ESG Risk and Audit Firm Reputation

Abstract

Purpose: The importance of ESG continues to grow day by day, and ESG risk management has become crucial for corporate sustainability. Understanding ESG risk management is an urgent and crucial issue that cannot be delayed any longer. This study aims to examine the relationship between ESG risk management and audit firms’ reputation. Design/methodology/approach: This study investigates the correlation between the reputational effect of audit firms and ESG risk management, using companies listed on the TWSE and the TPEx in 2023 as the target population. We further develop two research models: first, a regression model (1) to examine whether the brand reputation effects of Big4 and non-Big4 audit firms are associated with corporate ESG risk management scores and set up an Ordered Probit model (2) to investigate how the reputation effect of Big4 and non-Big4 audit firms is related to corporate ESG risk ratings. Finding: The empirical results show that companies audited by the Big 4 audit firms have better ESG risk management performance than those audited by non-Big 4 audit firms, and that companies’ ESG risk management performance varies depending on the specific Big 4 audit firm engaged. Furthermore, the association between ESG risk management performance and the reputation effect of audit firms depends on the firm’s business model and corporate governance structure. The family-owned business model and strong corporate governance environment synergistically enhance the reputation effect of audit firms, thereby contributing to the improvement of ESG risk management performance. Finally, the choice of earnings management strategy affects the relationship between ESG risk management performance and the reputation effect of audit firms. Risk-averse companies that adopt conservative earnings management strategies benefit from the positive impact of the Big 4 audit firm reputation effect on ESG risk management performance. Research limitations/implications: The research limitations of this study stem from the difficulty in accessing ESG information, which constrains the sample size. Originality/value: First, this study provides a comprehensive examination of the ESG risk management performance of listed companies in Taiwan, contributing to a deeper understanding of the current status of ESG strategy development and implementation among Taiwanese companies. Second, by examining corporate ESG risk management, the study explores the impact of audit firms’ reputation on corporate ESG risk management performance. Third, our findings contribute to academic research on ESG issues by incorporating the potential impact of audit firms’ reputation into the analysis.