Auditor's Adaptive Approach in Explaining the Effects of ESG Risk Ratings and Audit Quality

Abstract

This research aims to present new empirical evidence regarding the role of auditors from public accounting firms in building public trust, specifically by adaptively introducing a novel approach to formulating audit opinions using extended external reporting information from audited companies. The alignment between corporate reporting information, namely financial statements and non-financial reports, must be consistent and reliable. It is also the auditor's duty in the financial statement audit process to read, understand, and analyze the disclosures and presentation of information from various types of corporate reports to avoid bias in concluding the audit results. Information on Environmental, Social, and Governance (ESG Risk Ratings) risk ratings of issuers from a credible international institution such as Morningstar Sustainability represents a new approach in considering important areas for auditors to analyze issuer risks, as also stipulated in ISA 315 (Revised) "Identifying and Assessing the Risks of Material Misstatement." The authors used data from a sample of 543 companies in four Asian countries, namely China, Singapore, Malaysia, and Indonesia, during the year 2023. The cross-sectional data were collected from the Morningstar Sustainalytics ESG Risk Ratings and the capital market databases of the four countries and were subsequently analyzed using STATA 14. The results of this study indicate that Company characteristics, namely ESG Performance proxied by the ESG Risk Ratings dataset, and Auditor characteristics such as Auditor Gender, Audit Tenure, and KAP Size, significantly affect Audit Quality. Conversely, other company characteristics, such as size and Age do not affect audit quality. These results prove that the adaptive patterns of auditors in the audit process can maintain high-quality audits and enhance public trust in the role of this profession both now and in the future.