Accounting: Research Proposal

This research proposal explores the benefits of integrated reporting and examines the relationship between voluntary assurance of sustainability reports and audit pricing behavior. It reviews relevant literature on integrated reporting, sustainability assurance, and audit fees. The research aims to determine whether there is a positive relationship between voluntary assurance of sustainability reports and audit pricing behavior.

Accounting: Research Proposal
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1. Introduction and Background to the Issue
The issues of sustainability and transparency are creating the need for businesses to
incorporate wide information in their annual reports for addressing the varying needs and
requirements of its different stakeholders. The business stakeholders are placing large emphasis
on gaining an insight regarding the nature of business activities, their associated social and
environmental risks and the value that they intends to create for them. As such, the businesses
are emphasizing on incorporating non-financial information in their annual reports in addition
with the financial information and this is leading to development of the concept of integrated
reporting (Zhou, Simnett, & Green, 2017). Integrated reports providing disclosure of both
financial and non-financial information and thus is regarded to be very accurate for depicting the
holistic picture of the company by aligning its financial objectives with the non-financial
performances. The incorporation of sustainability reports enhances the reliability of the public
disclosures developed by the business corporations.
Integrated reporting is increasing large attention from the public and the companies to
meet the future challenges and opportunities of implementing more reliability in the business
operations and activities. This can be achieved by businesses through disclosing the information
in relation to the corporate governance, resource use, strategic risks and operational risks
management for creating long-term value for the stakeholders. There has been increasing
evidence shown by researches that the extent of integrated disclosure by business corporations is
positively associated with the valuation of firms. The concept of integrated reporting is largely
adopted by the firms operating within South Africa but is also recently adopted on a voluntarily
basis within Australian firms. It has been estimated that about 200 big companies operating
within Australia are adopted the concept of developing integrated reports. Sustainability
reporting is regarded as one of the essential requirements of developing and disclosing integrated
reports (Simnett & Huggins, 2015).
The Global Reporting Framework has been developed in this context to provide guidance
to business entities in measuring and disclosing their performance in relation to the social,
economic and environmental issues. The development of integrated reports by the Australian
firms will help in providing encouragement to the companies for considering their sustainability
risks and finding ways for enhancing their long-term performance and growth. The traditional
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reporting practices adopted by Australian firms do not prove to be very useful in providing a
comprehensive account of all the business activities that is covered by the development of
integrated reports. It helps in ensuring to the stakeholders that business entities are socially and
environmentally responsible and is also serving a means for them to enhance their goodwill in
the mind of stakeholders and thus promoting their long-term growth and performance (Lee &
Yeo, 2016). In this context, this research proposal is developed specifically for the purpose of
`developing an understanding of the nature of information included within the integrated reports
and examining the benefits of the information disclosed through it to the market participants such
as shareholders, managers, auditors, regulators and financial intermediaries.
2. Literature Review
As per the views of Simnett, Vanstraelen & Chua, (2010), the integrated reporting (IR)
framework has been developed by International Integrated Reporting Council (IIRC) that has
provided a principle-based approach for developing and presentation of integrated reports. This
innovative form of reporting significantly different from the current financial and sustainability
framework used by businesses in providing an integrated view of the overall performance of
business entities. It has been directed by the European legislators that integrated reporting format
is an effective method to be adopted by businesses to respond to the financial as well as non-
financial needs of business corporations. However, an important issue that is present in this
context is that whether the IR framework is able to disclose all relevant internal and external
decision-making information to the end-users. In this context, it has also been stated by Manetti,
& Toccafondi (2012), the assurance of the sustainability reports will ensure to the stakeholders
that the extent of sustainability information provided through the integrated reports is reliable
and trustworthy. The voluntarily nature of the integrated reporting system provides manager’s a
discretionary power to disclose only positive information and conceal any negative facts related
to its sustainability performance. As such, the assurance of integrated reports by a third-party
such as auditor or any other governing party is required to make such reports more comparable
and reliable and enhancing the trust of the end-users.
Pflugrath, Roebuck and Simnett (2011) has emphasized on the difference in the perceived
credibility of the sustainability reports on the basis of their type of assurance such as by
professional accountants or sustainability consultants in the mind of the end stakeholders. The
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study has indicated that credibility of a CSR report is perceived to be greater by the end-users
when it is assured by a professional accountant. The assurance of the integrated reports is
directly related with the credibility of the information due to improved quality of non-financial
information provided to the stakeholders. The non-financial information that is being included
within the sustainability reports need to be reviewed with the adoption of an internal control
system by business entities. As such, the audit committees and other systems of corporate
governance ca play a key role in enhancing the assurance of the sustainability information
disclosed by business entities.
The study carried out by Dhaliwal, Radhakrishnan, Tsang, & Yang (2012), has
emphasized on the link between the quality of Corporate Social Responsibility (CSR) disclosures
and the accuracy in the analyst forecast about its performance. The stakeholder theory in this
context has stated that effective management of stakeholder relationships is essential for
fostering better financial performance of a firm. This requires increased disclosures regarding the
information related to governance, risk management and social and environmental impact of a
firm by the stakeholders for developing a positive image in their mind regarding the nature of its
operational activities. The non-financial disclosures provided through development of
sustainability reports and integrated it with the financial reports enables in providing credible and
value-relevant information and reducing the uncertainty about the future earnings potential.
Further in this context Cohen & Simnett (2015) has also argued that the increasing pressure on
companies for assuring their sustainability reports is causing the need for them to be assured by
an external third party. The assurance of CSR reports is carried out by the big four auditing firms
and experts from outside the auditing profession. The assurance of the sustainability reports is
directly related with enhancing the relevance and reliability of the content disclosed within these
reports voluntarily by the firms. The CSR reports are regarded to be less reliable if they are not
assured for the stakeholders.
As per the opinion of Stanley (2011), there is direct influence on the level of audit fees
and the quality of the firm performance in relation to CSR (Corporate Social Responsibility).
The audit fees are also impacted largely by the complexity of the audit and the size and nature of
business operations. The more complex is the level of sustainability performance disclosed by an
entity the higher is the auditor labor hours which subsequently lead to an increase in the audit
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fees. The fact has also been ascertained by Kim, Park & Wier (2012), the audit quality on the
voluntary CSR reporting can be ascertained on the basis of audit fees. A higher quality CSR
report assurance is associated with greater audit fees due to the more information disclosed
within the sustainability reports that requires higher efforts of the auditors thus requiring greater
audit fees.
According to Rao & Gheyana, (2011), sustainability assurance can provide additional
information to the auditors regarding assessing the type of business risks. The voluntarily
reporting of sustainability performance by business in their integrated reports leads in improving
their credibility in the mind of auditors. Thus, if a suitability report is assured by any other
external part besides an auditor then it can lead to reduction in the audit fees as auditors perceive
the information disclosed by an entity to be more relevant and credible.
3. Development of Hypothesis
The aim of developing integrated reports by business entities is to link the environmental
and social performance with the business and competitive strategy. However, the reliability of
these reports in facilitating the decision-making of stakeholders has been questioned due to their
voluntarily nature of disclosure. The business entities are required to publish the sustainability
performance on a voluntarily basis which poses a threat for ensuring the reliability and integrity
in the sustainability reports. This is because the business managers possess the power to
influence the quality of reports for developing a positive impact in the mind of stakeholders. As
such, this has resulted in causing a need for assuring the sustainability reports by an external
third-party such as by the auditors. The signaling theory has suggested that the business entities
that places large focus on developing voluntarily disclosures largely adopts the use of
independent third parties for providing assurance to ensure that they provide superior
sustainability performance (Barth, Cahan, Chen & Venter, 2017).
It has also been provided by legitimacy theory that companies who are subjected to
public pressure tend to develop and provide their sustainability reports for improving their
legitimacy in the mind of the stakeholders. The legitimacy may be further improved by
businesses through adopting the use of third parties to provide assurance for their sustainability
reports. The assurance achieved on sustainability reports may be used by businesses as a risk
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management tool for avoiding the issue related legitimacy risks and promoting greater
confidence of the investors. The theory of legitimacy has described sustainability reporting and
assurance as a strategic organizational tool for influencing the society perceptions towards its
functions and activities. The external assurance on the sustainability reports assists the managers
in overcoming the legitimacy gaps and improving their brand image in the mind of the
stakeholders. The business entities are emphasizing on carrying out audit of the overall content
of their integrated reports by the auditors (Rao & Gheyana 2011).
The audit fees charged by an auditor for assessing the assurance of CSR reporting are
dependent on the nature of business operations and the relative size of a business entity. The
quality and reliability of the sustainability reports is influenced by the top management and thus
they have a determining role to be played in impacting the audit fees. The top management for
attracting the investors through developing attractive integrated reports often requires more
efforts and thus leads to increasing the audit fees. The carrying out of higher quality audits
requires investment of more resources for gaining higher assurance of the sustainability reports
and this have a direct impact on the fees charged by the auditors. Also, auditors possess less
knowledge in relation to examining the social and environmental disclosures. Therefore, it
requires more efforts on their part for acquiring knowledge in this respect and evaluating the
credibility of the sustainability information disclosed by a firm. The auditors must possess
significant education and knowledge about the social and environmental regulations for carrying
out audit in a proper manner. As such, the auditors require higher audit fees due to their higher
level of efforts required for carrying out assurance of the voluntarily sustainability reports
(Cohen & Simnett, 2015).
The auditor’s efforts can be reduced by decreasing the audit risk by disclosing higher
quality financial and non-financial information. The greater level of social and environmental
information provided within the sustainability reports lead to reducing the operating and default
risk and as such developing its positive image in the mind of the stakeholders. The development
of higher quality CSR reports that requires less efforts on the part of auditors require less audit
fees. Thus, it can be said that auditors charge lower fees for conducting audit of the sustainability
reports of the firms that are believed to report higher CSR performance. It can be stated from the
overall theoretical reasoning discussed that audit fees charged by an auditor for conducting
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assurance of voluntarily sustainability reports is influenced by their level of efforts. The higher
the level of auditor efforts due to complexity of the sustainability reports developed the greater is
the audit fees charged by an auditor (Dhaliwal, Radhakrishnan, Tsang, & Yang, 2012).
As such, the research intends to develop an answer for the following research question:
‘Does there exist any relationship between voluntary assurance of sustainability reports and
audit pricing behavior’?
The above stated research question developed for conducting the research is evaluated with the
use of following research hypothesis:
 Research Hypothesis 1: There is a positive relation between the voluntary assurance of
sustainability reports and audit pricing behavior.
 Research Hypothesis 2: There is relatively no relation between the voluntary assurance of
sustainability reports and audit pricing behavior
4. Research Methods
a. Sources of Information to be used
The present research will mainly incorporate the use of qualitative research methodology
for examining the research hypothesis developed. This type of research methodology involved
gathering relevant literary data from the academic journal articles that contains exhaustive
information in relation to the research issue. The research mainly involves the use of secondary
information for addressing the research issue that involves exploring the resources that already
contains information about the research topic. The secondary data is collected from indentifying
searching and extracting it from the selected 8 journal articles that are selected with the use of
relevant key words such as sustainability reports, integrated reports, voluntarily sustainability
assurance and audit fees. The nature of data collection process is selected as per the nature of
research subject that can be explored adequately with the use of qualitative information in
relation to the research subject (Jackson, 2008).
b. Sampling Techniques
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The research study will incorporate the use of purposive sampling method that intends to
selecting and extracting information from the academic journals for the purpose of addressing
the research question. The academic journals selected for the purpose are eight containing
exhausting information in relation to the voluntary assurance of sustainability reports and audit
fees. The key words that are used for selecting the sample are ‘integrated reports’, ‘sustainability
reports’, ‘voluntary assurance of sustainability reports’ and ‘relation between voluntary
assurance of sustainability reports and audit fees’. The overall findings developed by exploring
the selected journal articles are analyzed by the use of thematic analysis that involves developing
specific themes for addressing the research hypothesis (Vermez, 2016).
c. definition of variables
 Dependent Variable: The dependent variable is regarded as the variable that is being
studies and measured during a research study. The dependent variable that is used in the
present research is audit fees as it intends to examine the impact of level of assurance of
sustainability reports on the fees charged by an auditor.
 Independent Variable: The independent variable is regarded as the variable that is
changed or controlled for evaluating the impact on the dependent variable. The level of
voluntary assurance of sustainability reports is an independent variable that is used for
examining the impact on the fees of the auditor.
 Control Variable: The variables that are held constant during conducting overall research
and this includes the corporate governance, capital structure and profitability that are
estimated to be constant during the overall research study.
d. Model for Examining the Hypothesis
The hypothesis developed can be tested with the use of statistics tools and techniques that
helps in examining the relation between the research variables. The statistical methods such as t-
test, regression model, correlation, ANOVA, factor analysis and MANOVA can be used for the
purpose of depicting the relation between the research variables. The present research will
involves the use of regression and correlation model to depict the relation between the dependent
and independent research variables. The use of regression model can help in examining the
impact of independent variables on the dependent variable. Correlation model will help in
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determining the linear relationship between the two research variables (Saunders, Lewis and
Thornhill, 2009).
Conclusion
The overall research proposal developed has inferred that the voluntary assurance of
sustainability reports is regarded to be very essential for the purpose of enhancing credibility and
reliability in the mind of the stakeholders regarding the integrated reports developed by
businesses. It has emphasized on the need of assuring the sustainability reports by an external
third-party such as auditors. It has developed the research hypothesis to test the impact of
voluntary sustainability report assurance on the audit fees charged by auditors. The proposal has
stated the use of qualitative research methodology to examine the research hypothesis. This
involves examining the relation between the two research variables by exploring their impact on
each other by gathering secondary data from the relevant literary sources. The analysis involves
selecting and exploring relevant data from the secondary literary sources by developing key
words. The purposive sampling technique is proposed to be used for selecting the relevant
academic journal articles to examine the research hypothesis. The models suggested to be used
are correlation and regression model that would help in examining the relation between the
dependent and independent variables.
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References
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Cohen, J., & Simnett, R. 2015. CSR and assurance services: a research agenda. Auditing: A
Journal of Practice & Theory, 34 (1), 59-74.
Dhaliwal, D.S., S. Radhakrishnan, A. Tsang, & G.Y. Yang. 2012. Nonfinancial disclosure and
analyst forecast accuracy: international evidence on corporate social responsibility disclosure.
The Accounting Review, 87(3), 723-759
Jackson, S.L. 2008. Research Methods: A Modular Approach. Cengage Learning.
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