Choice of Independent Assurance Provider and Assurance Level
Carly Loeffel & John McKune
This study examines firm- and industry-level characteristics that are expected to be associated with: (1) the firms’ decisions whether or not to purchase independent third-party assurance on their sustainability disclosures: (2) the level of assurance purchased (limited vs. reasonable); and (3) the choice of assurance provider (e.g., international public accounting firm, boutique/consulting firm, engineering firm).
Publicly-listed firms’ stakeholders (e.g., investors, regulators, creditors, customers, employees) are becoming increasingly interested in the environmental and social impacts of their operations, as well as the disclosures of these impacts. Because of the increased demand for information, corporate social responsibility (CSR) reports have emerged as the primary way for public firms to disclose this information to stakeholders.
However, because the disclosure of CSR reports in the United States is voluntary, material misstatements are prone to occur, whether due to mistake or embellishment. In order to minimize the risk of material misstatement, some organizations are choosing to gain assurance over their report. Disclosures in CSR reports allow organizations to increase transparency of their activities in relation to environmental issues, human rights, and overall impact on society. When organizations decide to gain assurance, they can choose from two types: limited or reasonable assurance. Both of these forms of independent assurance decrease the risk of material misstatement. Independent third-party assurance of CSR and other sustainability reports allows stakeholders to increase confidence over information that typically is voluntarily reported. The goal of this study is to provide a better understanding regarding public firms’ choices of independent assurance providers and the level of assurance purchased by the firms.
To address our research question we collected data from the Global Reporting Initiative (GRI) database, which contains information on over 10,000 corporate social responsibility (CSR) reports (CSR) submitted to GRI between 2010 and 2013. Our sample consisted of 3,364 sustainability reports which choose to purchase limited/moderate assurance. Further, organizations that were larger in size and operations were more likely to choose international public accounting firms as their assurance providers, while smaller firms were more likely to choose boutique/consulting firms to gain assurance. Our results also indicated that organizations that have operations far more technical in scope were more likely to choose engineering firms as their assurance providers. Our findings have implications for organizations all over the world that are deciding whether or not to gain assurance over their CSR report. Organizations have choices on the type of assurance provider and level of assurance they are seeking. Our research can help these organization make more informed decisions by comparing themselves to what other organizations of similar size, location and industry have already chosen to do.