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Paymasters and Assurance Providers: Exploring Firms’ Discretion in Selecting Non-financial Auditors

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Abstract

Ethical issues in non-financial auditing are increasingly under scrutiny and questions have been raised about the impartiality and independence of audits. Among many other problematic issues, firms have discretion to select their assurance providers and are also required to cover the cost of the audit. Previous literature highlighted several consequences of this competitive and client-driven environment. However, research has mainly focused on firm-level investigation of the consequences—in this paper, we enhance this research by also considering assurance providers. Our approach is grounded in legitimacy and institutional perspectives and we study how organizational motives and selection of assurance providers impact the benefits arising from the audit. In particular, we assume that firms select their assurance providers on the basis of audit strictness (substantial auditing) and market credibility (symbolic auditing) and we study the operational and market benefits that arise from the audit. Based on the data collected from 597 firms, we demonstrate that internal motives drive firms to be more likely to select assurance providers that offer audit strictness, while external motives drive firms to be more likely to select assurance providers that offer market credibility. The findings further show that assurance providers associated with auditing strictness have a stronger effect on operational benefits compared to assurance providers that offer market credibility. We also find that firms’ motives alone are important in driving the benefits achieved. These findings provide a basis for exploring the ethical implications of non-financial auditing.

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Notes

  1. In this paper, we use the terms “registrars”, “certifiers”, “certification bodies” and “assurance providers” interchangeably as they appear at the sources—even though we stick mainly with the term “assurance provider”—which is frequently used in the Journal of Business Ethics. We refer to these groups as bodies that oversee and certify independent assessments of whether or not an organization has met the requirements of a non-financial standard, eco-label, code of conduct, or other reference point. Independent assessments are carried out by auditors hired or contracted by assurance providers and may be oversighted by accreditation bodies, such as the ANSI National Accreditation Board (ANAB), the United Kingdom Accreditation Service (UKAS), or the Joint Accreditation System of Australia and New Zealand (JAS-ANZ).

  2. ISO 9001 is management system standard specifying requirements for quality management systems. It was introduced in 1987 and has been updated four times, most recently in 2015. The standard includes an extensive set of requirements intended to help an organization improve its product quality, but it does not specify required levels of performance or methods to meet the requirements. Further discussion on ISO 9001 is available throughout the paper.

  3. Meta-standards specify the rules and requirements for designing management systems.

  4. “Third-party audits” are conducted by arms-length independent auditors, usually for the purposes of certification. Firms may also conduct what are referred to as “first-party audits”, which are internal audits the firm conducts on its own processes, and “second-party audits”, which are audits conducted by interested parties external to the firm, such as customers. Further details on first-, second-, and third-party audits are available in Ciliberti et al. (2009).

  5. In the Corruption Perceptions Index 2019 developed by Transparency International, New Zealand is ranked as the least corrupt country in the world. Australia also scores well in the index, ranking 12th out of 180 countries in terms of the least perceived corruption. Of course, the ranking (and our results) do not imply that these countries are corruption free. For more information see https://www.transparency.org/country.

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Acknowledgements

The authors would like to thank the Joint Accreditation System of Australia and New Zealand (JAS-ANZ) for their support of this study, particularly in the distribution and collection of the survey data.

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Authors and Affiliations

  1. Department of Management, Monash Business School, Monash University, Caulfield East, Australia

    Daniel Prajogo

  2. Department of Management, Marketing and Entrepreneurship, UC Business School, University of Canterbury, Private Bag 8041, Christchurch, New Zealand

    Pavel Castka

  3. Department of Mechanical and Industrial Engineering, Faculty of Engineering and Architectural Science, Ryerson University, Toronto, Canada

    Cory Searcy

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  1. Daniel Prajogo
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  2. Pavel Castka
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  3. Cory Searcy
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Correspondence to Pavel Castka.

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Prajogo, D., Castka, P. & Searcy, C. Paymasters and Assurance Providers: Exploring Firms’ Discretion in Selecting Non-financial Auditors. J Bus Ethics 173, 795–811 (2021). https://doi.org/10.1007/s10551-020-04539-9

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