Based on the assertion that audit hours/effort enhances audit quality, we posit that as Environmental, Social and Governance (ESG) ratings increase, shareholders have an incentive to secure increasing levels of audit hours as an ESG rating assurance strategy (audit demand theory).
Using a sample of South Korean listed client-firms over the 2011–2019 period, the study captures the association between ESG, (1) audit hours, (2) audit fees and (3) fees per hour.
Empirical results show that clients with higher ESG ratings secure increasing levels of audit effort/hours. Moreover, based on ESG status, no fee premium is imparted by audit firms. Results are robust to various forms of additional analysis, including Big4/NonBig4 division, endogeneity tests, amongst others.
The study contributes to policymaking by reporting that in a rare instance of audit hour information availability on annual reports, a basis exists for clients to secure increasing levels of audit hours, as an ESG rating assurance strategy. The study therefore extends the ESG assurance and audit literatures.
