SSRN Id3537535

The Relative Role of Firm Incentives, Auditor Specialization and Country Factors
as Antecedents of Non-financial Audit Quality
Nicola Dalla Via

Free University of Bozen-Bolzano
nicola.dallavia@unibz.it
Paolo Perego
Free University of Bozen-Bolzano
paolo.perego@unibz.it
Auditing: A Journal of Practice and Theory, Forthcoming
We thank Gary Monroe (editor) and two anonymous reviewers for their valuable comments. We
also appreciate the helpful suggestions from Pietro Bianchi, Roger Simnett, seminar participants
at Erasmus University Rotterdam, and conference participants at the 39th European Accounting
Association Annual Congress (2016), the 5th GRI Global Conference (2016), the 22nd International
Symposium on Auditing Research (2016), the EIASM 6th Workshop on Audit Quality (2016), and
the IX Financial Reporting Workshop (2018).
Electronic copy available at: https://ssrn.com/abstract=3537535

The Relative Role of Firm Incentives, Auditor Specialization and Country Factors
as Antecedents of Non-financial Audit Quality
ABSTRACT
This paper examines the antecedents of non-financial audit quality in the novel setting of
sustainability assurance (SA). We proxy SA quality by a content analysis of the information
disclosed in approximately 1,200 publicly available SA statements issued by a panel of G500
global firms in the period 2005-2013. Our findings indicate that a higher emphasis on stakeholder
engagement and executive compensation schemes linked to sustainability targets are significant
internal client incentives for enhanced levels of SA quality. Our study also confirms the importance
of supply-side factors, such as auditor competence and auditor specialization, in explaining the
heterogeneity of (non-financial) audit quality. SA quality appears to be further strengthened if a
country’s institutional environment privileges the enforcement of a legal infrastructure aimed at
the protection of social and environmental dimensions of corporate practices. Our results suggest
that the complement view of governance mechanisms proposed by Doidge, Karolyi, and Stulz
(2007) applies in this emergent non-financial auditing market.
Keywords: sustainability assurance; audit quality; corporate social responsibility; non-financial

reporting.
I. INTRODUCTION
Corporate reports increasingly include non-financial information beyond the traditional financial
statement focus (Accountancy Europe 2015; KPMG 2015). Assurance services on these novel and
still evolving forms of corporate reporting are growing rapidly (IAASB 2016; Accountancy
Europe 2017). Among them, assurance on stand-alone corporate social responsibility (CSR) or
sustainability reports represents an emergent market of non-financial assurance services with
distinct characteristics (Simnett, Vanstraelen, and Chua 2009; O’Dwyer 2011; Simnett 2014;
Cohen and Simnett 2015; Moroney and Trotman 2016). In contrast to mandatory audits of financial
2

statements, firms voluntarily purchase sustainability assurance (SA)1 from a variety of third-party
assurance providers who offer various levels of assurance engagements based on customized audit
approaches and standards (KPMG 2015; Moroney and Trotman 2016). Despite anecdotal evidence
showing that SA engagements vary considerably across firms (WBCSD 2016), scant research has
examined the quality of the SA process and output. Previous studies predominantly focused on SA
adoption, examining either antecedents (e.g., Mock, Strohm, and Swartz 2007; Simnett et al. 2009;
Kolk and Perego 2010; Peters and Romi 2014; Zhou, Simnett, and Green 2016) or consequences
(e.g., Pflugrath, Roebuck, and Simnett 2011; Brown-Liburd and Zamora 2015; Casey and Grenier
2015; Cheng, Green, and Ko 2015) associated with a firm’s voluntary decision to engage in SA
(see Velte and Stawinoga 2017 for a recent review of the SA literature).
In this paper, the research objective is to address three currently underinvestigated issues.
First, we examine the antecedents of SA quality by focusing on a cross-country panel of SA
voluntary adopters. Similar to prior attempts to capture SA quality (O'Dwyer and Owen 2005;
Perego and Kolk 2012; Fuhrmann, Ott, Looks, and Guenther 2017; Hummel, Schlick, and Fifka
2019), we proxy audit quality in this novel setting by conducting a content analysis of publicly
disclosed SA statements accompanying sustainability reports.2 Our aim is to explain heterogeneity
in the level of information disclosed in SA statements about an assurance engagement as a proxy
of audit quality (Knechel and Schefcik 2014), thus moving beyond prior SA studies that limited
their analysis to the mere distinction between SA adopters versus non-adopters. Second, prior SA
adoption studies mainly investigated the role of country-level determinants (Cohen and Simnett
1
We acknowledge a variety of labels previously used in the sustainability reporting and assurance literature (cf. Velte
and Stawinoga 2017). In this paper, the acronym SA denotes the assurance provided by an external, third-party
assurance provider on a firm’s CSR or sustainability report. The labels “CSR report” and “sustainability report” here
refer interchangeably to a stand-alone, typically voluntary disclosure that contains information on a firm’s social and
environmental performance.
2
The SA statements consist of the publicly-available audit/assurance reports issued by a third-party assurance provider
that accompanies a firm’s stand-alone CSR or sustainability report.

2015; Velte and Stawinoga 2017), with less emphasis on the relative roles and dynamic interplay
between firm- and country-level factors associated with SA voluntary assurance choices (cf. Zhou
et al. 2016). We posit that a combination of micro- and macro-level institutional incentives shape
audit quality in SA services. Third and related to the previous point, we jointly examine both
demand- (client incentives) and supply-side (auditor specialization) factors as firm-level
determinants of audit quality. Building on analogies with auditing traditional financial statements,
this paper draws on the conceptual framework proposed in DeFond and Zhang (2014) to enhance
our knowledge on the antecedents of non-financial audit quality.
Our empirical analysis exploits a large, manually collected dataset comprising a content
analysis of approximately 1,200 SA statements issued in the period 2005-2013 by a panel of
Fortune G500 firms domiciled in 24 countries. Compared to the few studies that have begun to
examine proxies of audit quality in the setting of SA (Fuhrmann et al. 2017; Hummel et al. 2019),
our sample design has the advantage of using a panel dataset of the largest multinationals in the
world during the period of time in which SA began to diffuse. Further, our sampling strategy allows
us to build a comprehensive, longitudinal dataset that exploits a period in which the two main
international SA standards (AA1000 and ISAE 3000) were introduced and began to diffuse. Our
findings indicate that a higher emphasis on stakeholder engagement and executive compensation
schemes linked to sustainability targets are significant client incentives for enhanced levels of SA
quality. Our paper suggests that, compared to traditional financial auditing, a firm’s decision to
voluntarily assure CSR or sustainability disclosures arises endogenously as a result of information
asymmetry between the firm’s management and internal audiences (Bagnoli and Watts 2017). In
our analysis, we control for possible firm-level variables capturing external rather than internal
demand-side factors of SA quality (i.e., analyst following and inclusion in a sustainability index).

We show that in the early phases of the market development of this emergent practice, SA mainly
appears to be a managerial tool associated with the intention to enhance the congruence of internal
managerial decision-making and evaluation processes, rather than a differentiating credibility
signal to external stakeholders and investors (Lys, Naughton, and Wang 2015). We additionally
provide evidence that non-professional third-party assurance providers in this emergent market are
associated with significantly lower levels of SA quality. Relative to internal client incentives, our
study confirms the crucial importance of supply-side factors such as auditor competence and
auditor specialization in explaining the heterogeneity of (non-financial) audit quality (DeFond and
Zhang 2014; Knechel and Schefcik 2014).
Furthermore, we document that the relative importance of the firm-level determinants
(client incentives and auditor specialization) is confirmed even in the presence of a set of country-
level factors capturing institutional settings characterized by a stronger emphasis on CSR and
stakeholder orientation. Our findings thus indicate that overall the complement argument advanced
by Doidge, Karolyi, and Stulz (2007) with regards to financial accounting auditing practices
applies in the novel setting of SA. Demand for voluntary (non-financial) assurance services
appears to be strengthened in the presence of an institutional environment that privileges the
enforcement of a legal infrastructure aimed at the inclusion of social and environmental
dimensions in corporate strategy and decision-making processes.
This paper adds to the literature in two ways. First, our study addresses recent calls for
research on audit quality in a non-financial setting (DeFond and Zhang 2014; Simnett 2014; Cohen
and Simnett 2015; Simnett, Carson, and Vanstraelen 2016). Content analysis of SA statements
provides a suitable methodological approach to obtain knowledge on the quality of non-financial
assurance engagements in a voluntary auditing setting. Compared to audit quality proxies normally

used in archival auditing research, we extend a rather limited set of studies focused on content
analysis of SA statements (Perego and Kolk 2012; Fuhrmann et al. 2017; Hummel et al. 2019).
Moreover, the voluntary setting of SA allows us to jointly examine the roles of client incentives
and institutional factors that affect audit quality in a market other than traditional financial
assurance (DeFond and Zhang 2014, 303).
Second, we identify and examine a rather comprehensive set of firm- and country-level
antecedents of SA quality. We add to the previous SA literature by exploring firm-specific client
incentives for audit quality in addition to the determinants previously investigated. More broadly,
we draw on and contribute to international auditing (e.g., Choi and Wong 2007; Francis, Khurana,
Martin, and Pereira 2011; Simnett et al. 2016) and CSR/sustainability reporting (e.g., Dhaliwal,
Li, Tsang, and Yang 2011; Dhaliwal, Radhakrishnan, Tsang, and Yang 2012; Huang and Watson
2015) literature examining complementary and substitute effects of assurance services in relation
to broader corporate governance mechanisms and macro-level institutional contexts.
The remainder of this paper proceeds as follows. The second section reviews the related
literature and develops the hypotheses, the third section describes the sample and the research
design, the fourth section reports the empirical results, and the fifth section concludes.
II. THEORY AND HYPOTHESIS DEVELOPMENT
Literature Review
According to the 2015 periodic survey by KPMG among the G250, nearly two thirds of
sustainability reports are currently accompanied by an SA statement provided by a third-party
verification body (KPMG 2015). This trend of extending the boundaries of assurance services
outside traditional financial statement audits has developed alongside the sustainability reporting

movement over the last three decades, with the increasing support of a number of professional
organizations and affiliations of interested parties (IAASB 2016). In addition to its voluntary,
unregulated nature, two specific aspects of SA make it an interesting research setting distinct from
traditional financial statement audits (Simnett 2014; Cohen and Simnett 2015; Moroney and
Trotman 2016). First, in this novel assurance market, different auditing standards are applied. Two
international assurance standards have assumed dominant roles (for a comparison among standards
see O'Dwyer and Owen 2005). The AA1000 Assurance Standard (AA1000AS) was developed by
the London-based Institute of Social and Ethical AccountAbility (more commonly known as
AccountAbility). Launched in March 2003 (AccountAbility 2003a, b) and slightly revised in 2008,
AA1000AS is a free, open-source set of principles that focuses on the learning aspects of
addressing sustainability/CSR. The ISAE 3000 standard (“Assurance Engagements Other Than
Audits or Reviews of Historical Financial Information”) published by the International Auditing
and Assurance Standards Board has provided guidance since 2005 in the form of basic principles
and essential procedures for professional accountants on how to conduct non-financial assurance
engagements (IAASB 2003). Second, the presence of different types of assurance providers is a
peculiar feature of the emergent and unregulated nature of the SA market (Simnett 2014). Findings
by O'Dwyer and Owen (2005) and Perego and Kolk (2012) confirm the presence of a diverse range
of professional audit firms and other entities (e.g., academic institutions or nongovernmental
organizations), with varying degrees of technical expertise and perceived credibility associated
with different types of assurance providers.
Velte and Stawinoga (2017) have reviewed the emergent stream of research on SA. A
group of studies have focused on the determinants of SA adoption and employed empirical
analyses to explain a firm’s decision to assure its sustainability report. These studies have mainly

examined country-level factors, such as country of origin and legal environments (e.g., Simnett et
al. 2009; Kolk and Perego 2010; Herda, Taylor, and Winterbotham 2014), whereas the potential
influence of firm-level characteristics beyond traditional variables such as firm size and industry
membership remains underinvestigated. Another group of studies examined the consequences of
SA, either on capital-market effects (Dhaliwal et al. 2011; Casey and Grenier 2015) or on
individual investor behavior (Pflugrath et al. 2011; Brown-Liburd and Zamora 2015; Moroney and
Trotman 2016).
Only a few papers have addressed SA processes and outcomes in an attempt to go beyond
an explanation of SA adoption. Some studies have explored SA processes qualitatively (O'Dwyer
and Owen 2005; O’Dwyer 2011), revealing a varying degree of supply-side strategies by different
assurance provider types in developing the SA market. Other papers have examined SA content in
publicly available assurance statements. The rationale of this methodological approach is to infer
levels of audit quality from the completeness and accuracy of the information disclosed in SA
statements and its adherence to audit standards. The key assumption is that the more information
the SA statement contains in conformity with recommended auditing standards, the more the
underlying assurance engagement is expected to reflect high-levels of audit quality. Perego and
Kolk (2012) show how patterns of SA evolved over time using a panel of the Fortune Global 250,
suggesting that an assurance provider's ability to perform a high-quality SA engagement may vary
significantly across different types of assurance providers. Using a similar methodology,
Fuhrmann et al. (2017) document a significant cross-sectional association between SA quality
levels and the bid-ask spread for a matched sample of 442 STOXX 600 Europe companies with
and without assured sustainability reports. More recently, Hummel et al. (2019) hypothesize and
find that a firm’s sustainability performance is related to the information disclosed in SA

statements capturing the depth of the assurance process, whereas the affiliation of the assurance
provider with the accounting profession is related to the breadth of the assurance statement. Their
results are derived from an analysis of a sample of 122 European firms for the reporting year 2011
only.
Based on the extant literature, we argue that, compared to a traditional financial statement
audit, SA provides a unique opportunity to obtain insights on emergent forms of non-financial
disclosures and related assurance services. In their recent literature review and plea for a research
agenda to enhance SA, Cohen and Simnett (2015) underline the potential of third-party verification
to deliver trustworthy and reliable sustainability-related information. The apparent high
fragmentation of assurance practices among SA engagements and inherent quality is a joint effect
of demand-side and supply-side drivers that remains underinvestigated. In this study, we build on
the conceptual framework proposed by DeFond and Zhang (2014) to address such a variation in
SA quality. Our aim is to disentangle the role of potential factors associated with high or low levels
of SA quality by drawing an analogy from auditing research on traditional financial statement
assurance (Knechel and Schefcik 2014). Because SA quality is not directly observable, we follow
prior studies and empirically measure a proxy of audit quality by a content analysis of SA
statements in terms of completeness of information disclosed about the assurance engagement and
adherence to international auditing standards. Since the assurance standards usually recommend
the minimum information that an assurance statement should contain, the content analysis of SA
statements allows us to assess the nature and rigor of the assurance engagement performed and
hence indirectly infer the level of audit quality. Similar to Fuhrmann et al. (2017) and Hummel et
al. (2019), our content analysis methodology relies on the coding originally elaborated by O'Dwyer
and Owen (2005) and initially applied by Perego and Kolk (2012) on a Fortune G250 sample.

In the next sections, we develop hypotheses associated with both firm-level demand- and
supply-side determinants of SA quality. The last hypothesis covers country-level institutional
factors that are likely to shape SA quality jointly with firm-level variables.
Demand-Side Firm-Level Hypothesis
The voluntary demand of SA can be explained by firms’ willingness to enhance a
sustainability report’s credibility vis-à-vis stakeholders and external investors (Simnett 2014). This
reflects a view of SA services as a way of generating greater transparency, trustworthy information
and consensus on the purpose of business and catalyzing effective scrutiny and a constructive
dialogue with a firm’s stakeholders and its investors. An external assurance process can help to
improve information systems and embed sustainability efforts into the organization. Including
external opinions and advice may further improve the accuracy of data and aid the identification
of key risks for the company (Edgley, Jones, and Solomon 2010). These claims are consistent with
financial auditing practices indicating that voluntary, third-party verification provides greater user
confidence in the credibility and verifiability of the non-financial information disclosed (Cohen
and Simnett 2015).
Firms seek to use assurance statements as a tool for checking and improving internal
management systems (IAASB 2016). A sustainability report accompanied by SA creates external
credibility as well as awareness within the company and thus represents a relevant driver of
integration of sustainability issues in daily business operations. Therefore, we expect that the
formal engagement of a firm toward a sustainability strategy and its stakeholders facilitates the
adoption of SA and simultaneously promotes SA quality (Edgley et al. 2010). Since strategy
formulation requires reliable information, as in the case of financial reporting, third-party
10

verification of sustainability-related data can ensure internal compliance with a sustainability
strategy by advancing quality in the assurance engagement between assurance-seeking firms and
external verifiers. Eccles, Ioannou, and Serafeim (2014) provide evidence that companies scoring
high on sustainability performance have embedded stakeholder engagement in their business
models. These firms appear to be more focused and effective in managing the needs of their
stakeholders, including the reporting processes (both internally and externally) on the quality of
their stakeholder relationships.
Furthermore, SA becomes an informational signal that provides insight into the actions of
managers (Libby, Salterio, and Webb 2004). This signaling is consistent with the use of financial
audits as a monitoring mechanism integral to agency theory to strengthen the credibility of
corporate information and its usefulness in executive compensation contracts (Shivakumar 2013).
There has been growing pressure to consider sustainability performance as part of executive
compensation to enhance alignment between managerial objectives and sustainability strategy. A
2014 survey by Glass Lewis (a leading provider of global governance services) indicated that
approximately 40 percent of the global companies reviewed included sustainability-related
information in their executive compensation packages, up from 29 percent in 2010 (Glass Lewis
2014). Such a trend is documented in empirical academic research on CSR. For instance, Berrone
and Gomez-Mejia (2009) indicate that environmental performance is positively associated with
CEO total pay in a sample of 469 US firms. Their study also reveals that companies with an explicit
environmental pay-for-performance scheme reward environmental strategies more than companies
without such programs. These findings suggest that corporate sustainability strategies can play a
merely symbolic (e.g., window dressing or greenwashing) role when not formally attached to
executive compensation systems. Consistent with the role of traditional financial auditing as a
11

contractual facilitator in agency theory, assurance thus becomes a mechanism aimed at disciplining
prior information released by managers and settling executive compensation contracts. In our
setting, we expect that SA is used by firms to signal congruence with their commitment to
stakeholders to align sustainability strategies and corporate actions. Whenever internal
measurement processes and information systems cannot ensure accurate and verifiable
performance measures, the contractibility of sustainability-related performance measures is
hindered because eliciting managerial effort is more difficult. Under these conditions,
sustainability-related performance measures should be used less in compensation contracts (Eccles
et al. 2014). Thus, the following hypothesis focused on firm-level client demand for SA quality is
formulated:
H1: There is a positive association between SA quality and (a) a firm’s engagement with
its stakeholders; (b) a firm’s reliance on executive compensation systems linked to
sustainability performance.
Supply-Side Firm-Level Hypothesis
Previous experimental research on the type of SA assurance provider suggests that
investors associate a higher level of credibility with accounting professionals (traditionally Big 4
auditing firms) than with other auditor types (Pflugrath et al. 2011; Brown-Liburd and Zamora
2015; Moroney and Trotman 2016). In theory, accounting firms are subject to professional conduct
requirements, thus qualifying them as more effective external monitoring assurance providers as a
result of their reputational capital (Simnett et al. 2009). Such findings rely on experimental designs
that compare the presence or absence of SA provided by an accounting professional. For instance,
Moroney and Trotman (2016) engage 82 Big 4 audit managers to experimentally examine their
materiality assessment decisions by comparing a financial audit versus a sustainability (water)
assurance engagement. Findings indicate that auditors are more likely to consider the audit
12

difference material in the financial statement audit than in the SA engagement, suggesting a
significant difference in the input and process factors that may impact audit quality in these novel
types of (non-financial) assurance engagements. Empirical evidence on the link between the
assurance provider and SA quality is more scattered. O'Dwyer and Owen (2005) identify distinct
differences in approach and viewpoint between consultant and accountant assurors. Accountant
assurors are more cautious, focus mainly on the consistency of the reported information with
underlying data sets, and tend to conduct a “mere data-checking exercise” (O'Dwyer and Owen
2005, 225). By contrast, consultant assurors are expected to focus more on completeness, fairness
and overall balance in their opinion statements. Perego and Kolk (2012) document the distribution
of SA statements issued by four categories of assurance providers, namely, traditional Big 4
accounting firms, certification bodies, specialist consultants, and non-governmental organizations
(NGOs), across a sample of large multinationals. Perego and Kolk (2012) show that, despite their
consolidated expertise in assurance engagements in financial reporting and their higher penetration
in the SA market, accounting firms appear to score only slightly better than certification bodies.
Consultant specialists, especially non-professional assurance providers, are associated with
significantly lower levels of SA quality.
In this paper, we draw on findings from O'Dwyer and Owen (2005) and Perego and Kolk
(2012) and posit that industry knowledge and technical expertise enable professional assurance
providers to ensure higher levels of SA quality compared to non-professional assurance providers.3
3
To the best of our knowledge, there are three possible alternative categorizations of assurance provider types. The
first one merely distinguishes accounting versus non-accounting assurance providers and remains the one more
commonly followed (cf. the comprehensive review by Farooq and De Villiers 2017). The second one attributes a more
precise label that distinguishes accounting firms from certification bodies and consultants as professional assurance
providers, versus a heterogeneous category of non-professional assurance providers comprising NGOs, academics,
stakeholder panels and the like (cf. Perego and Kolk 2012). The third one recognizes a parallel with mainstream
financial audit research and distinguish Specialist versus Non-specialist assurance providers on the basis of the
industry specialization of an assurance provider (e.g., Martínez-Ferrero and García-Sánchez 2018). We have chosen
to classify assurance providers in Professional versus Non-professional consistently with the second approach.
13

We expect that the more extensive set of skills, competences and experience of SA assurance
specialists is associated with enhanced levels of audit quality proxied by adherence to assurance
standards and completeness of assurance engagements. Hence, we hypothesize the following:
H2: There is a negative (positive) association between non-professional (professional)

assurance providers and SA quality.
Country-Level Hypothesis
Following a stream of auditing papers investigating the auditor’s governance function in
cross-country comparisons (Choi and Wong 2007; Francis et al. 2011), it can be argued that the
quality of a national legal environment is a key determinant of financial market developments,
corporate ownership structures and the properties of auditing procedures around the world. A
distinction is usually made between countries characterized by weak versus strong legal and
enforcement mechanisms, with the underlying assumption that independent audits facilitate
contracting by reducing information asymmetry and monitoring the performance of the contracting
parties.
Two competing predictions can be posited from this stream of literature. On the one hand,
Ball (2001) suggests that in countries without a strong legal infrastructure, the role of accounting
and auditing in contracting is minimal, and other institutional mechanisms become more
important. By extension, the role of assurance services for sustainability could be hindered in a
country with a weak legal environment due to a lack of credibility. On the other hand, findings by
Durnev and Kim (2005) and Choi and Wong (2007) indicate that governance mechanisms, such
as having an independent audit or assurance, can serve as a substitute for absent or weak country-
level institutions that constrain the behavior of contracting parties. They argue that, in countries
with stronger legal systems and other institutions, a firm has less to gain from independent audits
14

because existing country-level institutions impose constraints on contracting parties and may
therefore provide sufficient protection.
In the stream of emerging SA studies, Kolk and Perego (2010) found, in a cross-sectional
sample of the G250, that the demand for assurance is higher in countries where sustainable
corporate practices are better enabled by legal and market characteristics. They additionally
documented that firms domiciled in weak governance enforcement regimes are less likely to adopt
SA. Herda et al. (2014) examined the impact of country-level investor protection on SA decisions.
Their findings indicated that managers in countries with weak investor protection use voluntary
SA as a substitute monitoring mechanism. Given the mixed arguments and inconsistent empirical
results, the effects of macro-level institutional factors on SA decision and quality remain an
empirical question.
In this paper, we rely on insights from recent papers that use large archival datasets with
cross-country, longitudinal designs to investigate the role of institutional factors on firms’
sustainability disclosures and reporting choices or associated capital market effects (Dhaliwal et
al. 2011; Dhaliwal et al. 2012; Chen, Srinidhi, Tsang, and Yu 2016). We expect that firms
domiciled in countries with a higher pressure toward corporate sustainability due to public policy
and macro-level factors will be more likely to demand a higher level of SA. We proxy the strength
of a country’s sustainability policy and enforcement by several variables that capture a variety of
institutional and market mechanisms. Multinationals headquartered in national environments that
require/enable higher levels of corporate sustainability will demand higher quality in SA
engagements to respond to a greater demand of macro-level transparency and credibility of
sustainability reporting. Accordingly, we posit the following:
H3: There is a positive association between SA quality and firms domiciled in countries
with a higher strength of national policies and practices for sustainability.
15

III. RESEARCH DESIGN
Sample
We develop a panel dataset for 2005-2013 starting from the 2005 Fortune Global 500
(G500) ranking. This choice reflects a period in which the two main international SA standards
(AA1000 and ISAE 3000) were introduced and began to diffuse in their initial version (ISAE 3000
was slightly adjusted in 2013). Compared to prior studies examining SA adoption with cross-
sectional, unbalanced or incomplete samples, our sampling strategy allows us to build a
comprehensive, longitudinal dataset. Large global firms are typically leaders in sustainability
reporting. By focusing on the early stages of SA adoption for these multinationals, we expect to
observe a trend for this novel auditing practice that can be generalized more widely to smaller
types of firms.
We manually checked in CorporateRegister (www.corporateregister.com) and in
companies’ websites whether the firms in the G500 panel issued a CSR report and whether they
obtained an SA statement in the period investigated. In total, we identify 1,346 assured CSR reports
issued by G500 companies from 24 countries over the period 2005-2013. We obtain financial data
from Datastream Worldscope and analyst forecast data from I/B/E/S. We exclude 98 firm-year
observations referring to companies not included in Thomson Reuters Datastream (ASSET4),
resulting in a final sample of 1,248 observations (see Table 1).
The most represented country is Japan (404 SA statements, 32 percent of the sample),
followed by the United Kingdom (N = 133, 11 percent), the United States (N = 102, 8 percent),
and France (N = 101, 8 percent). The descriptive statistics are in line with Simnett et al. (2009). In
their study, the three main countries represented in the sustainability report sample are Japan, the
16

United Kingdom, and the United States. However, given the sample period (2002-2004), the
relative number of assured statements in the three countries is much lower compared to our sample.
Model Specification and Variable Measurement
The model tested is as follows:
SAQUAL = f(firm-level variables, country-level variables, control variables) (1)
In our model, we distinguish between firm-level variables and country-level factors derived from
recent studies on SA (e.g., Simnett et al. 2009; Herda et al. 2014; Peters and Romi 2014; Casey
and Grenier 2015; Peters and Romi 2015). Appendix 1 provides a complete description of the
variables.
Dependent Variable
We measure the quality of SA (SAQUAL) by means of a content analysis of publicly
available SA statements based on the framework originally provided by O'Dwyer and Owen (2005)
and by Perego and Kolk (2012). The content analysis includes 20 aspects or ranking criteria that
reflect a combination of the main characteristics and assurance statement requirements available
in the two most commonly applied international assurance standards (AA1000AS and ISAE 3000).
The coding framework, coding rules and resulting scores per item are presented in Appendix 2.4
The ranking criteria range from items that simply track factual data (such as title, addressee, name
and location of assuror) to items that capture characteristics of the assurance engagement and
require more interpretation of the principles stated in the standards (such as materiality,
4
To increase the quality and the accuracy of the coding, we apply two changes to the coding framework developed
by Perego and Kolk (2012). We split item “19. General conclusion/opinion” into two separate items, and we add a
further option to the scale of item “15. Summary of work performed.”
17

completeness, and responsiveness to stakeholders). As a result of our coding framework, the
possible scores obtained from the content analysis range from one to 30, with one representing the
lowest value of SAQUAL and 30 the highest. The mean and standard deviation scores shown in
Appendix 2 reveal noteworthy variation across items. Because of the inherent principles-based
nature of the coding framework, we ensure reliability and validity of the SAQUAL scores by
employing a 100 percent double coding process. Two of the authors first independently completed
the content analysis and then engaged in iterative rounds of comparisons and discussions until all
disagreements on scores per item were resolved.
Independent Variables
H1 focuses on the relationships linking SA quality with a firm´s policy to respectively
engage with stakeholders and include CRS/sustainability indicators in executive compensation. To
proxy these two demand-side client incentives, we rely on ASSET4 and collect two proxies used
in previous research on sustainability management (e.g., Eccles et al. 2014; Ferrell, Liang, and
Renneboog 2016). ENG indicates whether the firm explains in the sustainability report how it
engages with its stakeholders. COMP identifies whether a firm´s senior executive’s compensation
is linked to CSR/sustainability targets.
To test H2, we create our variables to indicate the type of assurance provider (see the
rationale behind in Footnote 3): we distinguish accountant or auditor (AP_ACC), certification body
(AP_CERT) and consultant (AP_CONS) within the category of Professional assurance providers.
The category comprising NGOs, academics, testimonials and stakeholders panels that form the
Non-Professional assurance provider type are labeled as other (AP_OTHER).
18

The country level variables referring to H3 measure several dimensions coherently with
international accounting studies. First, consistent with Dhaliwal et al. (2012), CSRLAW captures
the existence of CSR-related disclosure laws. CSRLAW takes a value of one if the country requires
mandatory CSR-related disclosure for either industrial companies or pension funds, and zero
otherwise.5 An overall measure of how well a country performs on high-priority environmental
issues is the environmental performance index (EPI), which is issued annually. Further, we
measure the intensity of ISO 14001 certification (ISO14001). As in Casadesús, Marimon, and
Heras (2008), the number of ISO 14001 certificates issued by each country is scaled by the gross
domestic product (GDP). This variable is a proxy for the diffusion of environmental management
standards and the level of awareness regarding environmental issues in each country. From
Dhaliwal et al. (2012), we also include a measure of public awareness of CSR issues
(PUBAWARE). based on surveys of the views of corporate executive officers on CSR activities.
More specifically, PUBAWARE is the mean rank score of four survey-based indices: (1)
sustainable development priority; (2) ethical practice implementation; (3) social responsibility of
business leaders; and, (4) corporate responsibility competitiveness index.
Control Variables
With regards to control variables at the firm-level, arguably firms with a higher level of
sustainability-related managerial mechanisms and performance are more likely associated with SA
quality. Hence, we introduce in our models several control variables used in previous SA research
5
In contrast to Dhaliwal et al. (2012), we use a dummy variable instead of a discrete variable. They distinguish
between countries with mandatory disclosure requirements on CSR issues for both industrial companies and pension
funds and countries with mandatory disclosure requirements only for industrial companies or only for pension funds.
In both cases, our CSRLAW variable takes a value of one. Further, we gather information for countries in our sample
not examined by Dhaliwal et al. (2012) i.e., China, Ireland, Luxemburg, Russia and South Korea.
19

to exclude possible confounding effects among such firm characteristics and the alleged client
incentives for SA quality. First, similarly to Peters and Romi (2015), we measure the presence of
a sustainability committee (COMM) as a potential sustainability-oriented governance mechanism
that firms adopt to enhance the credibility of CSR reporting and reinforce trust among
stakeholders. We then control for a firm's CSR performance as potential confounding factor in our
regressions. We obtain from ASSET4 a firm´s score on four basic pillars: economic (ECN),
environmental (ENV), social (SOC), and corporate governance (CGV). For instance, these
variables reflect whether the board members and executives act in the best interests of the long-
term shareholders, whether the firm can generate trust and loyalty with its workforce, customers,
and society, and whether the firm has an impact on living and non-living natural systems.
In addition to the internal firm-level client incentives, we further control for two external
potential variables that might be associated with SA quality. First, analyst following proxies for
stronger competition and higher incentives for firms to provide credible CSR reports towards
capital markets. The extent of analyst coverage represents an external pressure that could arguably
positively affect SA quality, hence we control for ANALYST measured as the average number of
analysts following the concerned firm in a given year. We obtained this variable from I/B/E/S.
Second, we control for possible confounding effects of the inclusion in sustainability indices on
SA quality. Sustainable indices rank firms’ performance based on several social and environmental
criteria and provide meaningful signals to investors of both reduced exposure to sustainability-
related risks and increased social legitimacy. Producing a sustainability assurance statement with
varying quality levels might influence the decision of rating agencies to upgrade or downgrade a
firm in a sustainability index. Sustainability ratings could therefore serve as a powerful motivator
for enhanced demand for SA quality. Hence, we control for the variable SUSTIND which assumes
20

the value of one if a firm in a specific year belongs to a sustainability index, and zero otherwise.
Additional firm-level control variables derived from prior SA-related literature include firm size
measured as the natural logarithm of sales revenue (SALES), profitability measured as net income
scaled by total assets (PROFIT), market-to-book ratio measured as market value of equity scaled
by book value of common equity (MTB), leverage measured as total debt scaled by total assets
(LEV), and an indicator variable that equals one if the concerned firm belongs to an environmental
sensitive industry (INDU).
Control variables at country-level include first of all a dummy variable to identify common
law and code law countries (LAW). We then introduce ENFORCE computed as the average of two
indices: legal enforcement and public enforcement. The legal enforcement measure for each
country is the average score across three variables measured by La Porta, Lopez-de-Silanes,
Shleifer, and Vishny (1998): (1) an index of the legal system’s efficiency; (2) an index of the rule
of law; and (3) the level of corruption. Public enforcement is the average score across five
component indices developed by La Porta, Lopez-De-Silanes, and Shleifer (2006): (1) supervisor
characteristics index; (2) rule-making power index; (3) investigative powers index; (4) order index;
and (5) criminal index. Finally, GDPCAP is the natural logarithm of the GDP per capita and
captures both the size of the country and the level of economic performance. GDPCAP permits
consideration of the different investment possibilities in CSR-related issues.
IV. RESULTS
Descriptive Statistics and Univariate Analysis
As outlined earlier, we identified 1,248 SA statements from 24 countries. The most
represented countries are Japan, the United Kingdom, the United States, and France. Table 2
21

presents the overall descriptive statistics. On average, the SA quality is 15.59 and ranges from 2
to 30. Approximately 83 percent of the firm-year observations indicate the presence of a
sustainability committee or team, 70 percent explain how they engage with stakeholders, and 72
percent indicate their inclusion in a sustainability index. However, only 34 percent adopted
CSR/sustainability targets linked to compensation.
As exhibited in Table 3, panel A, the SA quality changes across countries and across years.
Japan has the highest number of SA statements, but the quality is the lowest (8.52 points). The
countries with the most comprehensive statements are Ireland (25.00 points), Luxembourg (25.00
points), and India (24.11 points). Appendix 3 reports more detailed descriptive statistics of the
country-level variables. Seven of 24 countries adopt common law (24 percent of the observations),
whereas 11 require mandatory CSR-related disclosure (42 percent). India and Switzerland are the
countries with the lowest and the highest environmental performance indices (31.20 and 87.76
points), respectively.
Panel B of Table 3 relates SA quality to the type of assuror. Accountants (including Big 4
auditors and other accountants) assure approximately 54 percent of the reports in the sample,
whereas certifications bodies and consultants assure 10 percent and 9 percent of the reports,
respectively. Assurance quality is much higher for these three types of assurors (respectively
18.83, 20.60, and 18.50 points) than for other assurors (6.24 points), and significant differences
are not observed over time.6 Accountants, certification bodies, and consultants provide mainly
limited assurance engagements (about 78 percent, 58 percent, and 53 percent of their engagements,
respectively), whereas accountants and certification bodies provide reasonable assurance or a mix
of reasonable and limited assurance in 13 percent and 21 percent of their engagements,
6
When the level of assurance is explicitly indicated in the assurance statement, quality is on average 19.69 (SD =
4.19), compared to 8.71 (SD =7.09) when the level of assurance is not indicated.
22

respectively. Further, consultants do not provide information on the level of assurance in
approximately 47 percent of the engagements and this percentage increases to 87 percent for third-
party assurance providers.
The correlation matrix is shown in Table 4. SA quality is positively and significantly
correlated with engagement with stakeholders and the presence of CSR targets for compensation
purposes (ρ = 0.40 and ρ = 0.38, respectively). These correlations are in line with our first
hypothesis. Further, as predicted by our second hypothesis, SA quality is also positively correlated
with accounting assurance providers (ρ = 0.46) and negatively correlated with individual or other
third-party assurance providers (ρ = -0.75). Finally, SA quality is positively correlated with
CSRLAW (ρ = 0.40) as expected by our third hypothesis.
Multivariate Analysis
We test our hypotheses by performing weighted ordinary least square regressions with
clustered standard errors by firm using different formulations of the base model.7 Consistent with
Choi and Wong (2007), we use weighted regressions to prevent undue influence by the U.K., U.S.,
French, and Japanese firms with 740 firm-year observations, which represent approximately 59
percent of the entire sample. Table 5 presents the results. Controls are included in all models
(SALES, PROFIT, MTB, LEV, and INDU). All t-statistics are computed based on standard errors
clustered at the firm level.8
7
In our empirical model, we control for autocorrelation, drawing on Petersen (2009), by using clustered standard
errors at the firm level. Petersen (2009) provides an extensive review and analysis of the various methods used to
address correlations across time and/or firms and recommends that if a firm effect is suspected to be present, the
standard errors should be clustered by firm. He claims that “the standard errors clustered by firm are unbiased and
produce correctly sized confidence intervals whether the firm effect is permanent or temporary” (Petersen 2009, 475)
and that they are robust to heteroscedasticity.
8
All VIF values are below the threshold of 10 (Kennedy 2008). Mean VIF of the complete model (column (5) in Table
5) is 3.02. Thus, multicollinearity is not an issue.
23

Table 5, columns (1) and (2) present the results regarding demand- and supply-side firm-
level determinants, respectively. Column (3) examines the influence of country-level factors.
Column (4) combines demand-side firm-level determinants with country-level determinants.
Finally, column (5) reports the results for the complete regression model, including simultaneously
firm- and country-level determinants, as well as the variables related to the type of assurance
provider.
At the firm-level demand-side, the internal client incentives, ENG and COMP, exhibit
positive and significant coefficients.9 These findings suggest that the engagement of stakeholders
and the presence of CSR-related compensation targets are associated with improved assurance
quality, supporting Hypothesis 1a and 1b. Among the firm-level control variables, the coefficient
of SUSTIND is significantly negative and contrary to the expectation. A possible explanation is
that the inclusion in a sustainability index can be considered a substitutive mechanism of high-
quality SA. Stakeholders appear to associate inclusion in a third-party sustainability index with a
monitoring function and a guarantee of the sustainability policies and procedures in place. Thus,
in line with this argument, relevant investments in SA quality appear not to be considered
necessary by the firm. Further, analyst following (ANALYST) is not significant in all the examined
models. We can then infer that, in initial stages of market development of such an emergent non-
financial assurance market, the external pressure to obtain credible third-party verification of
CSR/sustainability reporting has relatively less impact than a firm´s internal drivers.
At the firm-level supply-side, we test the role of auditor specialization in explaining SA
quality variation. Columns (2) and (5) in Table 5 show that, on average, SA quality is significantly
higher when companies rely on accountants, consultants and certification bodies (AP_ACC,
9
To test the robustness of our findings, we replaced ENG and COMP with the absolute scores (measured on a scale
0-100) provided by ASSET4. The results do not qualitatively change.
24

AP_CONS and AP_CERT) rather than non-professional individuals or third-parties as SA
providers.10 More in detail, if we analyze the general conclusion and the opinion provided in the
assurance statement (i.e., items 19 and 20 of the codebook), consultants and certification bodies
include more elaborated statements and explanation and score higher (2.76, SD = 1.29 and 2.75,
SD = 1.17, respectively) than accountants (1.93, SD = 1.13) and other non-professional assurance
providers (1.32, SD = 1.29). These results confirm that professional assurance providers with a
more extensive set of skills, competences and experience ensure higher levels of SA quality. Thus,
Hypothesis 2 is supported.
At the country-level, we predict a positive association between SA quality and firms
domiciled in countries with a higher strength of national policies and practices for CSR and
sustainability. The results presented in Table 5, columns (3), (4), and (5), indicate that the effect
of mandatory CSR disclosure rules (CSRLAW) is significant and positive. In particular, the
implementation of mandatory CSR disclosure regulations is associated with higher SA quality. In
addition, the environmental performance level of the country (EPI) and the level of public
awareness of CSR issues (PUBAWARE) are determinants with positive and significant influences
on SA quality. Overall, these results indicate that the institutional environment as well as the
general perception of stakeholders in a country with relation to CSR/sustainability issues are
significant factors influencing the level of SA quality, supporting Hypothesis 3. Further, there is
an inverse relation between SA quality and GDP per capita (GDPCAP). We speculate that for the
period investigated countries with lower GDP per capita are still in an expansion phase with
10
We use individual or other third-party assurance providers different than accountant, auditor, consultant, and
certification body as baseline category of assurance providers’ type. Thus, we leave out the dummy AP_OTH from
the regression model.
25

regards to sustainability reports and investments in SA quality, whereas wealthier countries might
have reached high SA quality levels.
Finally, a direct comparison of column (1) with columns (2) and (3) reveals that country-
level determinants explain more variance in the dependent variable than firm-level determinants
(R2 = 0.47 vs. R2 = 0.41) but less variance than that explained by the type of assurance provider
(R2 = 0.47 vs. R2 = 0.60). However, the overall model (Table 5, column 5) provides an R2 equal to
0.69, supporting our attempt to include a quite complete set of determinants in our specification.
Previous analyses could arguably be affected by potential confounding effects with respect
to variable measurement and model specification. To address these concerns, we conduct a set of
sensitivity analyses. First, we investigate whether an alternative measure of SA quality would
generate different results. As described earlier, our SA quality proxy includes 20 aspects or ranking
criteria, and the score ranges from one to 30. However, some of the criteria show low variability
within the sample (Appendix 2). Thus, to test whether our findings are affected by items with large
variance, we remove all items with a standard deviation lower than 0.70 from the set of ranking
criteria.11 As a result, we obtain a modified SA quality measure based on seven items, with a mean
of 7.22 (SD = 4.23; range 0-15). The results (untabulated) lead to inferences consistent with the
main analysis, thereby suggesting the robustness of our findings with the original SA quality
variable with 20 items.
Second, we perform a sensitivity test for possible confounding effects associated with
assurance standards and level of assurance.12 We include two dummies capturing the use of
AA1000AS and ISAE 3000 as reference assurance standards (AA1000 and ISAE3000,
11
We retain the following ranking criteria of the original content analysis codebook: 12. Competencies of assuror; 13.
Criteria used to assess evidence and reach conclusion; 14. Assurance standard used; 15. Summary of work performed;
16. Materiality (from a stakeholder perspective); 19. General conclusion; 20. Opinion.
12
We thank a reviewer for this suggestion.
26

respectively). Further, we control for the difference in assurance engagement type by adding a set
of indicator variables reflecting varying levels of assurance (LOA_LIM: limited assurance;
LOA_REA: reasonable; LOA_MOD: moderate; LOA_HIG: high; LOA_MIX: mixed, a combination
of different assurance levels). As exhibited in Table 5 (columns 6-10), inclusion of these additional
control variables does not qualitatively alter the results reported in the primary analysis.
Third, we check whether including country fixed effects would change our findings. After
excluding the time-invariant country-level variables (CSRLAW, PUBAWARE, LAW, and
ENFORCE) from the overall model (Table 5, column 5), the results (untabulated) confirm the
hypotheses about the engagement of stakeholders and the auditor specialization. The coefficient
about the presence of CSR-related compensation targets is significant only in absence of the
variables related to auditor specialization. This result highlights the role of assurance provider type
as significant firm-level determinant of SA quality.
Taken together, the evidence from our sensitivity tests confirm the main analysis. In the
supplemental analysis presented next we hence rely on the base model exhibited in Table 5, column
(5).
Supplemental Analysis
CSR Disclosure Quality
It is possible that the level of CSR disclosure may influence the level of audit quality. For
instance, more transparent companies may arguably adjust the scope of engagement by requesting
a higher level of assurance. Thus, we control for the CSR disclosure level by using Bloomberg’s
Environmental Social and Governance (ESG) Disclosure Score (ESG_SCORE) to provide
additional evidence of the robustness of our results. The score measures the degree of transparency
27

of a company’s reporting based on environmental, social, and governance metrics, and it is the
metric of greatest interest to the market on a global basis (Eccles, Serafeim, and Krzus 2011). Due
to missing values, the sample size decreases to 1,003 observations. On average, the ESG_SCORE
is 46.07 (SD = 11.82) and is positively and significantly correlated with SA quality (ρ = 0.43, p-
value < 0.01). The coefficient of the parameter added to the complete model (not tabulated) is
marginally significant (0.047, t-value = 1.68, p-value = 0.094). Overall, including the
ESG_SCORE variable in our regression models does not qualitatively change the results and does
not improve significantly the variance explained by the model.
Logit Model Using Indices to Measure Firm, Country, and Assurance Provider Factors
In the multivariate analysis section, we discussed the relative importance of demand- and
supply-side factors, as well as country-level determinants of SA quality. To formally test whether
these factors are weighted differently and to verify the alternative predictions proposed by Durnev
and Kim (2005) and Doidge et al. (2007), i.e., substitute versus complement effects, we apply a
two-stage logit analysis similarly to Francis et al. (2011).
In the first stage, we conduct logit estimations (not tabulated) by using the same
independent variables included in the main regression analysis. As the dependent variable, we
compute a dummy (D_SAQUAL) by applying a median split to our main variable of SA quality
(SAQUAL). The variable assumes a value of one if SA quality is above the median, and zero
otherwise. As instruments, we use firm variables, assurance provider variables, and country
variables to develop predicted values of SA quality based on firm characteristics alone (F_score),
assurance provider alone (AP_score), and country factors alone (C_score). The indices F_score,
AP_score, and C_score assume values from zero to one and represent the predicted probability
28

that an observation has high SA quality based on demand-side firm characteristics, supply-side
type of the assurance provider, and country factors, respectively.
In the second stage, we replace all firm, country, and assurance provider variables with the
predicted values computed in the first stage to determine which has more explanatory power in
explaining SA quality. As indicated by Francis et al. (2011), the coefficient values on the scores
measure the relative weightings of the firm, assurance provider, and country factors in explaining
SA quality.
The first two columns of Table 6 report the full sample model estimation. First, we test the
model by including firm (F_score) and country (C_score) indices (Table 6, column 1). Both
factors are significantly associated with SA quality, consistent with our main findings. We use a
Wald statistic to test the equality of the two coefficients. The result shows that C_score is
significantly higher than F_score (χ2 = 2.87, p-value = 0.090), indicating that country factors are
more important than firm factors in explaining SA quality. Then, we add the assurance provider
(AP_score) index to the model (Table 6, column 2). The index representing the firm factors
becomes insignificant, and the comparison between C_score and AP_score reveals that the two
coefficients are not significantly different (χ2 = 0.44, p-value > 0.10). Thus, for the complete model
estimation with the full sample, we conclude that country factors and type of assurance provider
are of equal importance in explaining SA quality variance.
Next, we examine the relative weighting of the three scores based on a partition of countries
by GDP per capita, legal origin, CSR disclosure requirements, and ISO 14001 intensity of
certification (Table 6). Consistent with Francis et al. (2011) and Doidge et al. (2007), we partition
into low and high GDP per capita countries based on the median country’s GDP per capita. For
the low GDP per capita countries, the coefficients on the C_score and AP_score are positive and
29

significant, indicating that country factors and the type of assurance provider are weighted
relatively more than the firm factors in explaining the variance of SA quality. By contrast, for the
high GDP per capita countries, all factors yield the same importance. The country-level factors are
also weighted relatively more than other factors in common law countries, in countries with
mandatory CSR disclosure requirements, and in countries with low ISO 14001 intensity of
certification. The results further show that in code law countries, in countries with voluntary CSR
disclosure requirements, and in countries with high ISO 14001 intensity of certification, the type
of assurance provider appears relatively more important than firm- and country-level factors.
Multilevel Analysis (HLM)
Previous studies in international accounting (Dong and Stettler 2011) and in auditing
(Fernandez‐Feijoo, Romero, and Ruiz 2015) have applied hierarchical linear modeling (HLM) to
simultaneously estimate both firm- and country-level determinants of disclosure or assurance.
These studies claim the superiority of the HLM method over ordinary least squares (OLS)
regression to simultaneously assess different layers of a nested dataset. More in detail, with HLM
it is possible to examine hierarchical data in a single comprehensive model and to enable the
measurement of variables and variances at different organizational levels (Dong and Stettler 2011).
However, Dong and Stettler (2011) argue that the number of country-level observations is often
not sufficient to overcome the issue of unbalanced country clusters and generate reliable
inferences. Thus, given the limitations of the HLM method and the characteristics of our sample,
we use it as a robustness test.
In our investigation, data at the firm level (level 1) are nested in countries (level 2). Hence,
the country represents the grouping factor (random variable). Similar to Fernandez‐Feijoo et al.
30

(2015), we run a generalized linear mixed model. First, we exclude all explanatory variables, and
we apply the unconditional or null model to measure the effect of the country factor on SA quality.
As presented in Table 7, panel A, the variance among countries is 12.237, and the intra-class
coefficients in different years range from approximately 0.25 to 0.30. Approximately a quarter of
the total variability of SA quality is the consequence of the grouping by country. Second, we repeat
the analysis with the country as the random effect and the explanatory factors as fixed effects.
Panel B of Table 7 shows the values of the intra-class coefficients computed by including the
demand-side firm-level variables and the country level variables, whereas panel C of Table 7
shows the values of the intra-class coefficients for the full model. Compared to the values obtained
with the unconditional model and presented in Table 7, panel A, we observe a reduction (mean
values of intra-class coefficients: 0.285 in panel A, 0.216 in panel B, 0.206 in panel C), indicating
that the determinants introduced in the model partially explain variation among countries. Further,
due to the explanatory variables, the overall variance decreases from 12.237 to 3.849.
The HLM fixed effects are presented in Table 8. Column (1) presents the results for the
firm- and country-level determinants, and column (2) reports the results for the complete
regression model, including the variables related to the type of assurance provider. With regard to
the demand-side firm characteristics, the coefficients of ENG and COMP are in line with our main
findings presented in Table 5, confirming that the engagement of stakeholders and the presence of
CSR-related compensation targets are associated with improved SA quality. The coefficients
related to the assurance provider type are also consistent with our main findings and confirm the
positive and significant relation between professional assurance providers and SA quality.
For the country-level variables related to national policies and practices for CSR and
sustainability, we find slightly different results than those obtained with the main regression model.
31

In particular, the environmental performance level of the country (EPI) is positive and significant
when tested with country- and firm-level determinants (column 1), whereas the intensity of ISO
14001 certification is positively significant in the complete model (column 2). Finally, CSRLAW
becomes insignificant in both models.
Self-Selection and Heckman’s Two-Stage Analysis
As discussed earlier, our sample comprises those companies issuing a CSR report and
obtaining an SA statement. However, this might introduce a self-selection bias to our analysis as
companies can voluntarily choose whether to engage in SA. To address the potential bias and
provide additional evidence of the robustness of our results, we also perform Heckman’s (1979)
two-stage analysis (Table 9).
To conduct our test, we follow the suggestions and criteria indicated in Lennox, Francis,
and Wang (2012). In the first stage, we model the decision to obtain a sustainability assurance
statement by extending our sample to all companies belonging to the G500 index and issuing a
CSR report (with or without assurance). Thus, the dependent variable, ASSURANCE, assumes the
value of one if the company obtains an SA statement, and zero otherwise. Based on prior studies
on voluntary CSR disclosure and CSR assurance, we select two variables as instruments (i.e.,
exclusion restrictions). In particular, to choose our exclusion restrictions, we use an approach
similar to Zhou et al. (2016). First, we include ASSU_LAG, which is the company’s previous year’s
assurance status. It assumes the value of one if the company’s CSR report obtained an SA
statement in the previous year, and zero otherwise. If a company decided to request an SA
statement, it is more likely to stick to its decision. Second, we include PROPASSU, which
measures the previous year’s proportion of companies in an industry that obtained an SA
32

statement. This variable represents industry pressure. The selected exclusion restrictions are in our
view appropriate because they measure the companies’ propensity to obtain SA assurance
specifically. A company requesting assurance generally sticks to the decision in the following
years and industry pressure also stimulates the decision of obtaining assurance. Further, as
suggested by Lennox et al. (2012), we do not expect a direct influence of these variables on the
dependent variable in the second-stage model (SAQUAL). The general control variables applied in
the main model, such as sales, profitability, market-to-book, leverage, and environmentally
sensitive industry have been commonly found to be related to voluntary disclosure and assurance
decisions. Larger, more profitable, and less leveraged firms have more financial resources for CSR
activities and disclosure (Cormier, Magnan, and Van Velthoven 2005; Simnett et al. 2009). Thus,
we include the set of controls in the first stage model.
In the second stage, we add the inverse Mills ratio (IMR) computed in the first stage to the
main regression model to control for potential selection bias due to omitted correlated variables.
The IMR variable is not significant, which suggests that self-selection is not a significant concern.
Overall, the results of the second stage regression are similar to our main results reported in Table
5, column (5) and confirm the robustness of our outcomes.
V. CONCLUSIONS
Our findings indicate that a higher emphasis on stakeholder engagement and executive
compensation schemes linked to sustainability are significant client incentives associated with
enhanced levels of SA quality. Our results provide evidence that, for the period 2005-2013 in
which SA started to diffuse, SA is part of a broader set of a firm´s mechanisms of internal control
and risk management aimed at increasing the awareness and credibility of sustainability
33

information within a company (Bagnoli and Watts 2017). In the early phases of market
development of such an emergent practice, SA mainly appears to be a managerial tool associated
with the intention to enhance the congruence of internal managerial decision-making and
managerial evaluation processes, rather than a differentiating credibility signal to external
stakeholders and investors (Lys et al. 2015). Our findings hold even in presence of control
variables that proxy potential alternative firm-level demand-side factors that capture external
rather than internal antecedents of SA Quality (extent of analyst coverage and inclusion in
sustainability ratings). We additionally show that non-professional third-party assurance providers
in this emergent market are associated with significantly lower levels of SA quality. Relative to
internal client incentives, our study confirms the crucial role of supply-side factors such as auditor
competence and auditor specialization in explaining the heterogeneity of (non-financial) audit
quality (DeFond and Zhang 2014; Knechel and Schefcik 2014).
The relative importance of client incentives (demand-side) and auditor specialization
(supply-side) as antecedents of SA quality remains further confirmed even in the presence of a set
of country-level factors capturing national policies and practices for sustainability. When
comparing the relative importance of firm-level versus institutional factors in influencing the level
of SA quality, we find a rather equally distributed role, with substantially high R2s in both
regression models. In this respect, our paper confirms the conclusions of Francis et al. (2011) that
both firm-specific incentives and country characteristics are important in firms’ decisions to
voluntarily adopt and demand better non-financial governance mechanisms such as SA. Our
evidence is consistent with the complement view of governance practices advanced by Doidge et
al. (2007). Voluntary (non-financial) assurance services appear, therefore, to be strengthened by
the presence of an institutional environment that privileges the enforcement of a legal
34

infrastructure aimed at the protection of social and environmental dimensions of corporate
practices.
This study further contributes to the emergent stream of research on SA by introducing two
important methodological improvements, i.e., measurement of SA quality and reliance on a panel
analysis of SA adopters. We argue that our approach unambiguously provides an advantage
compared to most extant studies on SA, which suffer from sample selection choices and an
exclusive focus on SA adoption rather than its underlying quality. Our paper responds to recent
calls for research on SA (Simnett 2014; Cohen and Simnett 2015) and also provides a relevant
example of non-financial audit quality that could have interesting implications in mainstream
financial auditing literature as well (DeFond and Zhang 2014).
A few limitations of this study and associated avenues for future research are worth noting.
First, we exclusively focus on determinants of SA quality without examining potential
consequences. The beneficial effects of enhanced levels of SA quality warrant further exploration
as a contribution to the recent stream of accounting papers linking sustainability to financial
performance (Dhaliwal et al. 2011; Huang and Watson 2015; Peters and Romi 2015). Future
research on SA effects could for instance exploit qualitative data to investigate the actual impact
of sustainability assurance engagements in different types of auditing firms, or explore how
restatements of sustainability reports are associated with SA quality examined in this paper
(Ballou, Chen, Grenier, and Heitger 2018; Michelon, Patten, and Romi 2018). Second, while our
empirical model specifications appear robust and introduce several variables from widely used
datasets, to the extent that additional determinants of SA quality exist, there is a caveat that our
results suffer from omitted-variables bias. We encourage future researchers to exploit additional
variables from alternative datasets and explore other mechanisms at the firm- or country-level
35

through which SA quality can be potentially affected. Our findings highlight for instance a
negative relationship between inclusion of a firm in a sustainable index and SA quality. Further
archival or field-based research on such external pressures could generate relevant insights on
legitimacy and reputational concerns as main drivers of sustainability assurance adoption and
quality. Third, our sampling choice focused on Fortune G500 large global firms, which limits our
ability to generalize to smaller and private firms. Further research should consider extending our
sample and the time period examined in this paper. Finally, the recent European Union Directive
2014/95/EU mandates the disclosure of non-financial (including sustainability) information for
approximately 6,000 large companies starting from the financial year 2017 (European Commission
2017). Future opportunities to examine antecedents and consequences of assurance services
expected to enhance credibility and transparency of mandatory non-financial information seem
warranted.
36

REFERENCES
AccountAbility. 2003a. AA1000 Assurance Standard. London: AccountAbility.

AccountAbility. 2003b. AA 1000 Assurance Standard practitioners note. London: AccountAbility.
Accountancy Europe. 2015. The future of corporate reporting – creating the dynamics for change.
Brussels: FEE.
Accountancy Europe. 2017. How to respond to assurance needs on non-financial information.
Brussels: Accountancy Europe.
Bagnoli, M., and S. G. Watts. 2017. Voluntary assurance of voluntary CSR disclosure. Journal of
Economics & Management Strategy 26 (1): 205-30.
Ball, R. 2001. Infrastructure requirements for an economically efficient system of public financial
reporting and disclosure. Brookings-Wharton Papers on Financial Services: 127-82.
Ballou, B., P.-C. Chen, J. H. Grenier, and D. L. Heitger. 2018. Corporate social responsibility
assurance and reporting quality: Evidence from restatements. Journal of Accounting and
Public Policy 37 (2): 167-88.
Berrone, P., and L. R. Gomez-Mejia. 2009. Environmental performance and executive
compensation: An integrated agency-institutional perspective. Academy of Management
Journal 52 (1): 103-26.
Brown-Liburd, H., and V. L. Zamora. 2015. The Role of corporate social responsibility (CSR)
assurance in investors' judgments when managerial pay is explicitly tied to CSR
performance. Auditing: A Journal of Practice & Theory 34 (1): 75-96.
Casadesús, M., F. Marimon, and I. Heras. 2008. ISO 14001 diffusion after the success of the ISO
9001 model. Journal of Cleaner Production 16 (16): 1741-54.
Casey, R. J., and J. H. Grenier. 2015. Understanding and contributing to the enigma of corporate
social responsibility (CSR) assurance in the United States. Auditing: A Journal of Practice
& Theory 34 (1): 97-130.
Chen, L., B. Srinidhi, A. Tsang, and W. Yu. 2016. Audited financial reporting and voluntary
disclosure of corporate social responsibility (CSR) reports. Journal of Management
Accounting Research 28 (2): 53-76.
Cheng, M. M., W. J. Green, and J. C. W. Ko. 2015. The impact of strategic relevance and assurance
of sustainability indicators on investors' decisions. Auditing: A Journal of Practice &
Theory 34 (1): 131-62.
Choi, J.-H., and T. J. Wong. 2007. Auditors' governance functions and legal environments: An
international investigation. Contemporary Accounting Research 24 (1): 13-46.
Cohen, J. R., and R. Simnett. 2015. CSR and assurance services: A research agenda. Auditing: A
Journal of Practice & Theory 34 (1): 59-74.
Cormier, D., M. Magnan, and B. Van Velthoven. 2005. Environmental disclosure quality in large
German companies: Economic incentives, public pressures or institutional conditions?
European Accounting Review 14 (1): 3-39.
DeFond, M., and J. Zhang. 2014. A review of archival auditing research. Journal of Accounting
and Economics 58 (2): 275-326.
Dhaliwal, D. S., O. Z. Li, A. Tsang, and Y. G. Yang. 2011. Voluntary nonfinancial disclosure and
the cost of equity capital: The initiation of corporate social responsibility reporting. The
Accounting Review 86 (1): 59-100.
37

Dhaliwal, D. S., S. Radhakrishnan, A. Tsang, and Y. G. Yang. 2012. Nonfinancial disclosure and
analyst forecast accuracy: International evidence on corporate social responsibility
disclosure. The Accounting Review 87 (3): 723-59.
Doidge, C., A. G. Karolyi, and R. M. Stulz. 2007. Why do countries matter so much for corporate
governance? Journal of Financial Economics 86 (1): 1-39.
Dong, M., and A. Stettler. 2011. Estimating firm-level and country-level effects in cross-sectional
analyses: An application of hierarchical modeling in corporate disclosure studies. The
International Journal of Accounting 46 (3): 271-303.
Durnev, A., and E. Kim. 2005. To steal or not to steal: firm attributes, legal environment, and
valuation. Journal of Finance 60 (3): 1461-93.
Eccles, R. G., I. Ioannou, and G. Serafeim. 2014. The impact of corporate sustainability on
organizational processes and performance. Management Science 60 (11): 2835-57.
Eccles, R. G., G. Serafeim, and M. P. Krzus. 2011. Market interest in nonfinancial information.
Journal of Applied Corporate Finance 23 (4): 113-27.
Edgley, C. R., M. J. Jones, and J. F. Solomon. 2010. Stakeholder inclusivity in social and
environmental report assurance. Accounting, Auditing & Accountability Journal 23 (4):
532-57.
European Commission. 2017. Non-financial reporting. Available online at:
https://ec.europa.eu/info/business-economy-euro/company-reporting-and-
auditing/company-reporting/non-financial-reporting_en, retrieved September 30, 2017.
Ferrell, A., H. Liang, and L. Renneboog. 2016. Socially Responsible Firms. Journal of Financial
Economics 122 (3): 585-606.
Fernandez‐Feijoo, B., S. Romero, and S. Ruiz. 2015. Multilevel approach to sustainability report
assurance decisions. Australian Accounting Review 25 (4): 346-58.
Francis, J. R., I. K. Khurana, X. Martin, and R. Pereira. 2011. The relative importance of firm
incentives versus country factors in the demand for assurance services by private entities.
Contemporary Accounting Research 28 (2): 487-516.
Fuhrmann, S., C. Ott, E. Looks, and T. W. Guenther. 2017. The contents of assurance statements
for sustainability reports and information asymmetry. Accounting and Business Research
47 (4): 369-400.
Glass Lewis. 2014. Greening the Green. Linking executive compensation to sustainability. New
York.
Heckman, J. J. 1979. Sample selection bias as a specification error. Econometrica 47 (1): 153-61.
Herda, D. N., M. E. Taylor, and G. Winterbotham. 2014. The effect of country-level investor
protection on the voluntary assurance of sustainability reports. Journal of International
Financial Management & Accounting 25 (2): 209-36.
Huang, X. B., and L. Watson. 2015. Corporate social responsibility research in accounting. Journal
of Accounting Literature 34: 1-16.
Hummel, K., C. Schlick, and M. Fifka. 2019. The role of sustainability performance and
accounting assurors in sustainability assurance engagements. Journal of Business Ethics
154 (3): 733-757.
International Auditing and Assurance Standards Board (IAASB). 2003. International standard on
assurance engagements (ISAE) 3000 - Assurance engagements other than audits or
reviews of historical financial information. New York: IFAC.
38

International Auditing and Assurance Standards Board (IAASB). 2016. Supporting credibility and
trust in emerging forms of external reporting: Ten key challenges for assurance
engagements. New York: IFAC.
Kennedy, P. 2008. A guide to econometrics. Oxford: Wiley-Blackwell.
Knechel, W. R., and L. B. Schefcik. 2014. Audit quality. In The Routledge Companion to Auditing,
edited by D. Hay, W. R. Knechel, and M. Willekens, 130-47. Abingdon: Routledge.
Kolk, A., and P. Perego. 2010. Determinants of the adoption of sustainability assurance statements:
An international investigation. Business Strategy and the Environment 19 (3): 182-98.
KPMG. 2015. KPMG International survey of corporate sustainability reporting 2015.
Amsterdam: KPMG Global Sustainability Services.
La Porta, R., F. Lopez-De-Silanes, A. Schleifer, and R. W. Vishny. 1997. Legal determinants of
external finance. Journal of Finance 52: 1131-50.
La Porta, R., F. Lopez-De-Silanes, and A. Shleifer. 2006. What works in securities laws? Journal
of Finance 61 (1): 1-32.
La Porta, R., F. Lopez-de-Silanes, A. Shleifer, and R. W. Vishny. 1998. Law and finance. Journal
of Political Economy 106 (6): 1113-55.
Lennox, C. S., J. R. Francis, and Z. Wang. 2012. Selection models in accounting research. The
Accounting Review 87 (2): 589-616.
Leuz, C., D. Nanda, and P. D. Wysocki. 2003. Earnings management and investor protection: An
international comparison. Journal of Financial Economics 69 (3): 505-27.
Libby, T., S. E. Salterio, and A. Webb. 2004. The Balanced scorecard: The effects of assurance
and process accountability on managerial judgment. The Accounting Review 79 (4): 1075-
94.
Lys, T., J. P. Naughton, and C. Wang. 2015. Signaling through corporate accountability reporting.
Journal of Accounting and Economics 60 (1): 56-72.
Michelon, G., D. M. Patten, and A. M. Romi. 2018. Creating legitimacy for sustainability
assurance practices: Evidence from sustainability restatements. European Accounting
Review: 1-28.
Mock, T. J., C. Strohm, and K. M. Swartz. 2007. An examination of worldwide assured
sustainability reporting. Australian Accounting Review 17 (1): 67-77.
Moroney, R., and K. T. Trotman. 2016. Differences in auditors' materiality assessments when
auditing financial statements and sustainability reports. Contemporary Accounting
Research 33 (2): 551-75.
O'Dwyer, B., and D. L. Owen. 2005. Assurance statement practice in environmental, social and
sustainability reporting: A critical evaluation. The British Accounting Review 37 (2): 205-
29.
O’Dwyer, B. 2011. The case of sustainability assurance: Constructing a new assurance service.
Contemporary Accounting Research 28 (4): 1230-66.
Perego, P., and A. Kolk. 2012. Multinationals’ accountability on sustainability: The evolution of
third-party assurance of sustainability reports. Journal of Business Ethics 110 (2): 173-90.
Peters, G. F., and A. M. Romi. 2014. Does the voluntary adoption of corporate governance
mechanisms improve environmental risk disclosures? Evidence from greenhouse gas
emission accounting. Journal of Business Ethics 125 (4): 637-66.
Peters, G. F., and A. M. Romi. 2015. The association between sustainability governance
characteristics and the assurance of corporate sustainability reports. Auditing: A Journal of
Practice & Theory 34 (1): 163-98.
39

Petersen, M. A. 2009. Estimating standard errors in finance panel data sets: Comparing
approaches. The Review of Financial Studies 22 (1): 435-80.
Pflugrath, G., P. Roebuck, and R. Simnett. 2011. Impact of assurance and assurer's professional
affiliation on financial analysts' assessment of credibility of corporate social responsibility
information. Auditing: A Journal of Practice & Theory 30 (3): 239-54.
Shivakumar, L. 2013. The role of financial reporting in debt contracting and in stewardship.
Accounting and Business Research 43 (4): 362-83.
Simnett, R. 2014. Assurance of environmental social and sustainability information. In The
Routledge Companion to Auditing, edited by D. Hay, W. R. Knechel, and M. Willekens,
325-37. Abingdon: Routledge.
Simnett, R., E. Carson, and A. Vanstraelen. 2016. International archival auditing and assurance
research: Trends, methodological issues, and opportunities. Auditing: A Journal of
Simnett, R., A. Vanstraelen, and W. F. Chua. 2009. Assurance on sustainability reports: An
international comparison. The Accounting Review 84 (3): 937-67.
Velte, P., and M. Stawinoga. 2017. Empirical research on corporate social responsibility assurance
(CSRA): A literature review. Journal of Business Economics 87 (8): 1017–66.
WBCSD. 2016. Assurance. Generating value from external assurance of sustainability reporting.
Geneva: World Business Council for Sustainable Development.
Zhou, S., R. Simnett, and W. J. Green. 2016. Assuring a new market: The interplay between
country-level and company-level factors on the demand for greenhouse gas (GHG)
information assurance and the choice of assurance provider. Auditing: A Journal of
40

APPENDIX 1
Variable Definitions
Variable Definition
Dependent variable
SAQUAL A measure of SA quality (range 0-30). Aggregate score based on the
items examined in the content analysis of the sustainability assurance
reports (see Appendix 2 for a list of the items).
Demand-side firm-level variables
ENG An indicator variable that equals one if the concerned firm explains how
it engages with its stakeholders in its sustainability report, and zero
otherwise (ASSET4).
COMP An indicator variable that equals one if the senior executive’s
compensation is linked to CSR/sustainability targets, and zero otherwise
(ASSET4).
Firm-level control variables
COMM An indicator variable that equals one if the concerned firm has a
sustainability committee or team, and zero otherwise (ASSET4).
ECN Economic pillar score (range 0-100) (ASSET4).
ENV Environmental pillar score (range 0-100) (ASSET4).
SOC Social pillar score (range 0-100) (ASSET4).
CGV Corporate governance pillar score (range 0-100) (ASSET4).
ANALYST Average number of analysts following the concerned firm (I/B/E/S).
SUSTIND An indicator variable that equals one if the concerned firm belongs to a
specific sustainability index, and zero otherwise (ASSET4).
AA1000 An indicator variable that equals one if AA1000AS is mentioned as
reference standard, and zero otherwise (Content analysis).
ISAE3000 An indicator variable that equals one if ISAE 3000 is mentioned as
reference standard, and zero otherwise (Content analysis).
LOA_LIM An indicator variable that equals one if the level of assurance is limited,
and zero otherwise (Content analysis).
LOA_REA An indicator variable that equals one if the level of assurance is
reasonable, and zero otherwise (Content analysis).
LOA_MOD An indicator variable that equals one if the level of assurance is moderate,
and zero otherwise (Content analysis).
LOA_HIG An indicator variable that equals one if the level of assurance is high, and
zero otherwise (Content analysis).
LOA_MIX An indicator variable that equals one if the level of assurance is mixed
(i.e., a combination of different assurance levels), and zero otherwise
(Content analysis).
LOA_NA An indicator variable that equals one if the level of assurance is not
available, and zero otherwise (Content analysis).
Supply-side firm-level variables
AP_ACC An indicator variable that equals one if the assurance provider is an
accounting or auditing firm (including Big 4 auditors), and zero
otherwise (Content analysis).
AP_CERT An indicator variable that equals one if the assurance provider is a
certification body, and zero otherwise (Content analysis).
AP_CONS An indicator variable that equals one if the assurance provider is a
consultant, and zero otherwise (Content analysis).
41 (continued on next page)

AP_OTHER An indicator variable that equals one if the assurance provider is an
individual or third-party different than accountant, auditor, consultant,
certification body, and zero otherwise (Content analysis).
Country-level variables
CSRLAW An indicator variable that equals one if the concerned country has
mandatory disclosure requirements on CSR issues for industrial
companies or pension funds, and zero otherwise
EPI Environmental performance index (range 0-100). It indicates how well a
country perform on high-priority environmental issues in two broad
policy areas: protection of human health from environmental harm and
protection of ecosystems (http://epi.yale.edu).
ISO14001 A measure of ISO 14001 intensity of certification. Computed as the
number of ISO 14001 certificates per country and year divided by the
average GDP of the sample years expressed in 1.00E+09 constant US$
(Casadesús et al. 2008).
PUBAWARE A measure of public awareness of CSR issues at the country level
primarily based on opinion surveys among global corporate executives.
It is the mean rank score of the following four indices: (1) sustainable
development priority, (2) ethical practice implementation, (3) social
responsibility of business leaders, and (4) corporate responsibility
competitiveness index (2003). The first three indices are from the
Institute for Management Development’s (IMD) annual surveys. We use
the average of the IMD yearly survey scores in the ranking procedure
because these scores are relatively stable across years. The fourth index
is from AccountAbility, an international professional institute devoted to
promoting social accountability. This index is primarily based on various
other surveys, but also incorporates some hard data. It consists of seven
categories of social issues such as engagement with civil society and
environmental management (National Corporate Responsibility Index
2003, http://www.accountability.org/) (Dhaliwal et al. 2012).
Country-level control variables
LAW An indicator variable that equals one for common law countries, and zero
for code law countries (La Porta, Lopez-De-Silanes, Schleifer, and
Vishny 1997).
ENFORCE A measure of the level of legal and public enforcement. Following Leuz,
Nanda, and Wysocki (2003), we define legal enforcement as the mean
score across three legal variables used in La Porta et al. (1998), including
(a) efficiency of the judicial system, (b) assessment of the rule of law,
and (c) corruption index. The public enforcement index equals the
arithmetic mean of five components indices used in La Porta et al. (2006),
including: (a) supervisor characteristics index, (b) rule-making power
index, (c) investigative powers index, (d) order index, and (e) criminal
index. ENFORCE is the average of the two indices (rescaled from 0 to
10) (Dhaliwal et al. 2012).
GDPCAP Natural logarithm of the gross domestic product per capita (in constant
2005 US$) (The World Bank Group).
Further control variables
SALES Natural logarithm of sales revenue (ASSET4).
PROFIT Profitability measured as net income scaled by total assets (Worldscope).

MTB Market-to-book ratio measured as market value of company’s equity
scaled by book value of company’s common equity (Worldscope).
LEV Leverage measured as total debt scaled by total assets (Worldscope).
INDU An indicator variable that equals one if the concerned firm belongs to any
one of five environmentally sensitive industries (two-digits SIC codes:
13, 26, 28, 29, 33), and zero otherwise (Peters and Romi 2014).
Heckman’s two-stage analysis
ASSURANCE An indicator variable that equals one if the company obtained a
sustainability assurance statement, and zero otherwise (Content
analysis).
ASSU_LAG An indicator variable that equals one if the company obtained a
sustainability assurance statement in the previous year, and zero
otherwise (Content analysis).
PROPASSU The previous year’s proportion of companies in an industry that obtained
a sustainability assurance statement (Content analysis and Worldscope).
IMR The inverse Mills ratio from the first-stage analysis within Heckman’s
two-stage analysis.
43

APPENDIX 2
Coding Rules for the Content Analysis
Ranking criteria Definition ISAE 3000 AA1000AS Scale (total 30 points) Mean (SD)
1. Title Title of the assurance statement 0 No reference 0.99 (0.10)
 1 Reference
2. Addressee Party to whom the assurance statement is 0 No reference 0.61 (0.61)
formally addressed (either in title with   1 Addressee is internal or “the readers”
separate addressee line or within text) 2 Stakeholder mentioned in the addressee
3. Name of assuror Name of the firm that conducts the 0 No reference 1.00 (0.06)
assurance engagement   1 Reference
4. Location of assuror Location of the office of the assurance 0 No reference 0.68 (0.47)
provider   1 Reference
5. Report date Reference to the date at which the assurance 0 No reference 0.77 (0.42)
exercise was finished   1 Reference
6. Responsibilities of Explicit statement that reporter is 0 No reference 0.69 (0.46)
reporter responsible for preparation of report   1 Reference
(keywords: responsible, responsibility)
7. Responsibilities of Explicit statement that the reporter is 0 No reference 0.70 (0.46)
assuror responsible to express an (independent) 1 Reference
opinion on the subject matter (i.e., the  
sustainability/ environmental/ social report)
8. Independence of assuror Statement expressing the independence of 0 No reference 0.66 (0.48)
from reporting organization the two parties involved (A one is assigned 1 Reference or mere statement expressing
as soon as the word’s independent or that independence can be looked up on
independence appear anywhere in the   the internet
assurance statement or its title: remarks
such as “this is an independent opinion…”
already qualifies for a one)
9. Impartiality of assuror Assuror’s declaration of impartiality with 0 No reference 0.07 (0.26)
towards stakeholders respect to stakeholder interests (A remark 1 Reference (a remark that such a
that such a declaration can be made  declaration can be made available on
available on request or reference to an request or reference to an internet site
Internet site already qualifies for a one) already qualifies for a one)
10. Scope of the assurance Assurance statement coverage (A one is 0 No reference 0.75 (0.44)
engagement assigned if anywhere in the assurance 1 Reference
statement the coverage of the assurance  
exercise is stated)

11. Objective of the Objective to be achieved through the 0 No reference 0.75 (0.61)
assurance engagement engagement (indicating the level of 1 Review, limited assurance, independent
assurance intended) opinion, independent assurance, external
verification, external assurance, or
  validation
2 Reasonable assurance or reasonable and
limited assurance (e.g., two different
levels of assurance for different parts of
the report)
12. Competencies of Description of the professional skills that 0 No reference 0.53 (0.76)
assuror enable the engagement team to conduct the 1 Statement claiming competency (but no
assurance exercise explanatory note) or mere reference to
(1)  an internet site
2 Explanatory statement of competencies
based on prior experience/engagements
13. Criteria used to assess A statement that makes reference to 0 No reference 1.14 (0.98)
evidence and reach particular criteria against which the 1 Reference to publicly unavailable
conclusion sustainability report has been prepared criteria
(e.g., GRI and often internally developed 2 Reference to publicly available criteria
standards)   (e.g., internally developed criteria that
are
published anywhere in the report or
GRI)
14. Assurance standard Standards used which govern the work of 0 No reference 1.26 (0.96)
used the assurance provider (e.g., AA1000 or 1 Reference to publicly unavailable
ISAE 3000)   criteria
2 Reference to publicly available criteria
15. Summary of work Statement explaining the actions taken to 0 No reference 1.43 (0.87)
performed arrive at a conclusion 1 Reference
  2 Procedures/work performed are
illustrated with (some) details
16. Materiality (from a Degree of information provision on 0 No reference 0.93 (0.94)
stakeholder perspective) materiality level (If the conclusion states 1 Reference limited to a broad statement
that the report is in conformance with the (e.g., “covers all material aspects” or
AA1000 principles of materiality, “…in all
completeness and responsiveness, this  material respects…”) but also negative
qualifies for a reference and thus a one is statements claiming that assuror has not
assigned) undertaken any work to confirm that all
relevant/material issues are included
45
(continued on next page)

2 Reference and explanation of
materiality setting or reference limited
to a broad statement and stakeholder
perspective
introduced (e.g., “issues material to
stakeholders have been considered”)
3 Reference, explanation of materiality
setting and stakeholder perspective
introduced
17. Completeness Statement expressing that all material 0 No reference 0.48 (0.50)
aspects are covered by the report. If the 1 Reference
conclusion states that the report is in
conformance with the AA1000 principles 
(materiality, completeness, and
responsiveness) this qualifies for a reference
and thus a one is assigned
18. Responsiveness to Statement referring to the organization’s 0 No reference 0.24 (0.43)
stakeholders procedures (or lack of them) for identifying 1 Reference
stakeholder interests and concerns. If the
conclusion states that the report is in
conformance with the AA1000 principles 
(materiality, completeness and
responsiveness) this qualifies for a reference
and thus a one is assigned
19. General conclusion Statement expressing the result of the 0 No reference 1.15 (0.77)
assurance exercise. If there is no general 1 Mere statement expressing the opinion
conclusion but the conclusion solely refers of the assuror (e.g., “XY’s report is a
to the three AA1000 principles fair presentation of XY’s CSR
(materiality, completeness and performance”). A one should be
responsiveness) a zero is assigned   assigned only if the conclusion consists
only of one sentence
2 Explanatory statement (more than one
sentence, but recommendations for
improvement are not considered part of
the conclusion)
20. Opinion Recommendations given on the analysis of 0 No reference 0.77 (0.92)
the paper 1 Sentence generic and not elaborate
(1)  2 Elaborated statement with some
recommendations
(1)
Further possible content that could be included in the assurance statement.
46

APPENDIX 3
Descriptive Statistics of Country-Level Variables
N CSRLAW EPI ISO14001 PUBAWARE LAW ENFORCE GDPCAP
Australia 40 1 81.99 2.42 22.50 1 9.25 10.50
Belgium 16 1 66.18 1.89 17.50 0 5.47 10.54
Brazil 16 0 52.50 2.52 7.63 0 5.97 8.61
Canada 10 1 72.90 1.22 21.25 1 8.88 10.52
China 16 0 43.15 21.84 n/a 0 n/a 8.03
Denmark 6 1 76.92 3.93 29.00 0 6.85 10.77
Finland 17 0 75.81 5.26 29.13 0 6.60 10.60
France 101 1 70.55 2.38 14.00 0 8.19 10.48
Germany 70 1 80.25 2.13 19.25 0 5.63 10.55
India 9 0 31.20 3.96 4.50 1 6.14 7.00
Ireland 8 0 74.39 2.31 n/a 1 6.03 10.79
Italy 51 1 74.07 8.57 4.75 0 5.94 10.34
Japan 404 0 71.71 6.46 14.50 0 4.58 10.50
Luxembourg 6 0 83.66 0.05 n/a 0 n/a 11.30
Netherlands 66 1 76.65 2.28 25.00 0 7.35 10.68
Norway 9 1 77.82 1.02 25.75 0 6.60 11.11
Russia 7 0 52.37 2.61 n/a 0 n/a 8.73
South Korea 52 0 62.93 9.24 8.00 0 4.03 9.99
Spain 43 0 79.54 13.14 9.00 0 5.22 10.18
Sweden 22 1 77.87 9.79 26.75 0 7.50 10.71
Switzerland 42 0 87.76 5.39 25.25 0 6.65 10.97
Thailand 2 0 52.83 15.25 10.50 1 6.05 8.12
UK 133 1 76.87 4.84 14.25 1 8.01 10.60
US 102 0 67.29 0.39 14.75 1 9.27 10.71
All variables are defined in Appendix 1. The following variables have constant values in the sample period: LAW, CSRLAW, PUBAWARE, ENFORCE.
47

TABLE 1
Sample Selection
Firm-year observations theoretical number 4,500

Less:
Firm-year observations referred to companies without 1,911
a sustainability report, plus liquidated/transformed
companies
Firm-year observations referred to companies without a 1,243
sustainability assurance report
Firm-year observations referred to companies not 98
included in Datastream (ASSET4)
Total firm-year observations available 1,248
48

TABLE 2
Descriptive Statistics
N Mean SD Min Max

SAQUAL 1,248 15.59 7.62 2 30
ENG 1,199 0.70 0.46 0 1
COMP 1,199 0.34 0.47 0 1
COMM 1,199 0.83 0.37 0 1
ECN 1,199 75.77 22.08 6.12 99.06
ENV 1,199 88.76 10.49 9.33 97.08
SOC 1,199 85.18 13.96 7.54 98.83
CGV 1,199 54.35 31.30 1.43 96.89
ANALYST 1,199 20.54 8.82 1 52.75
SUSTIND 1,199 0.72 0.45 0 1
AA1000 1,248 0.19 0.39 0 1
ISAE3000 1,248 0.43 0.50 0 1
LOA_LIM 1,248 0.44 0.50 0 1
LOA_REA 1,248 0.03 0.18 0 1
LOA_MOD 1,248 0.08 0.27 0 1
LOA_HIG 1,248 0.00 0.07 0 1
LOA_MIX 1,248 0.07 0.25 0 1
LOA_NA 1,248 0.37 0.48 0 1
AP_ACC 1,248 0.54 0.50 0 1
AP_CERT 1,248 0.10 0.31 0 1
AP_CONS 1,248 0.09 0.28 0 1
AP_OTHER 1,248 0.27 0.44 0 1
CSRLAW 1,248 0.42 0.49 0 1
EPI 1,248 72.62 7.69 31.03 88.79
ISO14001 1,248 5.22 3.82 0.02 29.44
PUBAWARE 1,211 15.56 5.37 4.50 29.13
LAW 1,248 0.24 0.43 0 1
ENFORCE 1,219 6.33 1.75 4.03 9.27
GDPCAP 1,248 10.44 0.52 6.92 11.35
SALES 1,238 17.51 0.92 14.10 23.77
PROFIT 1,237 0.04 0.05 -0.27 0.50
MTB 1,210 1.84 1.48 0.38 10.02
LEV 1,214 0.28 0.15 0 1.26
INDU 1,248 0.22 0.42 0 1
All variables are defined in Appendix 1.
49

TABLE 3
Descriptive Statistics of SA Quality (SAQUAL)
Panel A: SA Quality per Country and Year
2005 2006 2007 2008 2009 2010 2011 2012 2013 N Mean SD Min Max
Australia 23.33 21.00 24.00 23.50 22.80 21.60 21.75 21.17 21.14 40 22.08 3.51 14 28
Belgium 18.00 15.00 12.67 8.50 8.50 8.00 19.00 18.00 18.00 16 13.06 4.99 8 19
Brazil n/a 10.00 14.50 16.00 18.50 17.33 18.50 17.50 22.00 16 17.25 3.82 10 28
Canada n/a 19.00 19.00 20.00 20.00 20.00 19.00 19.00 20.00 10 19.50 0.71 19 21
China n/a n/a n/a 18.00 21.50 16.67 14.00 17.00 15.33 16 16.94 4.45 9 24
Denmark n/a n/a n/a n/a 25.00 25.00 28.00 25.00 19.00 6 23.50 3.67 19 28
Finland 19.00 25.00 25.00 16.00 21.00 24.00 28.00 22.00 22.00 17 22.76 6.06 6 29
France 13.60 13.67 13.82 14.18 15.45 15.08 17.75 18.43 19.13 101 16.07 3.34 7 24
Germany 17.50 17.33 19.60 19.80 21.60 20.10 21.18 21.00 21.07 70 20.51 2.70 11 26
India n/a n/a n/a n/a n/a 26.00 26.50 23.00 23.00 9 24.11 2.57 19 28
Ireland n/a 22.00 22.00 25.00 23.00 24.00 26.00 29.00 29.00 8 25.00 2.83 22 29
Italy 16.67 17.00 17.60 18.33 21.50 20.67 20.60 18.14 18.00 51 18.80 3.07 10 25
Japan 7.91 8.22 8.30 7.46 7.82 7.98 7.52 11.20 10.63 404 8.52 6.73 2 26
Luxembourg n/a n/a n/a 21.00 23.00 25.00 28.00 26.00 27.00 6 25.00 2.61 21 28
Netherlands 19.60 20.14 21.00 18.50 20.17 19.63 19.13 18.90 18.55 66 19.38 3.74 6 28
Norway 21.00 19.00 20.00 25.00 27.00 21.00 21.00 20.00 20.00 9 21.56 2.65 19 27
Russia 26.00 26.00 26.00 26.00 13.00 13.00 n/a 18.00 n/a 7 21.14 6.28 13 26
South Korea 18.50 14.33 16.67 19.00 20.83 17.00 21.00 23.75 25.33 52 20.08 7.85 2 29
Spain 18.50 18.00 16.75 16.80 18.83 20.00 25.00 23.00 23.83 43 20.37 6.05 5 27
Sweden 15.00 17.00 18.50 18.33 18.67 18.33 17.33 21.00 20.00 22 18.64 3.00 15 26
Switzerland n/a 15.50 16.20 18.80 18.00 16.60 17.50 18.67 19.14 42 17.69 4.04 8 27
Thailand n/a n/a n/a n/a n/a n/a n/a 18.00 24.00 2 21.00 4.24 18 24
UK 14.45 17.55 17.82 19.00 21.60 20.95 22.88 22.44 22.05 133 20.29 5.72 4 30
US 16.50 11.00 13.13 15.80 15.80 13.88 18.14 17.30 17.18 102 16.01 6.48 3 28
All countries 12.84 13.46 13.56 13.90 15.31 15.31 16.87 17.86 17.94 1,248 15.59 7.62 2 30

50

TABLE 3 (continued)
Panel B: SA Quality per Assurance Provider and Year

Number % of
2005 2006 2007 2008 2009 2010 2011 2012 2013 Mean SD Min Max
of SA SA
Accountants 15.81 17.31 17.81 17.66 18.82 18.94 20.53 19.38 19.71 669 53.6 18.83 4.12 2 28
Certification bodies 13.20 16.89 18.00 19.27 21.53 20.29 22.14 21.87 22.74 131 10.5 20.60 5.71 3 30
Consultants/specialists 17.38 15.50 15.78 20.00 19.00 17.08 24.86 21.40 21.11 111 8.9 18.50 6.80 4 29
Others 4.86 5.72 6.78 5.71 5.63 5.85 5.68 8.63 7.38 337 27.0 6.24 5.70 2 28
51

TABLE 4
Pearson Correlations
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
1- SAQUAL
2- ENG 0.40
3- COMP 0.38 0.33
4- COMM 0.09 0.24 0.25
5- ECN 0.27 0.34 0.28 0.09
6- ENV 0.09 0.26 0.08 0.15 0.28
7- SOC 0.24 0.36 0.20 0.18 0.47 0.59
8- CGV 0.46 0.46 0.54 0.12 0.41 0.16 0.35
9- ANALYST 0.35 0.42 0.35 0.15 0.37 0.24 0.36 0.50
10- SUSTIND 0.16 0.31 0.21 0.25 0.24 0.23 0.35 0.36 0.33
11- AP_ACC 0.46 0.18 0.18 0.05 0.23 0.09 0.20 0.25 0.37 0.16
12- AP_CERT 0.23 0.10 0.09 -0.02 0.03 0.03 -0.01 0.14 0.01 -0.00 -0.37
13- AP_CONS 0.12 0.05 0.04 0.00 -0.04 -0.01 -0.03 0.12 -0.09 -0.01 -0.34 -0.11
14- AP_OTH -0.75 -0.31 -0.29 -0.03 -0.24 -0.11 -0.24 -0.45 -0.37 -0.17 -0.65 -0.21 -0.19
15- CSRLAW 0.40 0.33 0.39 0.08 0.34 0.10 0.31 0.52 0.45 0.24 0.42 -0.12 0.00 -0.40
16- EPI 0.13 0.14 0.25 0.16 0.15 0.16 0.19 0.24 0.26 0.25 0.13 -0.05 0.01 -0.12 0.36
17- ISO14001 -0.09 -0.14 -0.20 0.01 -0.15 -0.17 -0.14 -0.31 -0.07 -0.12 -0.03 -0.05 -0.14 0.16 -0.31 -0.17
18- PUBAWARE 0.12 0.11 0.17 0.08 0.14 0.07 0.07 0.24 0.21 0.11 0.07 -0.04 0.11 -0.12 0.24 0.55 -0.37
19- LAW 0.28 0.20 0.38 0.11 0.17 0.02 0.09 0.53 0.02 0.11 -0.06 0.15 0.24 -0.19 0.21 0.00 -0.35 -0.01
20- ENFORCE 0.40 0.38 0.51 0.11 0.32 0.08 0.26 0.78 0.33 0.26 0.19 0.10 0.20 -0.40 0.54 0.14 -0.60 0.29 0.72
21- GDPCAP -0.07 0.03 0.18 0.11 0.02 0.16 0.05 0.18 0.08 0.17 -0.04 -0.02 0.04 0.03 0.20 0.80 -0.39 0.51 0.07 0.22
22- SALES 0.10 0.20 0.19 0.14 0.20 0.11 0.07 0.21 0.31 0.09 0.10 0.09 -0.05 -0.14 0.14 0.02 -0.11 0.02 0.08 0.14 0.01
23- PROFIT 0.15 0.18 0.11 0.11 0.24 0.04 0.09 0.23 0.15 0.02 0.00 0.12 0.03 -0.10 0.06 -0.03 -0.15 0.09 0.22 0.26 -0.03 0.05
24- MTB 0.12 0.12 0.05 0.05 0.16 0.01 0.12 0.27 0.11 0.09 0.01 0.13 0.06 -0.14 0.07 0.10 -0.23 0.17 0.31 0.35 0.10 -0.08 0.40
25- LEV -0.14 -0.09 -0.11 -0.11 -0.15 -0.05 -0.09 -0.11 -0.08 -0.04 -0.04 -0.07 0.01 0.09 -0.08 -0.00 0.07 -0.19 -0.09 -0.15 0.00 -0.16 -0.12 0.09
26- INDU 0.09 0.13 0.03 0.03 -0.02 -0.02 -0.06 0.09 0.07 -0.11 -0.06 0.07 0.08 -0.02 -0.06 -0.10 -0.09 0.09 0.05 0.11 -0.06 0.18 0.29 0.09 -0.14
All variables are defined in Appendix 1. Significant correlations are indicated in italic (p-value < .10), using two-tailed test.
52

TABLE 5
Determinants of SA Quality (Dependent Variable = SAQUAL)
Pred. (1) (2) (3) (4) (5) (6) (7) (8) (9) (10)
Demand-side firm-level variables
ENG (H1a) + 3.398*** 2.669*** 1.637** 1.788*** 1.359** 1.439*** 1.221** 1.221***
(3.95) (3.51) (2.58) (3.35) (2.16) (2.96) (2.14) (2.73)
COMP (H1b) + 2.523*** 1.426*** 1.070** 0.830*** 1.017* 0.741** 0.770* 0.599**
(4.01) (2.78) (2.14) (2.64) (1.94) (2.23) (1.84) (2.05)
Firm-level control variables
COMM +/- -0.907 -1.492* -0.960* -1.699*** -0.907* -1.693*** -0.446 -1.367**
(-1.16) (-1.89) (-1.73) (-2.88) (-1.86) (-3.13) (-0.88) (-2.50)
ECN + 0.015 -0.014 -0.001 0.003 -0.001 0.003 0.001 0.004
(0.81) (-0.88) (-0.06) (0.29) (-0.07) (0.37) (0.08) (0.51)
ENV + 0.005 0.026 0.034 0.026 0.030 0.020 0.050 0.034*
(0.15) (0.57) (0.97) (1.20) (0.88) (1.00) (1.47) (1.69)
SOC + 0.043 0.011 -0.005 -0.001 -0.005 -0.001 -0.014 -0.008
(1.23) (0.31) (-0.20) (-0.06) (-0.20) (-0.03) (-0.61) (-0.46)
CGV + 0.056*** 0.036** 0.006 -0.000 0.001 0.000 0.008 0.001
(3.08) (2.10) (0.47) (-0.01) (0.53) (0.02) (0.63) (0.08)
ANALYST + -0.008 0.008 0.017 0.013 0.001 -0.001 0.039 0.012
(-0.21) (0.20) (0.49) (0.40) (0.04) (-0.23) (1.13) (0.36)
SUSTIND + -1.447* -1.171 -1.025* -1.270** -0.710 -0.880* -0.896* -0.852*
(-1.86) (-1.63) (-1.74) (-2.52) (-1.18) (-1.84) (-1.67) (-1.90)
AA1000 6.106*** 6.633*** 6.111***
(7.19) (8.88) (8.88)
ISAE3000 2.876*** 3.755*** 2.759***
(3.70) (6.79) (6.07)
LOA_LIM 4.467*** 3.444***
(4.45) (5.38)
LOA_REA 9.119*** 5.953***
(4.48) (5.73)
LOA_MOD 5.363*** 3.438***
(4.24) (3.74)
LOA_HIG 4.834*** 1.737
(3.41) (1.01)
LOA_MIX 5.443*** 4.445***
(4. 78) (4.47)
53

TABLE 5 (continued)
Supply-side firm-level variables

AP_ACC (H2) + 10.015*** 8.147*** 8.824*** 6.283*** 6.445*** 5.723*** 5.082***
(7.04) (5.20) (8.61) (3.70) (6.19) (4.27) (5.74)
AP_CERT (H2) + 12.822*** 11.417*** 10.099*** 11.192*** 9.691*** 9.177*** 8.381***
(8.39) (7.66) (8.60) (7.88) (9.30) (6.99) (9.78)
AP_CONS (H2) + 14.573*** 10.912*** 9.751*** 10.550*** 9.177*** 10.514*** 9.177***
(8.89) (5.46) (6.18) (5.39) (6.64) (7.06) (9.03)
Country-level variables
CSRLAW (H3) + 4.436*** 2.911*** 2.353*** 1.283* 2.523*** 1.413** 1.977*** 1.292**
(4.76) (3.21) (2.76) (1.69) (3.32) (2.20) (2.76) (2.21)
EPI (H3) + 0.308*** 0.294*** 0.205*** 0.158** 0.154** 0.088* 0.146** 0.065
(3.76) (4.10) (2.64) (2.42) (2.29) (1.76) (2.21) (1.28)
ISO14001 (H3) + 0.170 0.095 0.108 -0.075 0.161 -0.022 0.166* 0.015
(1.19) (0.71) (1.02) (-0.85) (1.59) (-0.26) (1.67) (0.16)
PUBAWARE (H3) + 0.146 0.165* 0.112* 0.054 0.129** 0.071 0.115* 0.068
(1.36) (1.72) (1.69) (1.11) (2.12) (1.59) (1.85) (1.53)
Country-level control variables
LAW +/- 0.867 0.988 2.137** 1.174* 1.025 -0.361 2.608*** 0.335
(0.86) (0.98) (2.56) (1.69) (1.09) (-0.51) (3.21) (0.51)
ENFORCE + 0.729** 0.120 -0.386 -0.253 -0.089 0.148 -0.579** -0.089
(2.23) (0.38) (-1.30) (-0.88) (-0.31) (0.58) (-2.03) (-0.37)
GDPCAP +/- -7.677*** -7.505*** -4.598*** -3.025 -4.217*** -2.391*** -3.383*** -1.803***
(-8.22) (-8.25) (-4.44) (-3.66) (-4.63) (-3.58) (-4.17) (-2.72)
Constant 9.729 15.031** 59.247*** 60.502*** 43.963*** 30.939*** 41.987*** 27.235*** 37.290*** 23.783***
(1.17) (2.28) (7.77) (5.99) (5.17) (3.80) (5.36) (3.81) (4.46) (3.29)
Further controls Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes
Year indicators Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes
Industry indicators Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes
R2 0.4123 0.6010 0.4668 0.5142 0.6874 0.7700 0.7068 0.8025 0.7448 0.8286
N 1,182 1,209 1,172 1,146 1,146 1,146 1,146 1,146 1,146 1,146
This table reports the weighted OLS regression coefficients (t-value). Standard errors are clustered by firm. All variables are defined in Appendix 1. Further controls
include: SALES, PROFIT, MTB, LEV, and INDU. *, **, and *** represent significance levels at the 0.10, 0.05, and 0.01 levels, respectively, using two-tailed tests. Mean
VIF model (5) = 3.02 and mean VIF model (10) = 3.04.
54

TABLE 6
Second-Stage Logit Estimations Testing the Relative Importance of Firm, Country, and Assurance Provider Indices
(Dependent Variable = D_SAQUAL)
(1) (2) Voluntary Mandatory Low High

Low GDP High GDP Code Common
Full Full CSR CSR ISO 14001 ISO 14001
sample sample
per capita per capita law law disclosure disclosure intensity intensity
2.029** 1.175 0.261 3.444** 2.092 3.482* 2.101 2.384* 3.022** 0.553
F_score
(2.01) (1.03) (0.14) (2.35) (1.63) (1.88) (1.42) (1.71) (2.03) (0.41)
3.686*** 3.349*** 4.967*** 4.955*** 2.656 6.320*** 2.941** 2.234** 6.213***
AP_score
(4.83) (3.64) (5.75) (6.65) (1.55) (7.42) (2.14) (2.29) (7.77)
5.081*** 4.657*** 5.669*** 3.369*** 2.012 7.708*** 1.646 5.514*** 6.364*** 2.362
C_score
(5.09) (4.27) (3.80) (2.85) (1.35) (3.96) (1.16) (3.36) (4.26) (1.45)
Controls Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes
Year indicators Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes
Industry indicators Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes
Pseudo R2 0.3971 0.4481 0.4459 0.5166 0.3734 0.4847 0.4266 0.4373 0.4639 0.4772
N 1,145 1,145 589 554 868 277 657 488 577 568
This table reports the weighted logistic regression coefficients (z-value). Standard errors are clustered by firm. Controls include: SALES, PROFIT, MTB, LEV, and
INDU. *, **, and *** represent significance levels at the 0.10, 0.05, and 0.01 levels, respectively, using two-tailed tests.
D_SAQUAL = an indicator variable that equals one if SAQUAL is above the median, and zero otherwise.
F_score = an index which is the predicted probability of high SA quality estimated by using a logistic regression (not tabulated) with demand-side firm-level
instruments and D_SAQUAL as dependent variable.
AP_score = an index which is the predicted probability of high SA quality estimated by using a logistic regression (not tabulated) with supply-side firm-level
instruments and D_SAQUAL as dependent variable.
C_score = an index which is the predicted probability of high SA quality estimated by using a logistic regression (not tabulated) with country-level instruments
and D_SAQUAL as dependent variable.
55

TABLE 7
Hierarchical Linear Modeling (HLM): Covariance Parameters
Panel A: Covariance Parameters with Null or Unconditional Model

Estimate Z Intra-class coefficients
Variable: country 12.237 3.090
Residual (Year 2005) 29.376 5.994 12.237 / (12.237 + 29.376) = 0.294
Residual (Year 2006) 30.193 7.108 12.237 / (12.237 + 30.193) = 0.288
Residual (Year 2007) 30.394 7.797 12.237 / (12.237 + 30.394) = 0.287
Residual (Year 2008) 32.480 8.206 12.237 / (12.237 + 32.480) = 0.274
Residual (Year 2009) 32.238 8.290 12.237 / (12.237 + 32.238) = 0.275
Residual (Year 2010) 35.654 9.026 12.237 / (12.237 + 35.654) = 0.256
Residual (Year 2011) 31.411 8.446 12.237 / (12.237 + 31.411) = 0.280
Residual (Year 2012) 28.441 9.145 12.237 / (12.237 + 28.441) = 0.301
Residual (Year 2013) 27.557 9.143 12.237 / (12.237 + 27.557) = 0.308
This table reports the covariance effect of the country factor on SA quality, excluding the explanatory variables.
Panel B: Covariance Parameters with Demand-Side Firm-Level Variables and Country Variables
Residual (Year 2005) 19.262 5.788 6.958 / (6.958 + 19.262) = 0.265
Residual (Year 2006) 18.959 6.856 6.958 / (6.958 + 18.959) = 0.268
Residual (Year 2007) 26.969 7.583 6.958 / (6.958 + 26.969) = 0.205
Residual (Year 2008) 28.890 7.588 6.958 / (6.958 + 28.890) = 0.194
Residual (Year 2009) 32.184 7.506 6.958 / (6.958 + 32.184) = 0.178
Residual (Year 2010) 30.146 8.237 6.958 / (6.958 + 30.146) = 0.188
Residual (Year 2011) 27.659 7.829 6.958 / (6.958 + 27.659) = 0.201
Residual (Year 2012) 24.607 8.632 6.958 / (6.958 + 24.607) = 0.220
Residual (Year 2013) 24.497 8.263 6.958 / (6.958 + 24.497) = 0.221
This table reports the covariance effect of the country factor on SA quality, including the demand-side firm-level and
country-level explanatory variables.
Panel C: Covariance Parameters with Overall Model
Residual (Year 2005) 11.656 5.788 3.849 / (3.849 + 11.656) = 0.248
Residual (Year 2006) 8.518 6.856 3.849 / (3.849 + 8.518) = 0.311
Residual (Year 2007) 15.314 7.583 3.849 / (3.849 + 15.314) = 0.201
Residual (Year 2008) 14.500 7.357 3.849 / (3.849 + 14.500) = 0.210
Residual (Year 2009) 16.550 7.442 3.849 / (3.849 + 16.550) = 0.189
Residual (Year 2010) 17.994 8.214 3.849 / (3.849 + 17.994) = 0.176
Residual (Year 2011) 9.574 7.741 3.849 / (3.849 + 9.574) = 0.287
Residual (Year 2012) 16.592 8.512 3.849 / (3.849 + 16.592) = 0.188
Residual (Year 2013) 11.081 9.083 3.849 / (3.849 + 11.081) = 0.258
This table reports the covariance effect of the country factor on SA quality, including demand- and supply-side firm-
level and country-level explanatory variables.
56

TABLE 8
Hierarchical Linear Modeling (HLM): Fixed Effects
(1) (2)
ENG 2.005*** 1.807***
(4.58) (5.47)
COMP 1.067** 0.794**
(2.39) (2.36)
COMM 0.143 0.450
(0.29) (1.20)
ECN -0.007 -0.002
(-0.72) (-0.25)
ENV 0.053** 0.028*
(2.48) (1.78)
SOC -0.000 -0.001
(-0.03) (-0.04)
CGV -0.021* -0.026***
(-1,90) (-3.16)
ANALYST 0.037 0.000
(1.29) (0.01)
SUSTIND -1.062** -0.569*
(-2.52) (-1.79)
AP_ACC 9.757***
(27.66)
AP_CERT 11.038***
(21.13)
AP_CONS 9.157***
(17.46)
CSRLAW 1.192 0.932
(0.76) (0.79)
EPI 0.315** 0.155
(2.42) (1.59)
ISO14001 0.072 0.183**
(0.60) (2.03)
PUBAWARE 0.076 0.075
(0.63) (0.85)
LAW 1.853 3.525**
(0.77) (1.96)
ENFORCE -0.027 -0.577
(-0.03) (-0.97)
GDPCAP -4.648*** -1.670
(-2.69) (-1.29)
Constant 44.633*** 24.856***
(3.77) (2.80)
Controls Yes Yes
N 1,146 1,146
This table reports the HLM regression coefficients (z-value). Data at firm-level (Level 1) is nested in countries (Level
2). Controls include: SALES, PROFIT, MTB, LEV, and INDU. All the variables are defined in Appendix 1. *, **, and
*** represent significance levels at the 0.10, 0.05, and 0.01 levels, respectively, using two-tailed tests.
57

TABLE 9
Heckman’s Two-Stage Analysis
First stage - Probit Second stage - OLS
DV = ASSURANCE DV = SAQUAL
SALES 0.180*** -0.850**
(3.74) (-2.24)
PROFIT 0.932 1.944
(0.91) (0.40)
MTB -0.004 -0.094***
(-0.88) (-4.92)
LEV -0.151* 0.115
(-1.72) (0.20)
INDU 0.108 0.561
(0.92) (0.59)
ASSU_LAG 2.286***
(26.82)
PROPASSU 0.437**
(2.15)
ENG 1.879***
(3.40)
COMP 1.129**
(2.54)
ANALYST 0.029
(0.83)
SUSTIND -1.101*
(-1.89)
COMM -0.810
(-1.36)
ECN -0.011
(-0.89)
ENV 0.035
(0.92)
SOC -0.017
(-0.59)
CGV -0.001
(-0.09)
AP_ACC 10.515***
(14.49)
AP_CERT 13.596***
(11.85)
AP_CONS 14.067***
(12.82)
CSRLAW 3.177***
(3.56)
EPI 0.133**
(2.14)
ISO14001 0.192
(1.48)
PUBAWARE 0.144*
(1.81)
LAW 0.260
(0.20)
ENFORCE -0.910***
(-3.02)
GDPCAP -4.322***
(-5.02)
IMR -0.286
(-0.77)
Constant -4.054*** 51.227***
(-4.67) (5.28)
Year indicators Yes Yes
Industry indicators No Yes
Pseudo R2 0.4888
χ2 (Prob > χ2) 1,233.66 (0.000)
R2 0.7527
N 1,840 953a
a This is lower than the sample of 1,146 observations tested in the original analysis (Table 5, column 5) due to restrictions on
the data availability. This table reports the regression coefficients (z-value for probit and t-value for OLS). Standard errors are
clustered by firm. All variables are defined in Appendix 1. *, **, and *** represent significance levels at the 0.10, 0.05, and
0.01 levels, respectively, using two-tailed tests. Mean VIF second stage model = 4.06.
58

SSRN Id3537535

Uploaded by

Document Information

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

SSRN Id3537535

Uploaded by

Copyright:

Available Formats

The Relative Role of Firm Incentives, Auditor Specialization and Country Factors

as Antecedents of Non-financial Audit Quality

Nicola Dalla Via

Auditing: A Journal of Practice and Theory, Forthcoming

Electronic copy available at: https://ssrn.com/abstract=3537535

Keywords: sustainability assurance; audit quality; corporate social responsibility; non-financial

sustainability reports represents an emergent market of non-financial assurance services with

Electronic copy available at: https://ssrn.com/abstract=3537535

First, we examine the antecedents of SA quality by focusing on a cross-country panel of SA

disclosed SA statements accompanying sustainability reports.2 Our aim is to explain heterogeneity

in the level of information disclosed in SA statements about an assurance engagement as a proxy

Electronic copy available at: https://ssrn.com/abstract=3537535

demand- (client incentives) and supply-side (auditor specialization) factors as firm-level

our knowledge on the antecedents of non-financial audit quality.

analysis of approximately 1,200 SA statements issued in the period 2005-2013 by a panel of

voluntarily assure CSR or sustainability disclosures arises endogenously as a result of information

Electronic copy available at: https://ssrn.com/abstract=3537535

managerial decision-making and evaluation processes, rather than a differentiating credibility

Zhang 2014; Knechel and Schefcik 2014).

Furthermore, we document that the relative importance of the firm-level determinants

appears to be strengthened in the presence of an institutional environment that privileges the

enforcement of a legal infrastructure aimed at the inclusion of social and environmental

dimensions in corporate strategy and decision-making processes.

provides a suitable methodological approach to obtain knowledge on the quality of non-financial

Electronic copy available at: https://ssrn.com/abstract=3537535

assurance (DeFond and Zhang 2014, 303).

antecedents of SA quality. We add to the previous SA literature by exploring firm-specific client

to broader corporate governance mechanisms and macro-level institutional contexts.

II. THEORY AND HYPOTHESIS DEVELOPMENT

sustainability reports are currently accompanied by an SA statement provided by a third-party

Electronic copy available at: https://ssrn.com/abstract=3537535

Audits or Reviews of Historical Financial Information”) published by the International Auditing

with different types of assurance providers.

Electronic copy available at: https://ssrn.com/abstract=3537535

membership remains underinvestigated. Another group of studies examined the consequences of

an explanation of SA adoption. Some studies have explored SA processes qualitatively (O'Dwyer

significantly across different types of assurance providers. Using a similar methodology,

Fuhrmann et al. (2017) document a significant cross-sectional association between SA quality

find that a firm’s sustainability performance is related to the information disclosed in SA

Electronic copy available at: https://ssrn.com/abstract=3537535

audit, SA provides a unique opportunity to obtain insights on emergent forms of non-financial

to deliver trustworthy and reliable sustainability-related information. The apparent high

of SA quality by drawing an analogy from auditing research on traditional financial statement

Electronic copy available at: https://ssrn.com/abstract=3537535

supply-side determinants of SA quality. The last hypothesis covers country-level institutional

Demand-Side Firm-Level Hypothesis

The voluntary demand of SA can be explained by firms’ willingness to enhance a

reflects a view of SA services as a way of generating greater transparency, trustworthy information

and Simnett 2015).

management systems (IAASB 2016). A sustainability report accompanied by SA creates external

formulation requires reliable information, as in the case of financial reporting, third-party

Electronic copy available at: https://ssrn.com/abstract=3537535

high on sustainability performance have embedded stakeholder engagement in their business

their stakeholder relationships.

audits as a monitoring mechanism integral to agency theory to strengthen the credibility of

compensation to enhance alignment between managerial objectives and sustainability strategy. A

approximately 40 percent of the global companies reviewed included sustainability-related

environmental pay-for-performance scheme reward environmental strategies more than companies

Electronic copy available at: https://ssrn.com/abstract=3537535

stakeholders to align sustainability strategies and corporate actions. Whenever internal

performance measures, the contractibility of sustainability-related performance measures is

sustainability-related performance measures should be used less in compensation contracts (Eccles

Supply-Side Firm-Level Hypothesis