Corporate governance and the use of external assurance for integrated reports

• Published date: 01 September 2022
• Author: Warren Maroun
• Date: 01 September 2022
• DOI: http://doi.org/10.1111/corg.12430

ORIGINAL ARTICLE

Corporate governance and the use of external assurance for

integrated reports

Warren Maroun

University of the Witwatersrand,

Johannesburg, South Africa

Correspondence

Warren Maroun, University of the

Witwatersrand, Johannesburg, South Africa.

Email: warren.maroun@wits.ac.za

Funding information

National Research Foundation, Grant/Award

Number: 118525

Abstract

Research Question/Issue: This paper investigates the relationship between the use

of external assurance for testing integrated reports (ESG assurance) and firm-level

governance features: the board of directors, the audit and/or risk committee, and the

internal audit department. Data are collected from South Africa where integrated

reporting and corporate governance practices are mature and listed companies have

had more time to implement ESG assurance than in other countries.

Research Findings/Insights: Monitoring attributes of boards of directors promotes

the use of ESG assurance which provide both limited (moderate) and reasonable

(high) assurance. The monitoring attributes of the audit and risk committees limit the

use of limited assurance but are associated with the greater use of reasonable assur-

ance. In contrast, internal audit functions are not affecting the use of ESG assurance.

Theoretical/Academic Implications: The study provides one of the first accounts of

how firm-level governance promotes or reduces the use of external assurance in an

integrated reporting context. The research also frames ESG assurance as part of the

broader corporate governance machinery rather than seeing assurance and gover-

nance as separate issues.

Practitioner/Policy Implications: Overall, the findings suggest that ESG assurance is

an important part of a combined assurance model. As those charged with governance

become more proactive in ensuring the credibility of their organizations' corporate

reports, they not only choose to appoint an external assuror but also rely on more

extensive testing designed to provide higher levels of assurance.

KEYWORDS

corporate governance, assurance, integrated reporting, nonfinancial reporting, proactivity

1|INTRODUCTION

The environmental, social, and governance (ESG) information con-

tained in sustainability and, more recently, integrated reports has

become a valuable source of information for investors and other

stakeholders (Barth et al., 2017; de Villiers et al., 2020; Martínez-

Ferrero & García-Sánchez, 2017). These types of reports (referred to

collectively as ESG reports) are usually prepared voluntarily. They

reduce information asymmetry, lower the cost of capital, and play an

important role in addressing stakeholder expectations for transparent

reporting on ESG performance (de Villiers et al., 2020; Grewal

et al., 2021; Schiehll & Kolahgar, 2021).

For ESG reports to be relevant for investors and other stake-

holders, the information they contain must be reliable. Consequently,

as the use of ESG reporting grows, so too does the demand from

investors, regulators, and other stakeholders for these reports to be

Received: 4 June 2020 Revised: 5 January 2022 Accepted: 5 January 2022

DOI: 10.1111/corg.12430

584 © 2022 John Wiley & Sons Ltd Corp Govern Int Rev. 2022;30:584–607.wileyonlinelibrary.com/journal/corg

subject to what this paper refers to collectively as “ESG assurance”

1

(Adams & Evans, 2004; Datt et al., 2021; KPMG, 2020; Simnett

et al., 2009).

Companies purchase ESG assurance to indicate the quality of

their ESG reporting, demonstrate commitment to managing underly-

ing ESG issues, and bolster reputations in the eyes of important con-

stituents (de Villiers et al., 2020; de Villiers & Maroun, 2018; Farooq &

De Villiers, 2017; Simnett et al., 2009; Wang et al., 2019). In addition

to these legitimacy-related factors, ESG assurance serves as an impor-

tant monitoring and control tool (Gray, 2000; Wong &

Millington, 2014) which enables higher quality ESG reporting (Wang

et al., 2019) and reduces information asymmetry (Grassmann

et al., 2021; Zhou et al., 2019). Like the audit of financial statements,

ESG assurance can substitute for weakness in the control mechanisms

which would otherwise mitigate agency-related costs, allow managers

to be held accountable for social and environmental performance, and

support the functioning of the broader corporate governance system

(Choi & Wong, 2007; Farooq & de Villiers, 2017; Herda et al., 2014).

The current paper builds on the role of ESG assurance as a tool

for ensuring the reliability of ESG reporting and lowering information

asymmetry by considering how the use of ESG assurance interacts

with other governance functions designed to mitigate agency-related

costs. The objective is to examine how the monitoring capabilities of

(1) the board of directors, (2) the audit and risk committee, and (3) the

internal audit department influence the use of ESG assurance by listed

companies. This line of inquiry is timely. Research on the design, mon-

itoring functions, and financial consequences of corporate governance

is vast (e.g., Ammann et al., 2011; Boone et al., 2007; Bozec &

Bozec, 2012; Gompers et al., 2003; La Porta et al., 1999;

Monem, 2013). In contrast, studies focusing on the connection

between ESG disclosures, assurance, and corporate transparency are

rare. This is despite the proliferation of codes of best practice which

stress the importance of the governance of social and environmental

performance (King & Atkins, 2016; Solomon, 2020) and the related

increase in the use of ESG assurance among the world's most promi-

nent organisations (see KPMG, 2017,2020).

The current paper makes an important contribution by connecting

two areas of corporate governance research. The first deals with the

influence of firm- or national-level governance features on corporate

social responsibility (Barako et al., 2006; Kim & Jo, 2021; Ntim &

Soobaroyen, 2013a) and the value relevance of ESG reporting

(e.g., Ntim et al., 2012; Schiehll & Bellavance, 2009; Schiehll &

Kolahgar, 2021). The second is concerned with how audits mitigate

the effects of a separation of ownership and control by principals and

lower information asymmetry (Abdel-Khalik, 1993; Blackwell

et al., 1998; Carey et al., 2000; Watts & Zimmerman, 1983). The two

bodies of research have been developed separately. “Assurance”is

traditionally understood as concerned only with financial statements

and distinct from other firm-level governance mechanisms. The inter-

connection between corporate social responsibility and corporate

governance has been evaluated (Jamali et al., 2008), but the role

which ESG assurance plays in enabling existing governance mecha-

nisms to improve the reliability of ESG disclosures is largely over-

looked by the mainstream corporate governance research.

As a result, this paper takes a broader position inspired by the

idea that the board of directors, supported by internal and external

assurance providers, works to ensure the integrity of the financial

and ESG information being reported to stakeholders (King, 2018).

The findings suggest that more proactive monitoring by boards of

directors promotes the use of more ESG assurance. Conversely, an

audit committee's monitoring activities may substitute for the use

of some ESG assurance services, especially those which do not

employ extensive test methodologies to verify ESG disclosures.

Internal audit does not affect the use of ESG assurance, possibly

because internal auditors are not as independent as external assur-

ance providers. Testing the relationship between the three well-

known governance mechanisms and the use of ESG assurance dem-

onstrates how assurance should be understood as an integral part

of corporate governance systems rather than as an ancillary

consideration.

There has been some work on how firm-level governance influ-

ences the decision to purchase ESG assurance. Kend (2015) and

Peters and Romi (2015) find that active sustainability committees and

environmental experts on board committees are associated with the

use of ESG assurance in Australia and the United States. Two interna-

tional studies find that the strength of a board's monitoring functions

(proxied by board size, board diversity, board independence, and sup-

port from a sustainability committee) have a similar effect (see also

García-Sánchez et al., 2021; Martínez-Ferrero & García-

Sánchez, 2017; Simoni et al., 2020; Wang et al., 2019). A study based

on Chinese firms reports comparable findings (Liao et al., 2018). The

current paper complements these efforts by using a composite gover-

nance score to evaluate internal monitoring holistically rather than

testing select firm-governance features. In addition, the focus is not

only on the presence or absence of ESG assurance (as is the case with

Liao et al., 2018; Martínez-Ferrero & García-Sánchez, 2017; Peters &

Romi, 2015) but also on the number of subject matters

2

being tested

and the level of assurance being provided. An important empirical

contribution is made by collecting data from South Africa. This

expands on the work dealing with the interconnection between cor-

porate social responsibility and governance in an African setting

(e.g., Barako & Brown, 2008; Ntim & Soobaroyen, 2013b) and pro-

vides insights into the link between ESG assurance and firm-level gov-

ernance from a jurisdiction where different types of ESG reporting

and related assurance services are well established but not mandated

by law.

The remainder of this paper is organized as follows: Section 2

provides background and develops hypotheses. Section 3discusses

briefly corporate governance and ESG assurance in a South African

context followed by the method in Section 4. Section 5presents the

findings. The discussion, conclusions, and areas for future research are

in Section 6.

MAROUN 585