Does mandatory CSR disclosure affect audit efficiency? Evidence from China

This study aims to examine the causal relationship between mandatory CSR disclosure and financial audit efficiency.

The authors use the unique institutional setting of China, where a subset of listed firms are mandated to disclose their corporate social responsibility (CSR) reports. The authors use propensity score matching and difference-in-differences approaches to compare audit efficiency in the pre- and post-mandatory CSR disclosure periods between the treatment and control groups. The regression models are estimated with robust standard errors clustered at the firm level.

This study finds that following China’s adoption of the mandatory disclosure of CSR, audit report lags decreased by 6% on average, suggesting that audit efficiency improved greatly following mandatory CSR disclosure. Moreover, this association is stronger when firms have better CSR performance, higher CSR report preparation costs, more earnings management before disclosure regulations and better internal controls and when firms belong to high-profile industries and in Big 4 (Big 10) accounting firms. Moreover, neither audit quality nor audit fees decrease when shorter audit lags occur for firms with mandatory CSR disclosures. Overall, the evidence suggests that mandatory CSR disclosure has a positive effect on audit efficiency and that the improvement of audit efficiency does not come as a consequence of reducing audit fees or deteriorating audit quality.

The results reported in this study have practical and policy implications for policymakers, accounting firms and auditors to pay more attention to CSR information.

This study provides evidence of the causal relationship between mandatory CSR disclosure regulation and audit efficiency. It enriches the research on audit service production efficiency from the perspective of nonfinancial information disclosure.