The Impact of Environmental, Social and Governance Disclosure on Auditor Effort and Audit Quality

In recent years, investors have considered the environmental, social and governance performance of companies to make economic decisions. Risks related to environmental, social and governance issues can affect business processes and can heighten financial risk and threaten a firm’s survival. The purpose of this study is to investigate whether the environmental, social and governance disclosure of the company is related to the auditor's effort and audit quality and how is this relationship. In particular, three hypotheses were examined, in this study. It was first examined whether there was a relationship between the level of environmental, social, and governance disclosure and the auditor's efforts. Then, the relationship between the level of environmental, social, and governance disclosure and audit quality was examined. Finally, it was examined whether the relationship between the level of environmental, social, and governance disclosure and the quality of the audit depends on the auditor's efforts.

 In order to achieve the research goal, 97 companies among the companies listed on the Tehran Stock Exchange during the years 2013 to 2019 by systematic elimination sampling method, and a total of 679 years-companies were considered for analysis. To test the research hypotheses, a multivariate regression model, and the ordinary least squares method were used. Also, in this study, the accounting quality variable was calculated using four important audit quality criteria. These four criteria are: Auditor tenure, auditor size, discretionary accruals and auditor expertise. To avoid the multiplicity of model estimates and the complexity of interpreting the results, four audit quality criteria with the help of factor analysis techniques in SPSS software have become an indicator.

The findings showed that the level of environmental, social, and governance disclosure is negatively related to audit efforts. Also, the relationship between the level of environmental, social, and governance disclosure has a negative relationship with the quality of auditing, which is affected by the audit effort.

The results indicate that auditors manage the audit risk due to the low level of environmental, social, and governance disclosure by exerting more effort. In fact, low levels of environmental, social, and governmental disclosure lead to increased auditor effort and consequently increased audit quality. The findings of this study that auditors generally with increased audit effort leads to higher audit quality is good news for investors and advocates of environmental, social, and governance issues. However, according to the findings, that environmental, social and governance performance affect the auditor's effort and audit quality, there is a need for legislation in this area. It is appropriate for Standard regulators to take steps to oblige companies to make mandatory disclosures of environmental, social, and governance issues.