BEYOND SUSTAINABILITY REPORTING: THE VALUE OF EXTERNAL ASSURANCE AND AUDITOR-PROVIDED SUSTAINABILITY ASSURANCE

Abstract

This paper examines whether external assurance of sustainability reports and the use of the same provider for financial audit and sustainability assurance provide value beyond that provided by mere issuance of sustainability reports. I provide insight into the financial consequences to stakeholders by studying the effects on cost of equity capital (COEC), earnings management (EM) and audit fee. First, I find a negative relation between sustainability report issuance and COEC; this association holds when I study sustainability assurance and COEC. Second, I demonstrate a positive relation between sustainability assurance and EM; this association becomes negative when I study the use of the same audit/sustainability assurance provider and EM. This negative association can be attributed to proprietary information spillovers from the assurance to audit teams and stronger auditor-client relationships, which may both serve as monitoring mechanisms of earnings management. Third, I show that firms which consolidate providers also enjoy a lower audit fee. Finally, I also find that sustainability assurance level is negatively associated with COEC, while sustainability assurance scope is negatively associated with EM and audit fee. This study advances emerging literature on the value of external sustainability assurance.