSR disclosure, as measured by different CSR

reporting properties, is related to audit fees. More specifically, we focus on CSR reports (1) issued

It should be noted that LITIGATION has a positive coefficient, CSR_PERF has a negative coefficient, and
21

CSR_CONC has a positive coefficient. CSR_REPORT has a positive coefficient after controlling for these variables,
which implies that higher audit fees are not the result of CSR_REPORT resulting in a greater litigation risk.

19

by firms with a high level of CSR concern, (2) those longer in length, (3) those backed up by

external assurance, and (4) those issued by a firm sporadically.22

Stakeholders are likely to have differential expectations of firms CSR practices contingent

upon the severity of CSR concerns. Therefore, when a firms CSR concern is higher, the pressure

on the firm to restore stakeholder trust through CSR reporting, and thus the firms commitment to

audited financial statements, is greater. Using the KLD data, we identify a total of 567 CSR reports

issued by firms with CSR concerns stronger than the industry median, and denote these firms by

an indicator variable (i.e., CSRREP_HICONC = 1). We expect these CSR reports to exhibit a more

positive relation with audit fees.

Simnett et al. (2009) suggests that firms having their CSR reports assured by independent

third parties exhibit stronger managerial incentives to enhance the credibility of those reports and

build stakeholder trust. In addition, longer CSR reports are indicative of greater managerial effort

devoted to dealing with strong stakeholder CSR concerns. In both cases, a stronger managerial

desire for the creditability of CSR reports suggests a more positive association between a

commitment to audited financial statements and CSR report issuance. To test these expectations,

we create two indicator variables: ASSURANCE, an indicator variable that equals 1 if a firms CSR

report is assured in a given year by a third party, and 0 otherwise, and HIPAGE, which takes a

value of 1 if the number of pages in a firms CSR report is greater than the industry median, and

of 0 otherwise.

Further, a commitment to ongoing disclosure has greater potential to reduce a firms

information asymmetry (Leuz and Verrecchia 2000). Despite the apparent benefits of a

22
We also examine the initiation of CSR reporting as another important property of CSR reports. Untabulated results
suggest that both first-time and subsequent CSR reporting are positively associated with audit fees, although the
magnitude and economic significance are much larger for subsequent CSR reporters than for first-time CSR reporters,
probably due to the predominantly high percentage of subsequent CSR reporters (98.8%).

20

commitment to disclosure, we find wide variation in the disclosure frequency of CSR reports in

our sample. Some firms issue these reports regularly (annually), whereas others do so sporadically.

A lack of regular CSR report issuance could be a signal that managers are strategically choosing

to issue such a report when it is opportune to do so. Under the premise that stakeholders are likely

to perceive regular CSR reporting as more informative and credible,23 we expect sporadic CSR

reports to have a stronger association with auditing fees. Accordingly, we define SPORADIC as

an indicator variable that equals 1 if the firm has not issued a CSR report every year since its first

CSR reporting year, and 0 otherwise.

The results are presented in Table 5. Consistent with Hypothesis 1, the estimated signs for

CSRREP_HICONC, HIPAGE, ASSUANCE, and SPORADIC are all significantly positive, whether

tested separately or in combination, suggesting that firms under greater pressure to build

stakeholder relations through the issuance of standalone CSR reports tend to devote more resources

to high-quality auditing services.

[Insert Table 5 about here]

By posing Hypothesis 2, we seek to examine whether firms propensity to issue CSR

reports is positively affected by their commitment to audit fees. We adopt both the level of audit

fees (LNFEE, Panel A) and excess audit fees (EX_FEE, Panel B) to proxy for a commitment to

paying audit fees, and examine their effects on the likelihood of CSR report issuance. Because

EX_FEE represents audit fees that are incremental to those associated with previously identified

determinants, it is likely a better proxy for firms incremental commitment to auditing for signaling

purposes. Table 6 shows a positive association between both the level of audit fees (Panel A) and

23
Prior studies provide support for this argument. Blacconiere and Patten (1994) demonstrate that investors interpret
a firms prior extensive environmental disclosures as a positive signal of the firms ability to manage its exposure to
future regulatory costs. Dhaliwal et al. (2014) find weak evidence to show that more regular (less sporadic) CSR
reporting tends to have a greater effect on reducing firms cost of equity capital.

21

excess audit fees (Panel B) with the likelihood of CSR report issuance, thus providing support for

Hypothesis 2.

[Insert Table 6 about here]

Additional Robustness Tests

Simultaneous equation model (2SLS technique)

The hypothesis that commitments to audit verification and to voluntary CSR reporting are

complements suggests that firms may simultaneously decide how to allocate resources for an

independent audit and for CSR reporting. To control for the endogeneity of commitments to audit

verification (LNFEE) and voluntary CSR reporting (CSR_REPORT), we deploy a simultaneous

equation model comprising Equations (1) and (2). We choose as instruments the reporting lag

(LNREPLAG) in the audit fee regression and the existence of a CSR committee (CSR_COMM) in

the CSR reporting regression because reporting lag has a strong correlation with audit fees but

little correlation with voluntary CSR reporting, whereas the existence of a CSR committee is

highly correlated with the decision to disclose CSR information but does not appear to correlate

with audit fees. The results of the 2SLS model24 reported in Online Appendix Table A1 confirm

the two-way positive associations between CSR reporting and audit fees reported in Tables 4 and

6, thereby providing stronger support for Hypotheses 1 and 2 on the complementary relation

between firms commitment to financial reporting verification and their voluntary disclosure of

non-financial information in CSR reports.

Cross-sectional regression with one observation per firm

To control for potential serial-correlation from unobserved firm-specific factors, we

estimate a cross-sectional regression that uses one observation per firm. For each firm, we compute

24
We follow the two-step procedure described by Wooldridge (2010) in the 2SLS model with a binary endogenous
variable. No econometric technique addressing a similar issue in the 3SLS model can be identified.

22

the time-series average across all sample years for each variable used in the simultaneous equation

model. The number of observations in this test corresponds to the number of individual firms in

the sample. The average value of the binary variable CSR_REPORT can take any value between 0

and 1. We apply both the 2SLS and 3SLS techniques in this test, and report the results in Online

Appendix Table A2. Consistent with our earlier results, the coefficients on average CSR report

issuance and average audit fees are both positive and significant across the 2SLS and 3SLS models,

although CSR reporting is not as significant as it is in the pooled test in Online Appendix Table

A1 (potentially due to the smaller sample size). These results mitigate the concern that our main

inferences may be affected by potential serial-correlation driven by unobserved firm-specific

factors.

Controlling for omitted time-invariant firm-specific factors

To the extent that commitments to both audit verification and a CSR reporting policy are

relatively stable over time, their firm-specific determinants may also be time-invariant, although

omitted from the current model specification. We first conduct the Hausman test on the addition

of fixed effects versus random effects in Equation (1), and then adopt fixed effects based on the

Hausman test p-value (p < 0.01). We add random effects to the Probit model in Equation (2), as

the model does not allow fixed effects.25 As Online Appendix Table A3 reports, the coefficients

on both variables of interest, CSR_REPORT and LNFEE, continue to be positive and significant

in their respective regressions, which indicates that both the effect of voluntary CSR reporting on

audit fees and that of a commitment to audit fees on the voluntary issuance of CSR reports seem

to be robust to controlling for time-invariant firm-specific effects. These findings provide stronger

support for our hypotheses.

25
We also control for time-invariant firm-specific factors in the Logit regression model of Equation (2) via a fixed-
effects rather than random-effects model. Subject to the limitation that there are 1,384 observations in the fixed-effects
models, the untabulated results are consistent with those reported in Online Appendix Table A3.

23

Controlling for sample selection bias via Heckman two-stage approach

Our analyses of CSR reporting properties are restricted to firms that actually issue CSR

reports, thus introducing a potential self-selection bias. To check the robustness of our results to

self-selection bias, we apply the Heckman two-stage approach, and report the results in Online

Appendix Table A4. In the first stage (Panel A of Online Appendix Table A4), we estimate an

amended Equation (2) with the audit fee variable omitted, i.e., a Probit regression of

CSR_REPORT on the previously documented determinants of firms decision to issue CSR reports.

In the second stage (Panel B), we then estimate an amended Equation (1) using the CSR reporting

property variables to replace CSR_REPORT, in addition to including the inverse Mills ratio

(MILLS) from the first stage.

The dimensional results in Panel B of Online Appendix Table A4 are generally consistent

with our prior findings, except for that on the issuance of lengthier CSR reports (HIPAGE). In the

combined regression, the effects of CSR reporting firms having stronger CSR concerns

(CSRRPT_HICONC), having their reports assured (ASSURANCE), and issuing CSR reports of

longer length (HIPAGE) and in a sporadic manner (SPORADIC) are all positive and significant.

Overall, the inference of our main findings does not change, and they do not seem attributable to

self-selection into the voluntary CSR report issuance group.

Additional Controls and Alternative Explanations

Carcello et al. (2002) and Abbott et al. (2003) find that companies with stronger corporate

governance pay higher audit fees, as better-governed firms are more concerned with financial

reporting quality and thus more willing to spend more on audit services. A recent study by Cao et

al. (2012) shows that companies with more favorable reputations have greater incentives to protect

those reputations, and are therefore more willing to pay higher audit fees for better-quality audit

services. As CSR reporting may be positively associated with both corporate governance and firm

24

reputation, our results could potentially be driven by these two omitted factors rather than by CSR

reporting. Therefore, we conduct an additional test to examine the effect of CSR reporting on audit

fees after controlling for both corporate governance and reputation.

In this additional test of Equation (1) (untabulated), we use the corporate reputation score

provided by Newsweek for Americas 500 largest corporations (firms not on the list are ranked as

501) to proxy for firm reputation, and the firms corporate governance performance score obtained

from the KLD database (i.e., the net corporate governance performance score measured by

CSR_STR_GOV- CSR_CON_GOV) to control for corporate governance. Our main inferences

remain unchanged after controlling for both variables, thus supporting the hypothesis that the

positive association between CSR reporting and audit fees is incremental to the effects of firm

reputation and corporate governance.

One other possible explanation for the positive relation between CSR reporting and audit

fees is that the additional effort required for the external assurance of firms CSR reporting may

increase those firms total audit fees. However, as less than 6% of the CSR reports issued by the

U.S. firms in our sample are actually assured by an independent third party, and the percentage

assured by professional auditors is even lower (less than 1%), we do not consider this explanation

to be plausible.26

As many users of CSR information are skeptical of CSR reports (Casey and Grenier 2015),

another alternative explanation for our findings is that firms issuing CSR reports that are backed

up by assurance, longer in length, or sporadic in issuance are viewed by investors (and therefore

by auditors) as more aggressive reporters (e.g., firms that are under pressure to manage

legitimacy threats). If auditors perceive greater aggressiveness in firms issuing CSR reports, they

26
Nevertheless, in an additional robustness check (untabulated), we also exclude all CSR reports issued with external
assurance, and find that our results and conclusions remain unchanged.

25

may also perceive a greater audit risk, thus leading to higher audit fees. To address this possibility,

we follow Dhaliwal et al. (2012) and estimate the future ERC model suggested by Collins et al.

(1994) and Lundholm and Myers (2002) to examine the perceived usefulness of CSR reporting. If

investors perceive voluntary CSR reports, particularly those issued by firms committed to higher

audit fees, as more truthful (aggressive), then we would expect current stock returns to incorporate

more (less) information about future earnings when such CSR reports are issued. More specifically,

we test the following model.

RETi,t=0+1Ei,t-1+2 E i,t+3 E i,t3+4 RET i,t3+5CSR_REPORTi,t + 6CSR_REPORT_HIFEEi,t

+ 7CSR_REPORTi,t Ei,t-1+ 8CSR_REPORT_HIFEEi,t Ei,t-1
+9CSR_REPORTi,tEi,t+10CSR_REPORT_HIFEEi,tEi,t
+11CSR_REPORTi,tEi,t3+ 12CSR_REPORT_HIFEEi,tEi,t3
+13CSR_REPORTi,tRETi,t3+14CSR_REPORTi,tRETi,t3
+15Controlsi,t+16Controlsi,tEi,t-1+17Controlsi,tEi,t+18Controlsi,tEi,t3+19Controlsi,tRETi,t3
+ i,t,
Equation (3)
where CSR_REPORT_HIFEEi,t is an indicator variable that equals 1 if a CSR report is issued by

firms with higher-than-the-median audit fees, and 0 otherwise; RETi,t (RETi,t3) is buy-and-hold

returns calculated over the one-year period from January to December in year t (three-year period

from year t+1 to year t+3) for firm i; E i,t equals income before extraordinary items divided by the

market value of equity; Ei,t3 is total E i,t over the three years from year t+1 to year t+3; and Controls

include firm size, number of analysts, and an indicator variable indicating whether a firm issues

common dividends.27

27
Given that there are only 146 CSR initiations in the sample, a difference-in-differences design is not appropriate.

26

 Table 7 presents the results for Equation (3). In all of the models (with and without

controls), we find significant and positive coefficients on the interaction term

CSR_REPORT_HIFEEi,tEi,t3. This finding implies that CSR reports issued by firms committed

to a higher level of financial reporting quality, as measured by higher audit fees, accelerate the

incorporation of future earnings information into the current stock price to a greater extent than

those issued by firms paying lower audit fees.28 It thus rejects the aggressiveness argument of

CSR reporting, and lends further support to the complementary role that firms commitment to

better financial reporting quality plays in enhancing the credibility of CSR disclosures.

[Insert Table 7 about here]

V. CONCLUDING REMARKS

In the spirit of Ball et al. (2012), we examine whether the voluntary issuance of CSR reports

is associated with a commitment to the independent verification of financial reporting proxied by

audit fees, or vice versa. Additionally, we also exploit differences in CSR reporting properties to

identify the reporting characteristics that strengthen the association between auditing fees and CSR

reporting.

We argue that committing to the independent verification of financial statements not only

builds investor confidence in the financial disclosures voluntarily made by firms, but also enhances

the perceived usefulness and credibility of their non-financial disclosures, such as CSR reports,

which in turn affects firms incentive to issue such reports. Consistent with this argument, we find

a positive association between the audit fees firms pay and their voluntary issuance of standalone

28
We recognize the possibility that firms that issue CSR reports and pay high audit fees may have some other factors
that result in a higher ERC. We thank an anonymous reviewer for pointing out this possibility.

27

CSR reports. We further find that positive association to be stronger for CSR reports that are longer

in length, backed up by external assurance, issued by firms with strong CSR concerns, and issued

by firms sporadically.

In an additional test examining the usefulness of CSR reports, we also find reports issued

by firms paying higher audit fees to exert a stronger effect on the association between their current

stock price and future earnings information, suggesting that a commitment to higher audit quality

indeed affects the perceived value of CSR disclosures. Overall, our findings on the mutual

complementary roles of voluntary CSR reporting and audited financial statements have important

implications for the accounting literature and, more broadly, for the management literature on

corporate environmental strategies and sustainability practices.

A few limitations of this study are worth noting. First, we do not argue that the confirmatory

role of audited financial statements holds equally strongly for nonfinancial and financial voluntary

disclosures. Despite our finding on a positive association between voluntary CSR reporting and

audit fees, we acknowledge the possible lack of a direct link between the two. For example, high

CSR performance may drive both voluntary CSR reporting and a commitment to high-quality

auditing but not be fully captured by KLD data, which may confound our findings. Second, we do

not examine contents of CSR reports in cross-sectional tests, which can also have important

implications for firms credibility. These caveats notwithstanding, we believe our results still

suggest promising opportunities for future research. For instance, in addition to the several CSR

reporting properties we examine, future research can explore credibility of CSR reporting by

developing more refined measures, e.g., adherence to a reporting framework such as Global

Reporting Initiatives and measures obtained from textual analysis.

28

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31

 APPENDIX I: Summary statistics of KLD categorical measures in the main sample (2000-2008)
CSR Std.
STR/CON Subcategories N Mean Min Med Max
Category Dev.
ENV_STR (1) Beneficial products and services, (2) pollution prevention, (3) recycling, (4) 12,429 0.15 0.470 0 0 4
clean energy, (5) management systems, and (6) other strengths.
Environment
(ENV) ENV_CON (1) Hazardous waste, (2) regulatory problems, (3) ozone-depleting chemicals, (4) 12,429 0.27 0.724 0 0 5
substantial emissions, (5) agricultural chemicals, (6) climate change, and (7) other
concerns.
EMP_STR (1) Union relations, (2) cash profit sharing, (3) employee involvement, (4) 12,429 0.283 0.621 0 0 5
Employee retirement benefits, (5) health and safety, and (6) other strengths.
Relations
EMP_CON (1) Union relations, (2) health and safety concerns, (3) workforce reductions, (4) 12,429 0.507 0.684 0 0 4
(EMP)
retirement benefits, and (5) other concerns.
PRO_STR (1) Benefits for the economically disadvantaged, (2) quality, (3) R&D/innovation, 12,429 0.063 0.260 0 0 3
Product and (4) other strengths.
(PRO) PRO_CON (1) Product safety, (2) marketing/contracting concern, (3) antitrust, and (4) other 12,429 0.217 0.551 0 0 4
concerns.
COM_STR (1) Charitable giving, (2) innovative giving, (3) non-U.S. charitable giving, (4) 12,429 0.108 0.418 0 0 4
support for housing, (5) support for education, (6) volunteer programs, and (7)
Community other strengths.
(COM)
COM_CON (1) Investment controversies, (2) negative economic effect, (3) tax disputes, and 12,429 0.075 0.289 0 0 3
(4) other concerns.

Notes: This table provides the subcategories of the four main KLD CSR-strength and CSR-concern categories, namely, environment, employee relations, product,
and community, and their summary statistics for the audit fee sample during the 2000-2008 period.

32

 APPENDIX II: Variable Definition

LNFEE: The natural log of FEE, where FEE is audit fees ($k).
BIG4: An indicator variable that equals 1 if the firm is audited by Deloitte & Touche,
Ernst & Young, KPMG, or PricewaterhouseCoopers, and 0 otherwise.
MERGER: An indicator variable that equals 1 if the firm is engaged in a merger or
acquisition, and 0 otherwise.
ARINV: The sum of the firms receivables and inventory divided by its total assets.
LOSS: An indicator variable that equals 1 if the firms net income before extraordinary
items is negative, and 0 otherwise.
SPI: An indicator variable that equals 1 if the firm reports special items, and 0
otherwise.
SALEGR: Growth rate in sales over the previous fiscal year.
SEGMENT: The natural log of a firms number of business segments.
PENSION: An indicator variable that equals 1 if the firm has a pension plan, and 0
otherwise.
FYE: An indicator variable that equals 1 if the firms fiscal year-end is December 31,
and 0 otherwise.
LNAGE: The natural log of AGE, where AGE is the number of years that the company
has been on Compustat.
LNTENURE: The natural log of TENURE, where TENURE is the auditors tenure with the
client (in years).
LNREPLAG: The natural log of REPLAG, where REPLAG is the number of days between
the firms fiscal year-end and its earnings announcement date.
VOL: The standard deviation of stock returns over the past year, with a minimum of 8
months of data.
GC: An indicator variable that equals 1 if the firm receives a going-concern opinion,
and 0 otherwise.
RESTATE: An indicator variable that equals 1 if the firm has a financial statement
restatement, and 0 otherwise.
RAM: A measure of real earnings management which is defined as AB_CFO -
AB_PROD+AB_EXP. (1) AB_CFO is the level of abnormal cash flows from
operations, estimated as the residual from Roychowdhurys (2006) model:
CFOt /ATt-1=0+ 1(1/ATt-1)+2(St /ATt-1)+3( St /ATt-1)+t, where CFOt is the
cash flow from the operations in year t, AT is total assets, S is net sales, and
S=St -St-1; (2) AB_PROD is the level of abnormal production costs. Following
previous studies (Roychowdhury 2006, Cohen, Dey, and Lys 2008,
Badertscher 2011, Zang 2012), we define production costs as
PRODt=COGSt+INVt, and estimate the abnormal production costs as the
residual from the equation PRODt/ATt-1=0+1(1/ATt-1)+2(St/ATt-1)+3(St/ATt-
1)+4(St-1/ATt-1)+t. COGSt is predicted by the model of COGSt/ATt-
1=0+1(1/ATt-1)+2(St/ATt-1)+t, where COGSt is the cost of the goods sold in
year t, and INVt is predicted by the model of INVt/ATt-1=0+1(1/ATt-
1)+2(St /ATt-1)+3(S t-1 /ATt-1)+t, where INVt is the change in inventory in
year t. (3) AB_EXP is the level of abnormal discretionary expenses, estimated
as the residual from the following equation: DISEXPt /ATt-1=0+1(1/ATt-
1)+2(St-1/ATt-1)+t, where DISEXPt are discretionary expenses in year t,
defined as the sum of R&D, advertising, and SG&A expenses.
DAC: Discretionary accruals computed through the cross-sectional modified Jones
model, controlling for performance.
FINANCE: An indicator variable that equals 1 if the firm issues equity or debt in the
subsequent year, and 0 otherwise.
LNMVE: The natural log of the market value of equity (CSHO*PRCC_F).
LEV: The firms total assets less its equity divided by its total assets.
MTB: The firms market-to-book ratio, defined as the market value of equity divided
by the book value of equity.
ROA: The firms return on assets, calculated as its net income before extraordinary
items divided by total assets at the beginning of the year.

33

 FORGN: The percentage of foreign sales to total sales.

LITIGATION: An indicator variable that equals 1 if the firm is litigated against for any alleged
cause in a year based on Audit Analytics Legal Case Data, and 0 otherwise.
CSR_CONC: The total CSR concern score provided by the KLD database.
CSR_REPORT: An indicator variable that equals 1 if the firm issues a CSR report in a given
year, and 0 otherwise.
HI_CONC: An indicator variable that equals 1 if the firms total CSR concern score is
higher than the industry median in the year, and 0 otherwise.
CSRRPT_HICONC: An indicator variable that equals 1 if the firm issues a CSR report in a given
year (CSR_REPORT = 1) and also has a CSR concern score higher than the
industry median in that year (HI_CONC = 1), and 0 otherwise.
HIPAGE: An indicator variable that equals 1 if the number of pages in a firms CSR
report is greater than the industry median in the year, and 0 otherwise.
ASSURANCE: An indicator variable that equals 1 if the firm has its CSR report assured by a
third party in a given year, and 0 otherwise.
SPORADIC: An indicator variable that equals 1 if the firm has not issued CSR reports
regularly in every year since its first CSR reporting year, and 0 otherwise.
COMPETITION: (-1)*Herfindahl-Hirschman Index (HHI), where HHI is calculated by summing
the squares of the market shares of the 50 largest or all companies (whichever
is smaller) in a two-digit SIC industry in a given year. We calculate a firms
market share by dividing its sales (SALE) in a year by the total sales of all 50
largest or all companies (whichever is smaller) in an industry in that year.
LIQUIDITY: Ratio of the number of shares traded to the total shares outstanding at the end
of the year.
CIG: An indicator variable that equals 1 if the firm issues an earnings forecast in the
year, and 0 otherwise.
CSR_COMM: An indicator variable that equals 1 if the firm has a CSR committee in place,
and 0 otherwise.

34

 TABLE 1 Summary statistics of main variables

Variable N Mean Std. Dev. P10 Median P90
Variables used in audit fee model
FEE ($k) 12,429 2,225.10 3,015.90 322.00 1176.50 5200.00
LNFEE ($k) 12,429 7.118 1.075 5.775 7.070 8.556
BIG4 12,429 0.925 0.263 1.000 1.000 1.000
MERGER 12,429 0.298 0.457 0.000 0.000 1.000
ARINV 12,429 0.233 0.157 0.050 0.210 0.454
LOSS 12,429 0.210 0.407 0.000 0.000 1.000
SPI 12,429 0.712 0.453 0.000 1.000 1.000
SGROWTH 12,429 0.166 0.316 -0.072 0.103 0.452
SEGMENT 12,429 5.831 4.711 1.000 3.000 12.000
PENSION 12,429 0.415 0.493 0.000 0.000 1.000
FYE 12,429 0.689 0.463 0.000 1.000 1.000
AGE 12,429 22.741 19.377 5.000 16.000 48.000
TENURE 12,429 10.937 8.596 2.000 8.000 26.000
REPLAG 12,429 62.312 81.628 25.000 42.000 73.000
VOL 12,429 0.116 0.061 0.052 0.102 0.197
GC 12,429 0.006 0.077 0.000 0.000 0.000
RESTATE 12,429 0.158 0.365 0.000 0.000 1.000
RAM 12,429 0.029 0.44 -0.455 -0.001 0.541
DAC 12,429 -0.035 0.099 -0.154 -0.030 0.069
FINANCE 12,429 0.199 0.399 0.000 0.000 1.000
MVE($m) 12,429 5,075.19 13,832.69 238.62 1,128.04 10,804.01
LNMVE($m) 12,429 7.204 1.495 5.475 7.028 9.288
LEV 12,429 0.502 0.237 0.189 0.500 0.796
MTB 12,429 3.162 3.603 1.019 2.370 6.425
ROA 12,429 0.035 0.141 -0.095 0.053 0.156
FORGN 12,429 0.320 0.368 0.000 0.163 1.000
LITIGATION 12,429 0.083 0.276 0.000 0.000 0.000
CSR_PERF 12,429 -0.464 1.542 -2.000 0.000 1.000
CSR_CONC 12,429 1.069 1.522 0.000 1.000 3.000
Other variables
CSR_REPORT 12,429 0.059 0.235 0.000 0.000 0.000
CSRRPT_HICONC 12,429 0.046 0.209 0.000 0.000 0.000
HIPAGE 12,429 0.059 0.236 0.000 0.000 0.000
ASSURANCE 12,429 0.004 0.063 0.000 0.000 0.000
SPORADIC 12,429 0.057 0.233 0.000 0.000 0.000
COMPETITION 12,429 -0.068 0.040 -0.121 -0.062 -0.034
LIQUIDITY 12,429 1.636 1.836 0.000 1.199 3.998
CIG 12,429 0.594 0.491 0.000 1.000 1.000
CSR_COMM 12,429 0.184 0.388 0.000 0.000 1.000
Notes: This table describes the summary statistics of the variables used in the main tests. All variables
are as defined in Appendix II.

35

 TABLE 2 Sample distributions by year

Panel A: Distribution of CSR performance and CSR reporting variables by year
(1) (2) (3) (4) (5) (6)
Year # of Obs. CSR_PERF CSR_CONC # of Report % of Report # of Page
2000 253 0.241 1.285 23 9.09% 24.5
2001 641 -0.108 1.090 64 9.98% 26.2
2002 662 -0.124 1.172 68 10.27% 29.6
2003 1,756 -0.378 0.793 69 3.93% 29.9
2004 1,807 -0.494 0.916 84 4.65% 34.7
2005 1,789 -0.558 1.036 98 5.48% 35.5
2006 1,812 -0.575 1.118 110 6.07% 37.6
2007 1,782 -0.579 1.222 124 6.96% 39.1
2008 1,927 -0.547 1.234 91 4.72% 39.2
Total 12,429 -0.464 1.069 731 5.88% 34.5

Panel B: Distribution of CSR reporting properties by year (CSR report sample of 731 obs.)
(1) (2) (3) (4)
CSRRPT_HICONC=1 HIPAGE=1 ASSURANCE=1 SPORADIC=1
# of % of # of % of # of % of # of % of
Year Obs. Report Report Report Report Report Report Report Report
2000 23 14 60.87% 14 60.87% 2 8.70% 8 34.78%
2001 64 49 76.56% 37 57.81% 5 7.81% 20 31.25%
2002 68 56 82.35% 39 57.35% 3 4.41% 15 22.06%
2003 69 55 79.71% 39 56.52% 2 2.90% 21 30.43%
2004 84 64 76.19% 46 54.76% 5 5.95% 29 34.52%
2005 98 74 75.51% 53 54.08% 5 5.10% 37 37.76%
2006 110 85 77.27% 60 54.55% 9 8.18% 47 42.73%
2007 124 94 75.81% 67 54.03% 12 9.68% 56 45.16%
2008 91 76 83.52% 49 53.85% 7 7.69% 40 43.96%
Total 731 567 77.56% 404 55.27% 50 6.84% 273 37.35%

Notes: This table presents the sample distributions by year for the variables of CSR performance and both the
issuance and properties of CSR reports. All variables are as defined in Appendix II.

36

 Figure 1: Time trends of CSR performance and CSR reporting

1.5

0.5

0
'00 '01 '02 '03 '04 '05 '06 '07 '08
-0.5

-1
Mean(CSR_PERF) Mean(CSR_CONC) 10 Pctg (CSR_REPORT=1)

37

 TABLE 3 Correlation matrix

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28
1-LNFEE -.16 .48 .35 .19 .17 .05 -.10 .31 -.12 .24 .43 .11 .34 .21 -.12 -.24 .00 .00 -.11 -.04 -.09 .59 .35 -.05 .09 .26 .30
2-CSR_PERF -.16 -.68 .00 -.01 .08 .03 -.01 -.05 .03 -.04 -.16 -.10 -.10 .01 -.07 .04 -.03 -.01 .12 -.10 -.02 -.05 -.19 .09 .03 .10 -.04
3-CSR_CONC .40 -.72 .37 .09 -.01 -.06 -.05 .14 -.09 .17 .37 .12 .35 .14 -.10 -.15 .03 .00 -.08 .01 -.01 .43 .28 -.06 .03 .00 .27
4-CSR_REPORT .31 -.01 .27 .07 .05 -.05 -.07 .09 -.07 .15 .22 .02 .25 .13 -.13 -.15 .00 -.01 -.01 -.03 -.03 .39 .12 .03 .06 .07 .32
5-BIG4 .19 .00 .07 .07 .06 -.05 -.04 .10 -.07 .08 .17 .02 .07 .22 -.11 -.11 -.02 .00 -.03 -.02 -.03 .24 .13 .01 .01 .04 .07
6-MERGER .17 .07 .00 .05 .06 .01 -.08 .08 .05 .09 .02 -.01 -.01 .02 -.11 -.07 -.03 -.01 .02 -.08 -.32 .18 -.02 .01 .07 .08 .09
7-ARINV .09 .03 -.04 -.03 -.04 .02 -.18 -.01 -.09 .08 .13 -.19 .12 .07 .13 -.02 -.02 .00 -.14 .06 -.08 -.11 -.03 -.02 .22 .13 -.10
8-LOSS -.10 -.01 -.03 -.07 -.04 -.08 -.19 .11 .02 -.11 -.17 .07 -.18 -.08 .08 .41 .11 .01 -.08 .10 .10 -.29 .06 -.13 -.71 .01 -.04
9-SPI .31 -.04 .14 .09 .10 .08 .01 .11 -.11 .09 .17 .03 .12 .08 -.07 .01 .02 -.01 -.07 -.03 -.05 .14 .20 -.12 -.19 .16 .11
10-SALEGR -.10 .03 -.10 -.07 -.04 .10 -.04 -.11 -.14 -.07 -.16 .08 -.21 -.11 .02 .12 -.01 -.01 .14 .07 .13 -.03 -.13 .23 .25 -.04 -.05
11-SEGMENT .18 -.03 .10 .10 .07 .08 .11 -.10 .07 -.04 .31 .02 .30 .09 -.09 -.20 -.02 .04 -.13 .03 -.03 .21 .12 -.05 .01 .03 .08
12-PENSION .43 -.16 .36 .22 .17 .02 .17 -.17 .17 -.18 .27 .05 .47 .19 -.15 -.28 -.02 .00 -.13 .04 -.04 .34 .38 -.11 .03 .14 .13
13-FYE .11 -.08 .09 .02 .02 -.01 -.20 .07 .03 .05 .00 .05 -.08 -.04 -.25 .01 .03 -.01 .00 .03 .03 .03 .13 .01 -.09 -.04 -.01
14-LNAGE .34 -.09 .30 .25 .06 -.01 .15 -.19 .11 -.21 .27 .49 -.08 .37 -.11 -.30 .00 .00 -.10 .00 -.04 .37 .25 -.11 .07 .07 .16
15-LNTENURE .20 .01 .13 .13 .21 .02 .08 -.09 .08 -.12 .09 .20 -.06 .40 -.09 -.14 -.01 -.03 -.05 -.01 -.03 .21 .09 -.02 .04 .06 .09
16-LNREPLAG -.15 -.11 -.10 -.19 -.17 -.13 .04 .13 -.08 .05 -.10 -.20 -.09 -.17 -.15 .11 .04 .02 -.05 .11 .09 -.26 .01 -.14 -.14 -.23 -.13
17-VOL -.27 .05 -.16 -.18 -.12 -.06 -.01 .38 -.01 .07 -.20 -.33 .01 -.34 -.16 .17 .12 .00 .02 .07 .09 -.40 -.13 -.11 -.26 .03 -.10
18-GC .00 -.03 .02 .00 -.02 -.03 -.02 .11 .02 -.02 -.02 -.02 .03 .00 -.01 .06 .09 .00 -.02 .05 .01 -.09 .07 -.08 -.09 .00 -.01
19-RESTATE -.01 -.01 .00 -.01 .00 -.01 .00 .01 -.01 -.02 .04 .00 -.01 -.01 -.02 .02 .00 .00 .00 .02 .01 -.02 .00 -.01 -.03 .00 -.00
20-RAM -.10 .11 -.08 .00 -.02 .03 -.12 -.11 -.06 .15 -.13 -.14 .00 -.08 -.04 -.10 .00 -.03 .00 -.33 -.01 .07 -.19 .29 .28 .04 .04
21-DAC -.03 -.12 .07 -.02 -.02 -.10 .00 .10 -.03 -.01 .03 .05 .02 .02 -.01 .16 .05 .04 .02 -.33 .09 -.17 .16 -.23 -.26 -.15 -.08
22-FINANCE -.09 -.02 .00 -.03 -.03 -.32 -.05 .10 -.05 .15 -.04 -.04 .03 -.05 -.03 .05 .09 .01 .01 .00 .11 .06 .06 .05 -.12 -.07 .02
23-LNMVE .56 -.03 .32 .32 .25 .18 -.09 -.29 .15 .03 .17 .34 .03 .36 .21 -.40 -.44 -.08 -.02 .09 -.17 .05 .15 .20 .29 .11 .39
24-LEV .38 -.20 .30 .13 .14 -.01 -.02 .09 .19 -.07 .13 .35 .13 .22 .07 .01 -.04 .10 .00 -.15 .12 .06 .21 -.04 -.15 -.09 .05
25-MTB -.07 .11 -.07 .05 .02 .04 -.03 -.05 -.08 .15 -.07 -.08 .02 -.08 -.02 -.06 -.03 -.06 -.01 .22 -.12 .06 .31 -.07 .09 .01 .03
26-ROA -.01 .08 -.05 .05 -.01 .08 .20 -.70 -.09 -.02 .07 .12 -.09 .13 .04 -.07 -.34 -.13 -.01 .22 -.21 -.04 .30 -.23 .39 .05 .04
27-FORGN .32 .11 .01 .09 .05 .11 .21 -.01 .18 -.02 -.01 .09 -.04 .03 .04 -.15 .04 .00 .00 .04 -.11 -.09 .15 -.09 .04 .04 .08
28-LITIGATION .28 -.01 .19 .32 .07 .09 -.09 -.04 -.11 -.05 .07 .13 -.01 .16 .10 -.20 -.13 -.01 -.00 .06 -.08 .02 .34 .06 .05 .03 .10

Notes: This table describes the Spearman (Pearson) correlation coefficients below (above) the diagonal for the variables used in the audit fee model. Significant correlations
are indicated in bold (p < .10, two-tailed test). All variables are defined in Appendix II.

38

 TABLE 4 Voluntary CSR report issuance and commitment to audit fees
Dependent Variable = LNFEE
Model 1 Model 2 Model 3
Variables Pred. Coef. t-stat Coef. t-stat Coef. t-stat
Intercept 2.704*** 16.13 2.748*** 16.50 2.874*** 17.46
BIG4 + 0.194*** 3.92 0.195*** 3.95 0.201*** 4.07
MERGER + 0.124*** 9.22 0.129*** 9.76 0.132*** 10.00
ARINV + 0.654*** 8.99 0.650*** 8.88 0.647*** 8.86
LOSS + 0.112*** 4.36 0.109*** 4.31 0.100*** 3.86
SPI + 0.235*** 11.77 0.231*** 11.73 0.227*** 11.86
SALEGR - -0.165*** -12.42 -0.162*** -12.16 -0.153*** -11.84
SEGMENT + 0.016*** 6.51 0.016*** 6.64 0.016*** 6.56
PENSION + 0.278*** 9.69 0.268*** 9.22 0.251*** 8.27
FYE + 0.231** 2.19 0.222** 2.10 0.214** 2.01
LNAGE ? 0.028 1.55 0.026 1.49 0.017 1.00
LNTENURE ? 0.009 0.67 0.012 0.84 0.011 0.80
LNREPLAG + 0.114*** 5.68 0.109*** 5.47 0.113*** 5.63
VOL + 0.904*** 3.65 0.850*** 3.41 0.760*** 3.24
GC + 0.112* 1.84 0.108* 1.79 0.092 1.57
RESTATE + 0.091*** 4.60 0.089*** 4.49 0.087*** 4.36
RAM + -0.071** -2.51 -0.065** -2.34 -0.070*** -2.61
DAC + 0.149* 1.86 0.133* 1.69 0.099 1.28
FINANCE + -0.041 -1.11 -0.039 -1.04 -0.035 -0.95
LNMVE + 0.405*** 29.98 0.401*** 30.35 0.380*** 27.70
LEV + 0.794*** 9.55 0.782*** 9.48 0.767*** 9.25
MTB - -0.028*** -9.53 -0.027*** -9.27 -0.026*** -8.86
ROA - -0.041 -0.43 -0.043 -0.45 -0.025 -0.28
FORGN + 0.459*** 15.39 0.464*** 15.65 0.465*** 15.66
LITIGATION + 0.216*** 5.86 0.210*** 5.78 0.187*** 5.30
CSR_PERF - -0.032*** -6.01
CSR_CONC + 0.070*** 10.75
CSR_REPORT + 0.263*** 8.44 0.280*** 9.31 0.193*** 6.35
Industry Indicators Yes Yes Yes
Year Indicators Yes Yes Yes
Adj. R-square 71.66% 71.84% 72.23%
N 12,429 12,429 12,429

Notes: This table reports the OLS regression results for the effect of voluntary CSR reporting on a
commitment to audit verification. We include 16 Fama-French industry-dummy variables to represent
the 17 industry classifications. The reported t-stats are based on robust standard errors adjusted for
clustering by firm and year. ***, **, and * indicate significance at the 0.01, 0.05, and 0.10 levels,
respectively, for a two-tailed test. All variables are defined in Appendix II.

39

 TABLE 5 Properties of CSR reporting and commitment to audit fees

Dependent Variable = LNFEE
Model 1 Model 2 Model 3 Model 4 Model 5
Variables Pred. Coef. t-stat Coef. t-stat Coef. t-stat Coef. t-stat Coef. t-stat
Intercept 2.778*** 16.69 2.752*** 16.40 2.752*** 16.44 2.752*** 16.46 2.786** 16.57
BIG4 + 0.198*** 3.97 0.195*** 3.96 0.195*** 3.94 0.195*** 3.94 0.198*** 3.96
MERGER + 0.130*** 10.17 0.129*** 9.66 0.129*** 9.77 0.129*** 9.79 0.130*** 10.15
ARINV + 0.626*** 8.43 0.651*** 8.86 0.650*** 8.85 0.648*** 8.85 0.624*** 8.34
LOSS + 0.101*** 3.85 0.110*** 4.40 0.109*** 4.30 0.109*** 4.28 0.101*** 3.88
SPI + 0.230*** 11.68 0.233*** 11.85 0.232*** 11.81 0.231*** 11.72 0.230*** 11.82
SALEGR ? -0.163*** -12.97 -0.162*** -12.15 -0.162*** -12.14 -0.161*** -12.17 -0.162*** -13.01
SEGMENT + 0.016*** 6.67 0.016*** 6.67 0.016*** 6.69 0.016*** 6.77 0.017*** 6.82
PENSION + 0.249*** 8.33 0.269*** 9.33 0.268*** 9.22 0.267*** 9.20 0.249*** 8.35
FYE + 0.217** 2.04 0.222** 2.10 0.221** 2.09 0.221** 2.09 0.216** 2.03
LNAGE ? 0.021 1.22 0.026 1.46 0.026 1.47 0.026 1.47 0.021 1.17
LNTENURE ? 0.011 0.82 0.012 0.87 0.012 0.82 0.012 0.86 0.012 0.85
LNREPLAG + 0.113*** 5.56 0.110*** 5.48 0.109*** 5.47 0.109*** 5.45 0.112*** 5.54
VOL + 0.749*** 3.05 0.845*** 3.38 0.851*** 3.42 0.850*** 3.41 0.748*** 3.04
GC + 0.105* 1.75 0.106* 1.79 0.108* 1.77 0.105* 1.80 0.102* 1.74
RESTATE + 0.087*** 4.42 0.090*** 4.52 0.089*** 4.50 0.090*** 4.51 0.088*** 4.45
RAM + -0.072*** -2.61 -0.064** -2.31 -0.065** -2.33 -0.065** -2.35 -0.072*** -2.59
DAC + 0.113 1.43 0.135* 1.72 0.134* 1.70 0.131* 1.66 0.115 1.46
FINANCE + -0.035 -0.92 -0.039 -1.04 -0.039 -1.05 -0.038 -1.02 -0.034 -0.90
LNMVE + 0.394*** 29.36 0.401*** 30.21 0.401*** 30.17 0.401*** 30.27 0.393*** 29.14
LEV + 0.779*** 9.58 0.781*** 9.49 0.783*** 9.52 0.783*** 9.50 0.780*** 9.63
MTB - -0.026*** -8.92 -0.027*** -9.25 -0.027*** -9.30 -0.027*** -9.27 -0.026*** -8.93
ROA - -0.051 -0.53 -0.040 -0.43 -0.042 -0.45 -0.043 -0.46 -0.050 -0.52
FORGN + 0.463*** 15.59 0.464*** 15.68 0.464*** 15.69 0.465*** 15.66 0.463*** 15.65
LITIGATION + 0.212*** 5.85 0.210*** 5.87 0.209*** 5.81 0.210*** 5.78 0.211*** 5.93
CSR_PERF - -0.017*** -2.73 -0.032*** -6.04 -0.033*** -6.10 -0.032*** -5.89 -0.017*** -2.71
HI_CONC ? 0.086*** 5.12 0.086*** 5.07
CSR_REPORT + 0.151*** 2.80 0.223*** 6.80 0.267*** 8.51 0.241*** 6.62 0.102* 1.74
CSRRPT_HICONC + 0.140*** 2.58 0.103** 2.11
HIPAGE + 0.109*** 4.83 0.062*** 2.65
ASSURANCE + 0.195*** 2.72 0.130* 1.71
SPORADIC + 0.109* 1.86 0.100* 1.80
Industry Indicators Yes Yes Yes Yes Yes
Year Indicators Yes Yes Yes Yes Yes
Adj. R-square 71.84% 71.88% 71.86% 71.86% 71.87%
N 12,429 12,429 12,429 12,429 12,429

Notes: This table reports the OLS regression results for the incremental effect of the properties of voluntary CSR reporting on a commitment to audit
verification. We include 16 Fama-French industry-dummy variables to represent the 17 industry classifications. The reported t-stats are based on robust
standard errors adjusted for clustering by firm and year. ***, **, and * indicate significance at the 0.01, 0.05, and 0.10 levels, respectively, for a two-
tailed test. All variables are defined in Appendix II.
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 TABLE 6 The effect of a commitment to audit fees on voluntary CSR reporting (Probit regression)
Panel A: Using audit fee level to proxy for a commitment to audit verification
Model 1 Model 2 Model 3 Model 4 Model 5
Dependent Variable= CSR_REPORT CSRRPT_HICONC HIPAGE ASSURANCE SPORADIC
Variables Pred. Coef. t-stat Coef. t-stat Coef. t-stat Coef. t-stat Coef. t-stat
Intercept -8.297*** -20.29 -9.618*** -17.97 -6.400*** -10.38 -9.188*** -10.69 -7.859*** -11.92
DAC ? 0.831*** 3.23 1.391*** 4.53 0.499 1.64 -0.906 -1.58 1.280*** 3.47
FINANCE + 0.112 0.61 0.149 0.60 -0.041 -0.34 0.156** 1.98 -0.126 -0.51
LNMVE + 0.348*** 8.14 0.396*** 7.72 0.317*** 10.53 0.256*** 4.86 0.355*** 6.13
LEV + 0.542** 2.57 0.466* 1.89 0.198 0.94 -0.762 -1.04 0.769** 2.45
MTB ? -0.011 -1.05 -0.017 -1.36 -0.008 -1.12 0.038* 1.92 0.007 0.66
ROA ? -0.215 -0.50 -0.664 -1.41 -0.485 -1.54 -0.682 -1.02 -0.038 -0.12
FORGN ? 0.120 0.93 0.215 1.51 -0.101 -1.00 0.122 0.55 0.221 1.33
LITIGATION ? 0.544*** 7.85 0.423*** 5.72 0.364*** 4.38 0.341** 2.31 0.474*** 4.38
CSR_PERF + 0.100*** 4.57 0.021 0.99 0.071*** 3.40 0.121*** 3.00 0.027 0.96
COMPETITION - -2.079 -1.49 -2.850* -1.85 -1.594 -1.40 12.730** 2.14 -2.508 -1.26
LIQUIDITY - -0.039 -1.25 -0.020 -0.66 -0.048* -1.86 -0.035 -0.69 -0.042 -1.06
CIG + 0.103 1.44 0.108 1.12 0.047 0.74 -0.077 -0.56 0.189* 1.79
CSR_COMM + 0.376*** 4.37 0.407*** 4.54 0.228*** 3.01 0.211 0.91 0.384*** 2.76
LNFEE + 0.376*** 7.94 0.456*** 9.34 0.223*** 3.86 0.581*** 5.51 0.297*** 3.76
Industry Indicators Yes Yes Yes Yes Yes
Year Indicators Yes Yes Yes Yes Yes
Wald chi-square 564.36 432.98 1087.72 285.00 291.80
Pseudo R-square 42.70% 45.91% 41.62% 45.16% 42.52%
N 12,429 12,429 12,429 12,429 12,429

Notes: This table reports the Probit regression results for the effect of committing to audit verification (proxied by audit fee level) on the likelihood
and properties of voluntary CSR reporting. We include 16 Fama-French industry-dummy variables to represent the 17 industry classifications. The
reported t-stats are based on robust standard errors adjusted for clustering by firm and year. ***, **, and * indicate significance at the 0.01, 0.05,
and 0.10 levels, respectively, for a two-tailed test. All variables are defined in Appendix II.

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 Panel B: Using unexpected audit fees to proxy for a commitment to audit verification
Model 1 Model 2 Model 3 Model 4 Model 5
Dependent Variable= CSR_REPORT CSRRPT_HICONC HIPAGE ASSURANCE SPORADIC
Variables Pred. Coef. t-stat Coef. t-stat Coef. t-stat Coef. t-stat Coef. t-stat
Intercept included included included included included
Controls included included included included included
EX_FEE + 0.192*** 2.87 0.236*** 3.67 0.264*** 5.02 0.557*** 3.57 0.236** 2.36
Industry Indicators Yes Yes Yes Yes Yes
Year Indicators Yes Yes Yes Yes Yes
Wald chi-square 570.89 427.80 1100.18 283.31 291.55
Pseudo R-square 41.38% 44.11% 41.54% 44.29% 42.58%
N 12,429 12,429 12,429 12,429 12,429

Notes: This table reports the Probit regression results for the effect of committing to audit verification (proxied by unexpected audit fees) on the
likelihood and properties of voluntary CSR reporting. We include 16 Fama-French industry-dummy variables to represent the 17 industry
classifications. The reported t-stats are based on robust standard errors adjusted for clustering by firm and year. ***, **, and * indicate significance
at the 0.01, 0.05, and 0.10 levels, respectively, for a two-tailed test. EX_FEE is the residual from a regression of log audit fees on all of the fee
determinants in Eq. (1), excluding the proxy for voluntary CSR reporting (CSR_REPORT). All other variables are defined in Appendix II.

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 TABLE 7 CSR reporting and future ERC

Dependent Variable = RET i,t
Model 1 Model 2 Model 3 Model 4
Control = Control = Number of Control = Issuance of
Firm Size Analysts Common Dividends
Variables Pred. Coef. t-stat Coef. t-stat Coef. t-stat Coef. t-stat
Intercept 0.011*** 16.70 0.011*** 17.17 0.009*** 8.29 0.012*** 18.04
E t-1 - -7.895*** -9.47 -7.061*** -8.01 -8.112*** -5.19 -6.821*** -8.02
Et + 6.400*** 7.78 5.198*** 5.99 4.497*** 3.24 5.918*** 6.99
E t3 + 4.602*** 10.58 4.827*** 10.63 2.283*** 3.29 4.937*** 10.73
RET t3 - -0.010*** -10.18 -0.010*** -10.36 -0.005*** -3.06 -0.010*** -9.78
CSR_REPORT t ? -0.005*** -2.75 -0.004** -2.24 -0.007*** -4.00 -0.005*** -2.82
CSR_REPORT_HIFEE t ? -0.010*** -7.75 -0.011*** -8.13 -0.011*** -8.40 -0.010*** -8.07
CSR_REPORT t E t-1 ? -11.598** -2.12 -6.622 -1.29 -7.013 -1.63 -3.255 -0.62
CSR_REPORT _HIFEE t E t-1 ? -8.867*** -3.20 -8.748*** -3.16 -6.308** -2.43 -9.301*** -3.39
CSR_REPORT t E t ? 4.825* 1.74 3.858 1.22 5.554** 2.04 3.289 1.14
CSR_REPORT _HIFEE t E t ? -2.483 -1.21 -1.846 -0.88 -2.131 -1.05 -2.048 -1.00
CSR_REPORT t E t3 ? -0.546 -0.32 -1.298 -0.75 -0.527 -0.32 -0.233 -0.13
CSR_REPORT _HIFEE t E t3 + 2.420** 2.30 2.078** 1.97 2.154** 2.08 2.461** 2.36
CSR_REPORT t RET t3 ? -0.005** -2.15 -0.005** -2.08 -0.004* -1.76 -0.005** -2.23
CSR_REPORT _HIFEE t RET t3 ? -0.008*** -5.15 -0.007*** -4.78 -0.007*** -4.27 -0.008*** -5.06
Controls t ? -0.003*** -4.02 0.001*** 2.86 -0.056*** -5.74
Controls t E t-1 ? -7.134*** -3.87 0.499 0.52 -5.884 -0.35
Controls t E t ? 8.065*** 4.08 1.275 1.48 17.315 1.46
Controls t E t3 ? -9.296* -1.80 2.329*** 4.69 -7.801 -1.42
Controls t RET t3 ? -0.002 -0.19 -0.004*** -5.39 -0.008 -0.66
Adj. R-square 12.00% 12.40% 12.90% 13.50%
N 5,255 5,255 5,255 5,255

Notes: This table reports the regression results of Equation (3). ***, **, and * indicate significance at the 0.01, 0.05, and 0.10 levels, respectively, for a
two-tailed test. CSR_REPORT_HIFEEi,t is an indicator variable that equals 1 if a CSR report is issued by firms with higher-than-the-median audit fees,
and 0 otherwise. RETi,t (RETi,t3) is buy-and-hold returns calculated over the one-year period from January to December in year t (three-year period from
year t+1 to year t+3) for firm i; E i,t equals income before extraordinary items divided by the market value of equity; Ei,t3 is total E i,t over the three years
from year t+1 to year t+3. Controls in Models 2, 3, and 4 are firm size, number of analysts, and an indicator variable indicating whether a firm issues
common dividends, respectively.

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