Aki Sik 2017

Sustainability Accounting, Management and Policy Journal
The Impact of Corporate Social Responsibility and Internal Controls on Stakeholders View of the Firm
and Financial Performance
Orhan Akisik, GRAHAM GAL,
Article information:
To cite this document:
Orhan Akisik, GRAHAM GAL, (2017) "The Impact of Corporate Social Responsibility and Internal Controls on Stakeholders
View of the Firm and Financial Performance", Sustainability Accounting, Management and Policy Journal, Vol. 8 Issue: 3,
doi: 10.1108/SAMPJ-06-2015-0044
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The Impact of Corporate Social Responsibility and Internal Controls on Stakeholders
View of the Firm and Financial Performance
Abstract
Purpose: The purpose of this study is to empirically examine whether two major stakeholder
groupscustomers and employeesconsider third party reviewed corporate social responsibility
reports and assurance on the quality of internal controls as value determinant in their decisions,
and how their decisions influence financial performance through the halo effect of these reports.
Methodology/approach: Using Compustat North America and Global Reporting Initiative data,
we employed first-order autoregressive models over the period from 2006 to 2012.
Findings: The results indicate that the impacts of customers and employees on financial
performance are influenced by third party reviewed corporate social responsibility reports and
effective internal control. Moreover, we find that the third party reviewed corporate social
responsibility reports and effective internal control enable the persistence of financial
performance.
Social implications: The findings have implications to stakeholders in terms of third party
reviewed CSR reports and effective internal control. Our findings are important due to the
influence that these stakeholders (customers and employees) have on the financial performance
of firms and the impact that CSR actions can have on society as a whole.
Originality/value: To our knowledge, this is the first study that contributes to the literature by
demonstrating that information about third party reviewed corporate social responsibility reports
and internal control reviews may influence the perceptions of firms by two primary stakeholders;
customers and employees.
Keywords: Corporate Social Responsibility, Internal Control, Financial Performance
Research paper
The Impact of Corporate Social Responsibility and Internal Controls on Stakeholders View
Of the Firm and Financial Performance
1. Introduction
A primary role of the board of directors is to provide strategic direction to the firm so as to meet
the objectives of a broad group of interested parties; their stakeholders. This recognition that
corporations have responsibilities to more than just shareholders is in contrast to views held in the early
part of the twentieth century that shareholders were the preeminent group to be considered by boards
(Berle, 1931). While there is recognition that other stakeholders have interests in the actions of the
corporation, the methods used to provide them with value relevant information1 are less formal than the
methods used to provide information to shareholders. Financial statements have been shown to be value
relevant and are required and prepared with a primary focus on the information needs of shareholders
(Francis & Schipper, 1999). The information contained in these statements has expanded from the
financial information mandated under the original Securities Exchange Act of 1934 (United States
Congress, 1934) to include information about the quality of firms internal controls under the Sarbanes-
Oxley (SOX) legislation (United States Congress, 2002).
For the purposes of internal control review there are two sections of SOX that are particularly
relevant. Section 302 of SOX requires management to attest to the quality of the firms internal control
over financial reporting (ICFR) and Section 404 requires independent auditors to review this assertion as
part of their audit of financial statements. While the report required by SOX is specifically related to
ICFR, internal controls within the organization are more broadly designed to ensure adherence to
established objectives in three general areas; reporting, complying with regulations, and operating in
1
Francis and Schipper (1999) define value relevant information as that information which changes the mix of information
used by stakeholders when making their decisions or evaluations of firms.
The Impact of Corporate Social Responsibility and Internal Controls on 1|P age
Stakeholders View of the Firm and Financial Performance
conformance with management policy (COSO 2013a).2 The writers of the SOX legislation and the
regulators from the Securities and Exchange Commission (SEC) considered the report on internal
controls to be value relevant for shareholders (Glassman, 2006), however not all stakeholders considered
the effort to create these reports to be worthwhile. For instance, financial executives did not believe that
managements review of internal controls under Section 302 improved shareholder confidence or the
value of the firm to investors (SEC, 2009). In contrast, Wu and Tuttle (2014) did show that there was
value in this separate statement by management. A problem with creating this internal control report by
management and then requiring independent auditors to review is that the process can impact the cost of
reporting and also may delay the release of financial statements (Ettredge, et al., 2006; SEC, 2009). In
recognition of the difficulty in evaluating internal controls, COSO continues to provide frameworks to
assist management (COSO, 2013a; 2013b; 1992) and the Public Company Accounting Oversight Board
(PCAOB) provides auditing standards (AS2 and AS5) for independent auditors review (PCAOB, 2007;
2004). While, these reports may impact reporting costs and the timing of financial statement release, in
the opinion of shareholders, the auditors report required by Section 404 had incremental benefits over
the information about the review of internal controls done by management and were therefore value
relevant (SEC, 2009). These assertions about internal control quality in financial statements are also seen
as value relevant for stakeholders other than equity investors. For instance, creditors have been shown to
have an interest in internal control weaknesses as the Section 404 report can impact borrowing costs
(Costello & Wittenberg-Moerman, 2011). Similarly, bankers have an interest in the quality of internal
controls in making their loan decisions (Kim, et al., 2011). Our research contributes to the literature by
examining whether specific stakeholder groups (customers and employees), consider reports on ICFR
2
A comprehensive internal control model was developed in 1992 by The Committee of Sponsoring Organizations of the
Treadway Commission (COSO), which is known as the Treadway Commission. Organizations that make up COSO are
American Institute of Certified Public Accountants (AICPA), American Accounting Association (AAA), Financial Executives
International (FEI), Institute of Internal Auditors (IIA), and the Institute of Management Accountants (IMA) (COSO 1992).
and third party reviewed CSR reports as value relevant information. Our work responds to a call made by
Cohen and Simnett (2015) to study the effect of assurance of CSR reports and disclosures on the quality
of ICFR on financial performance through a halo effect on stakeholders.3
In a speech, SEC commissioner Cynthia Glassman argues that there should not be, controls
for controls sake, and that the SOX requirements have provided benefits to the firms (Glassman, 2006).
She concludes that, Section 404 has caused some companies to streamline their business processes
This streamlining is more related to efficiency of operations, and is not strictly related quality of financial
information. Thus, the commissioner indicates that the SOX requirements to report on ICFR has
produced a halo-effect as it caused firms to improve their operational efficiency. This operational
efficiency may impact financial performance through cost reduction, but other stakeholders outside the
firm, such as customers, may be interested in a reduction in the use of resources within the firms
production process. A disclosure to stakeholders that a firm has more efficient operations may be taken
as a broader signal of a concern for use of resources and an interest in more sustainable practices within a
firm. However, to provide stakeholders with direct information about efficient and sustainable business
practices firms have channels other than a SOX 302 report to disclose this type of information.
Other reports on sustainability include those prepared using Global Reporting Initiative (GRI)
Guidelines (GRI, 2011) as one section of reports using GRI guidelines does discuss use of resources. In
addition to simply making these additional disclosures to signal more efficient and more sustainable
practices firms can use these disclosures to gain legitimacy with broader groups of stakeholders. Mutual
agreement between the firm and its broader group of stakeholders on the efficient use of resources and
the adherence to more sustainable practices is desirable and can result in Interpartner legitimacy
3
CSR reports are used to disclose quantitative and qualitative information about a firms socially responsible activities. There
are alternative frameworks for these disclosures, however firms increasingly use GRI G3 guidelines which include both
categories and elements concerning social and environmental indicators (Manetti & Becatti, 2009).
(Kumar & Das, 2007). The motivation to appear as a legitimate member of society is one reason firms
disclose their sustainable management practices (Windolph, et al., 2014). When management is
concerned about operating or managing a firm with a strategic direction that is in the interests of a broad
group of stakeholders, this stakeholder approach can make their operations more sustainable
(Campbell, 1997).
Kaler (2006) considers a stakeholder approach to running a company and to being socially
responsible to be more or less synonymous. The stakeholder approach to corporate governance

recognizes the need for an expanded set of corporate objectives and an expanded evaluation of corporate
success. Disclosure of corporate actions that are more sustainable and socially responsible, while
voluntary, can initiate communication with broader groups of stakeholders, can help firms gain trust and
legitimacy, and create alliances with these stakeholders (Benn & Bolton, 2011; Carroll & Shabana, 2010;
Park & Brorson, 2005; Windolph, et al., 2014). Corporate social responsibility (CSR) reports are still not
components of financial statements, but there is evidence that this information can impact measures of
financial performance (Akisik & Gal, 2014). This impact of CSR reports, which are primarily non-
financial, on financial performance may be due to the legitimacy and the alliances created with broader
coalition of stakeholders including shareholders, customers, employees, suppliers, as well as
communities (for example see Murphy, et al. 2005). The alliances with this broad group of stakeholders
can influence companies performance (Maignan & Ferrell, 2001; Maignan, et al., 2005; Berman, et al.,
1999). For instance, there is evidence that customers are willing to provide support to firms with
products and operations that are socially responsible (Biggar & Selame, 1992; Brown & Dacin, 1997;
Webb, et al., 2008). Moreover, employees are concerned with their employers socially responsible
performance (Backhaus, et al., 2002) and that the firms social responsibility increases employee
satisfaction (Bauman & Skitka, 2012). While in many cases firms will take the effort to disclose their
CSR activities, in contrast to financial statements, not all firms will seek assurance of these disclosures
(Simnett, et al., 2009b). However, just as firms produce CSR reports to seek legitimacy, the choice to
have an independent party provide assurance for their report is to gain additional legitimacy (Simnett, et
al., 2009b).
There are numerous studies that examine the relationship between CSR and financial
performance. However, no consensus has been reached about the impact of CSR on financial
performance (Lockett, et al., 2006). A comprehensive review of studies on the relationship between CSR
and financial performance belongs to Margolis and Walsh (2001). They report that, when used as an
independent variable, corporate social performance is found to have a positive relationship to financial
performance in fifty-three percent of the reviewed studies, five percent found a negative relationship,
nineteen percent reported mixed results, while twenty-four percent found no relationship (Margolis &
Walsh, 2001, p. 10). This lack of consensus on financial impact may also be due to a lack of consensus
on whether the reports on CSR activies are good measures of actual socially responsible performance.
For example, Clarkson, et al. (2008) compare disclosures and do find a positive association between
performance and disclosures, ie., firms with good things to report do choose to report. There is also a
possibility that the disclosures of CSR are too limited in nature and may limit an understanding of CSR
activities. Gray (2010, p. 47) discusses the need for alternative narratives to describe the accounting for
sustainability. These issues allow different stakeholder groups to use CSR reports to make conclusions
that support their position on CSR expenditures. Margolis and Walsh (2001, p. 4) argue that different
stakeholder groups focus on different results of this area of research depending on their preferred
argument. For instance, those that would like to argue that socially responsible activities reduce
shareholder wealth, focus on studies with negative or zero association between these activities and
financial performance. In contrast, individuals that argue for a broader role for firms in society use
studies with zero or positive association with financial performance as evidence that these activities do
not jeopardize shareholders interests. In an argument similar to that made by Glassman (2006) about the
organizational benefits of SOX, Porter (1990) argues that firms will be motivated to innovate when faced
with properly designed environmental regulation, and that this innovation will ultimately improve
financial performance.
Klassen and McLaughlin (1996) find a positive association between financial performance and
strong environmental management practices. Rassiers and Earnhart (2010) find that the Clean Water Act
improved both short-run and long-run financial performance. Du, Bhattacharya and Sen (2010) argue
that CSR activities will not only generate favorable stakeholder attitudes, but will also generate favorable
behaviors such as seeking employment, purchasing their products, and providing capital. Flammer
(2012) concludes that CSR leads to superior financial performance, arguing that companies may engage
in CSR in order to improve their efficiency and enhance their reputation, brand, and trust4 (see for
example: Porter and Kramer 2006, Orlitzky, Schmidt and Rynes 2003, Roman, Hayibor and Agle 1999).
In turn, such actions may attract new customers, such as socially conscious customers, green customers,
and increase the companies long-term viability and profitability. According to Eccles, Ioanni and
Serafeim (2012) and Eccles, Perkins, and Serafeim (2012), firms which emphasize social responsibility
considerably outperform their competitors both in terms of stock market and accounting performance.
Moreover, they report that the outperformance is stronger in sectors where firms compete on the basis of
brands and reputation and in sectors where firms products depend upon extracting large amounts of
natural resources. Finally, they find that firms which stress the importance of social responsibility
achieve higher profitability.
4
Again this is similar to the argument made by Glassman on the unintended benefits of SOX.
While information about CSR performance may be value relevant, a study by Akisik and Gal
(2014) indicates that the type of review of a GRI (2011; 2006) report,5 is also important and impacts
financial performance. The importance of independent reviews of disclosures, such as CSR and financial
statements, may be due to the complex and technical information contained in the disclosure (Schneider,
et al., 2012; Schaub, 2006). Although firms can choose whether or not to disclose their CSR data in GRI
format and whether or not to have GRI reports reviewed, the precise nature of the data quality is not
directly disclosed in these reviews; only the degree of coverage for specific categories of information as
deemed relevant by management. For other reports that have CSR implications, such as those required
by the SEC with respect to conflict minerals, the requirement is that firms describe measures they used to
exercise due diligence (SEC 2012) using OECD guidelines (OECD, 2013). Additionally, an independent
auditor must review the measures taken by the organization to ensure that the processes employed follow
these guidelines. For other disclosures with CSR implications alternative review standards and different
types of assurance have been suggested (Cohen & Simnett, 2015). Simnett, Nugent and Huggins (2009a)
argue that ISAE 3000 (International Auditing and Assurance Standards Board, 2013; 2005) is a good
framework to establish an assurance standard for greenhouse gas statements. ISAE 3000 makes a
distinction between providing limited assurance versus reasonable assurance for non-financial
information. In either case, the standard requires that the auditor understand and review processes (para.
47L and 47R)6. In contrast to the review of data, the required review of the processes used to create the
data is further recognition that controls over processes have a significant impact on data quality, and can
have an impact on the credibility of the disclosure. The quality of ICFR can improve business process
5
The GRI allows for three types of reviews of reports that use their format; self-review, third-party review, and GRI review.
These reviews are used to assign a level of coverage and are based on the number of areas covered; not necessarily on the
quality of the data items included in the reports (GRI 2011).
6
Similarly, AS5 (PCAOB, 2007) paragraph 42 requires an understanding and evaluation of the design of processes as part of
internal control evaluation while paragraph 44 requires an evaluation of the operational effectiveness of the controls.
and eliminate redundancy of operations (Glassman, 2006) which can provide a better work environment
for employees and align their efforts with the objectives of the firm and impact some measures of
financial performance (Pfister, 2009). An effective internal control system can create an environment
that allows companies to achieve their strategic goals and objectives. In addition the ICFR can impact the
quality of compliance controls which can directly affect a businesss bottom line as well as its reputation
(Lohrey, 2016).
This study adds to the previous research on value relevant information by demonstrating that
reviews of ICFR and reviews of CSR reports can enhance the perceptions of firms made by different
stakeholders. Benefits will accrue to these organizations as stakeholders will support firms that pursue
socially responsible goals in addition to their financial objectives (Fombrun, 1996; 2005; Servaes &
Tamayo, 2013). We obtained financial data from the Compustat North America, and qualitative data for
CSR reviews from the GRI website. Using a first-order autoregressive estimation method for the period
between 2006 and 2012, our findings provide evidence that effects of customers and employees,
measured by sales and employment, on financial performance are influenced by third party reviewed
CSR reports and effective internal control. Moreover, we find that the third party reviewed CSR reports
and effective internal control enable the persistence of financial performance.
The remainder of this paper is organized as follows. The literature review section that follows will
examine three issues: first, corporate governance systems; second, the role that internal controls play in
the overall governance of firms; and third, socially responsible activities and their benefits to
stakeholders. Section three presents the hypotheses. Section four describes methodology; part one is
about the data and part two is about the econometric model. Section five reports empirical results.
Finally, section six discusses our conclusions and suggestions for future research.
2. Literature Review
2.1. Corporate Governance Systems
In both the Anglo-Saxon (Hopt & Leyens, 2004; Friedman, 1962) and stakeholder models (Colley
Jr., et al., 2005; Dallago, 2007; La Porta, et al., 2000) of corporate governance, a disconnect exists
between those parties responsible for the governance of the firm (management and boards) and
stakeholders (particularly shareholders). This disconnect creates a general agency problem (Jensen &
Meckling, 1976) in which management performs actions that should be in the best interests of
stakeholders, but these parties are not able to directly observe their actions. In the Anglo-Saxon model,
shareholders are seen as a group whose interests are primarily supported by management as they supply
the capital necessary for corporate formation (Friedman, 1962). As such, the objectives critical to their
interests take precedence over objectives for non-shareholders and activities relevant to their interests
are measured, reported, and subjected to outside review prior to disclosure. Thus, the ability of
shareholders to review and to evaluate corporate governance activities is facilitated by the financial report
which has become the primary method of communicating the effectiveness of meeting the shareholders
objectives. The central focus of the information in these reports is the financial earnings and the value of
assets entrusted to management. Decisions made by the board of directors and the ability of management
to carry out objectives are measured and evaluated in terms of their effect on the reported financial
information. This means that the measurement of the quality of governance is done in terms of changes to
this set of financial numbers as compared to what shareholders anticipated. While CSR and
sustainability information are not disclosed in these formal statements, arguments made by Du,
Bhattacharya and Sen (2010) indicate that stakeholders will have favorable attitudes toward firms with a
governance structure that considers the sustainable and socially responsible objectives. However, it is
critical that firms disclose their intentions to govern firms with a broader set of objectives, so other
stakeholder groups can take actions to support (or not support) a firm.
While shareholders may be interested in a firms financial objectives, customers and employees
have interests that may supersede strict financial objectives. Customers have been shown to be interested
in more than the efficiency of the processes used to create the firms products. For instance, Green and
Peloza (2011) have shown that customers increase their purchases from firms that disseminate socially
responsible messages. Madden, Roth, and Dillon (2012) argue in their research, that customers are aware
of firms CSR disclosures and that these disclosures produce a halo effect on other products produced
by the firm. This information about firms social responsibility and sustainability activities allow them to
charge higher prices and therefore should improve certain measures of financial performance (Fombrun,
1996). Current and prospective employees have also been shown to be concerned with CSR and
sustainability information.
A financially successful firm can provide a stable workplace, which is a concern of individuals
that are currently employed or are seeking employment (Kinney, 2000). In addition, there is research
indicating that this group of stakeholders are interested in the CSR and the sustainable actions of the firm.
Gond, et al. (2010) have argued that individuals will have favorable attitudes toward firms whose
strategies and governance process include positive CSR actions and sustainability objectives. These
favorable perceptions of the firm, due to their socially responsible objectives, will improve employees
job satisfaction (Valentine & Fleischman, 2008; Turker, 2009). These favorable perceptions may
translate into accepting lower wages as employees receive other types of satisfaction and this could
impact financial performance measures (Abowd, 1989). In addition, there is also evidence that
employees as stakeholders will seek employment with firms that have disclosed socially responsible
objectives and strategies (Montgomery & Ramus, 2003; Turban & Greening, 1996). Thus, firms that
The Impact of Corporate Social Responsibility and Internal Controls on 10 | P a g e

disclose favorable information about their socially responsible actions could see both prospective and
current employees changing their behaviors toward the firms.
To review the actions of firms, stakeholders must have information about the activities that are of
interest to them. For shareholders, the financial statements have been shown to be value relevant, i.e.
change their perceptions of the firm and induce them to alter their behaviors toward the firm. Users of
these financial statements also place value on the independent review and assurance provided of these
statements (Asare & Wright, 2012; Schaub, 2006). In the United States, financial statements are covered
under section 12 of the Securities Exchange Act of 1934 (United States Congress, 1934) which requires
7
these reports to be accurate. The accuracy of these reports is determined by a materiality standard
included in SAS 47 (AICPA 1988) which basically defines materiality as that level of misstatement that
would change an investors decision about the firm. SAB 99 (SEC 1999) closed a loophole and made
qualitative misstatements just as material as those that were quantitatively material. While this provision
was initially seen as a way to cover bribes to foreign officials that were not quantitatively large enough to
be deemed material, it may also be relevant if stakeholders view other activities as being material to their
view of the success of the firm. The accounting and auditing standards establish a formal framework in
which the boards and managements governance activities, as they relate to financial performance, are
measured and reported to shareholders. These standard accounting and auditing activities are seen as
essential to measure the success of the impact which governance has had on shareholder interests. While
these standards relate strictly to financial reporting, concepts such as being free of material
misstatements, can and should be applied to the reports for other groups of stakeholders.
Unlike financial statements which have a specific method of disclosure, firms can choose a
number of channels to make stakeholders aware of the CSR and sustainability activities. Some firms
7
The term materiality has appeared in numerous releases by the FASB and the AICPA; SAS 47 is but one of these.

choose to make stakeholders aware of the socially responsible actions through advertising (Perks, et al.,
2013). A problem with using advertising is that disclosures through these channels are not reviewed
and therefore stakeholder reaction to this information is mixed (Morsing, et al., 2008; Morsing & Schultz,
2006). Therefore, firms use more formal disclosure channels and well established frameworks such as
the GRI (2011; 2006). In addition to simply disclosing socially responsible actions, firms can also
choose to have this information reviewed. The GRI suggests that to gain legitimacy, reports using their
format can and should be reviewed by third parties (GRI, 2013). Research such as that done by Simnett,
Vanstraelen and Chua (2009b) indicates that firms seeking an independent review of their CSR reports do
so to enhance the reports credibility and the firms reputation. These reviews can examine different
aspects of the CSR disclosures.
Firms can choose to have their reports reviewed by an independent assurance provider. The
review can look at both the degree of coverage and the quality of the information contained in the report
(GRI, 2013). One problem with this type of review is that much of the data in GRI reports is qualitative
in nature and therefore requires special skills to interpret and review the disclosure (Adams & Narayanan,
2007). This is also a problem for stakeholders as they may have difficulty using the information
contained in the CSR reports and therefore evidence suggests that stakeholders place reliance on the
third-party review of the report; independent of any reliance placed on the information contained in the
report (Akisik & Gal, 2014). Because reviews and assurance for these CSR statements are seen as
critical for the statements to gain legitimacy, Cohen and Simnett (2015) argue for additional research on
ways to provide assurance for CSR statements. While assurance on the quality of a CSR disclosure is
important for CSR information to be value relevant (either the report or the review of the report),
stakeholders must be able to influence the actions of the firm when this information becomes available,

i.e. they must be able to act on the information, influence decisions about the governance of the firm, and
the impact of the stakeholders actions must be measureable.
Dodd (1932) noted that directors are generally free of interference by shareholders due to the
difficulty in obtaining timely information. While the timeliness of information has increased over time,
there is still a lag between decisions taken by management and any release of information about these
decisions. Furthermore, there is an even longer time lag for the results of their decisions to become
apparent. Even if all information that is material to stakeholders was released, this lag makes it hard to
measure the results of the relevant governance activities. Moreover, if financial and non-financial
stakeholders were to have perfect information concerning the boards decisions and managements
actions, the Investor Responsibility Research Center (1990) has enumerated some by-law provisions that
make it hard for these groups to act upon the information.8 If boards are to direct firms in a way that is
beneficial to stakeholder groups, they must have relevant information about the precise actions of
management and other employees and it must be of sufficient quality. Thus, COSO (2004) stresses
reporting as an important objective and that information reliability is critical (2009, p. 33, para. 77). The
relationship between actions and reports on these actions is critical, and one major purpose of the internal
control structure is to ensure the integrity of this relationship. The nature of these internal control
mechanisms and their relationship to the ability of boards to govern and direct a firm is discussed in the
next section.
8
The Investor Responsibility Research Center Institute is a non-profit research organization that funds social, environmental,
and corporate governance research as well as research on the capital market context that affects how investors and firms make
decisions. http://irrcinstitute.org

2.2. Internal Control and Corporate Governance
The board of directors establish goals and objectives for the corporation and then monitor the
progress of the firm toward meeting them. Management must translate the directives into activities that
will progress the firm toward these goals and objectives. Management must also institute a set of internal
controls to ensure that these objectives are understood and that those activities which could prevent the
organization from meeting these objectives are restricted. The internal control system is an essential
component of the corporate governance mechanism. The internal control system needs to include
channels which effectively communicate the boards directives and allows accurate reports, both formal
and informal, which review the direction of the organization. The timeliness of the information allows
the organizations board and management to take necessary steps to alter activities, so that their
objectives and their goals have a better chance of being achieved (Cortesi, et al., 2009; Holm &
Birkholm-Laursen, 2007). Taken broadly, internal control consists of plans, methods, and measures
adopted by business entities to safeguard their assets, control the accuracy and reliability of accounting
information, promote operational efficiency and effectiveness, and encourage adherence to management
policies (AICPA 1949).
COSO (2013b) provides a more detailed consideration of internal control systems and sees their
role as ensuring that organizations meet objectives and goals in three related areas; operations, reporting,
and compliance. Organization risks include the chance of not meeting objectives in any or all of these
areas. Different objectives, and therefore risks, are relevant to different stakeholder groups. Considering
and including objectives, beyond those related to strict financial performance expands the boards
corporate governance role. Thus, the consideration by the board and management of a broad group of
stakeholders will play a significant role in the internal control procedures instituted and information
monitored within the firm. Publicly traded firms are required to produce and to publish financial

statements which include managements statement and an auditors assurance on internal controls. The
procedures for completing and reviewing these reports have been established for a number of years
(United States Congress, 1934). Official pronouncements such as those from the FASB provide
procedures for management to use as they create the numbers in the financial statements. In addition,
various auditing standards provide guidelines for independent auditors to review the information in the
financial statements. These financial statements and their review form a major component of the
information available to shareholders concerning the adequacy of the governance activities as they relate
to shareholder interests. Other types of measures about the firms operations, such as the efficient use of
resources, do not have a specific way to be included in these reports, instead users of the reports must
infer certain types of efficiency; constructing ratios is one approach . However, the original COSO (1992)
framework for evaluation of internal controls indicates that efficient and effective operations are also the
result of a well-functioning internal control system.
While the SOX Act and the guidelines for the review of internal controls (PCAOB, 2007) focus
specifically on those internal controls over financial reporting (Schneider, 2009), there is a view that
internal controls can have an impact on actions of management that are concerned with ethics and
managements responsibility to other stakeholders (Freeman, et al., 2010). Tackett, Wolf, and Claypool
(2006) argue that a high quality ICFR can have an impact on the costs of not only financial statement
audits, but on performance in other areas of the firm. Thus, stakeholders other than shareholders can
obtain benefits of better management controls; customers can be assured that the firms operations
produce quality products and employees can be assured that the operations of the firm are efficient and
obtain benefits of working for a well-run firm (Kinney, 2000). Corporations such as Novo Nordisk have
applied the principles of the SOX Act because they consider that the impact of any weakness in their
internal control system could also result in material misstatements of their non-financial information

(Dey & Burns, 2010; Novo Nordisk, 2013).9 The importance of strong internal controls is also relevant
for compliance with regulations.
To comply with regulations required by the Dodd-Frank Act (United States Congress, 2010), the
SEC established a set of guidelines for companies to comply with and to report on the presence of
conflict minerals in their supply chain (SEC 2012). In these guidelines, the SEC requires that companies
establish a set of procedures (exercise due diligence) to verify that their supply chain does not allow for
the introduction of what have been termed conflict minerals and that they do not bribe foreign officials.
For the provisions of Dodd-Frank Act, the SEC indicates that the OECD Guidelines (OECD, 2013) are
appropriate for this review. The importance of high quality internal controls is also critical to areas that
are non-financial. The Foreign Corrupt Practices Act (United States Congress, 1977) established
guidelines for corporations to monitor their interactions with foreign governments; including a strong
system of internal controls. This is an indication that the internal control reviews mandated by the SOX
can also be applied to controls relevant to ensuring other forms of compliance and the quality of non-
financial reports. The internal control reviews considered by SOX are not directly concerned with those
controls that affect the efficiency and effectiveness of operations in a broader sense as they generally do
not influence the fair presentation of financial statements (Arens, et al., 2009). For example, Section 302
of SOX requires that management of publicly owned companies certify only the financial reporting
controls and the effectiveness of disclosure controls concerning quarterly and annual financial reports.
Section 404 requires independent auditors to review only that assessment of the internal controls. While
this review is of the internal controls that impact the quality of financial statements, a high quality
9
Novo Nordisk, a Danish pharmaceutical company has gained reputation in the area of sustainability reporting since 1994.
Listed on the New York Stock Exchange, the company has applied the principles of SOX to protect against material
misstatements in all of its non-financial reporting in addition to its required financial statements (Dey & Burns, 2010). The
management is responsible for preparing the consolidated social and environmental information, including for establishing
data collection and registration, internal control systems with a view to ensuring reliable information, specifying acceptable
reporting criteria and choosing data to be collected for intended users of the report (Novo Nordisk, 2013).

internal control system can also improve the overall operation of the firm, and impact objectives of other
stakeholders.
There is evidence that the report on the reviews of internal controls is value relevant for
shareholders (Asare & Wright, 2012; Glassman, 2006). Other types of reports, such as those related to
going concern, have also been shown to be value relevant (Schaub, 2006). These reviews, which are
value relevant for shareholders, have also been shown to be relevant to the decisions made by other
stakeholders. Information about socially responsible activities has been shown to impact customers
decisions about providing support of the firm by buying their products; which has been shown to increase
profitability (Madden, et al., 2012; Smith & Brower, 2012; Brown & Dacin, 1997; Dhaliwal, et al.,
2012). Current and prospective employees have also been shown to consider a firms socially
responsible actions in their decisions. The impact of their support may be manifested in a number of
ways including seeking employment and increasing the satisfaction of current employees (Backhaus, et
al., 2002; Bauman & Skitka, 2012). However, there is also evidence that CSR disclosures may be met
with a certain degree of skepticism. Therefore, some firms take measures to increase the credibility of
these non-financial disclosures. Simnett, et al. (2009b) also point out that certain industries and types of
companies may be in a position to seek assurance for CSR disclosures. The requirement that firms not
only improve internal controls, but also have them reviewed is based on the impact that internal controls
have on all objectives within the firm including reporting and complying with regulations (COSO
2013b). Carroll (1991) argues for a moral management of organizational stakeholders. Carroll
discusses both amoral and moral orientation toward employees and customers. While an amoral
orientation requires management to deal with employees and customers, only as the law requires a
moral orientation requires management to treat employees and customers as valuable resources and to

respect their rights and interests. The broad requirement of internal controls10 to ensure compliance with
existing laws and regulations allow for management to operate with Carrolls (1991) amoral orientation.
Additionally, a quality system of internal control can allow management to govern the organization with
a greater consideration of stakeholders and with Carrolls moral orientation. Thus, improved controls
allow stakeholders, other than shareholders, to place greater reliance on non-financial disclosures when
internal controls are strong (Lixin, et al., 2014). Taken together, this research suggests that while
shareholders are interested in quality internal controls, customers and employees will also increase their
support for well run firms, and that reviews of internal controls are also value relevant.
In the next section the benefits to stakeholders from firms that are ethical and whose operations
are seen as socially responsible are discussed.
2.3. Socially Responsible Activities and Their Benefits to Stakeholders
Arguments have been made that consideration of all stakeholder objectives allows firms to
survive in the long run which in turn will maximize long term shareholder wealth (for example;
Campbell, 1997). However, the results are mixed (Lockett, et al., 2006). For certain types of
relationships with stakeholders the results suggest that the impact of CSR on financial performance can
be complex (Scholtens & Zhou, 2008). A comprehensive review of this area of investigation by
Margolis and Walsh (2001) also does not provide a clear conclusion on the relationship between CSR
and financial performance. Their review indicates that different conclusions can be made about the
relationship between CSR and financial performance depending on the position taken on the importance
of CSR activities. Some of these studies provide evidence that employees and customers do use social
responsibility disclosures in their decisions about whether or not to support firms (Abowd, 1989;
10
SOX Sections 302 and 404 are only concerned with internal controls that directly affect financial reporting while COSO
(2013b) has a broader definition of internal controls as those that not only are related to financial reporting, but also other
types of reporting, operating efficiency, and adhering to laws and regulations.

Albinger & Freeman, 2000; Brown & Dacin, 1997; Dhaliwal, et al., 2012; Heyes, 1996; Webb, et al.,
2008).
There is a growing perception that in todays global business environment it has become difficult
for companies to survive in the long run without considering the needs and preferences of diverse
stakeholders11. To support the objectives of multiple stakeholders, governance must be dynamic as any
change in the business environment could change the way management must direct the business to meet
objectives (Cooper & Owen, 2007). Pursuing a set of long-term objectives for this diverse group of
stakeholders requires management to direct the firm toward operating effectively and efficiently, toward
complying with laws and regulations, and perhaps most important to creating effective reporting systems
to monitor progress toward these objectives.
While some stakeholders are concerned with financial statements, other groups are concerned
with the social responsibility of corporations, and thus CSR reports are important for those groups
(Akisik & Gal, 2014). As long as the information contained in CSR reports meets expectations of
stakeholders, they are willing to provide more financial and non-financial support to the firms (Hopwood,
et al., 2010).12 Hart and Ahuja (1996) found support for Porters (1990) hypothesis that environmental
regulations can induce firms to innovate and become more efficient. There is also evidence that firms
may not have to wait for the benefits of their CSR activities (Luo & Bhattacharya, 2006). This may be
due to stakeholders who use CSR information, such as the way in which firms products are produced
and the impact of the firms operations on the environment, when considering whether to offer their
support for the firm.
11
According to Fox and Lorsch (2012, p. 57) The companies that are most successful at maximizing shareholder value
over time are those that aim toward goals other than maximizing shareholder value. Employees and customer often know
more about and have of a long-term commitment to a company other than shareholders.
12
Delfgaauw (2000) argues that the criteria for evaluating investment decisions in Shell Oil are not exclusively economic in
nature, but also take into account environmental and social impact of their investments.

Gond, et al. (2010) argue that employees attitudes toward firms will be influenced by their
perceptions of CSR activities. In support of Gond, et al., Glavas and Kelley (2014) found that employees
commitment toward the firm are impacted by the CSR and the perception by employees of the firms
treatment of outside stakeholders. This view is also supported by Chong (2009) as employees attitudes
toward DHL were enhanced and their motivation and satisfaction increased as a result of the firms
response to an environmental disaster. There is also evidence that employees will find socially
responible firms to be more attractive employers (Montgomery & Ramus, 2003; Turban & Greening,
1996) and will have greater job satisfaction (Valentine & Fleischman, 2008; Turker, 2009). In addtion,
employees perceptions of a firms CSR activites will influence their attachment to the firm with an
impact on performance (Lee, et al., 2013). These internal stakeholders can have an impact of the success
of the firm through their performance of activities that meet the overall objectives of the firm.
There is evidence that investors use CSR information in their decisions about whether to provide
funds to the firm and the interest rates they will charge (Elliott, et al., 2014). One major group of
stakeholders that make significant use of CSR activities is customers (Pomering & Dolnicar, 2009).
Customers are critical as they have a great deal of power over the success of a firm because they control a
significant amount of resources (revenue) needed by the firm (Prado-Lorenzo, et al., 2009). There is
evidence that consumers do see value in CSR actions and may be willing to pay higher prices to firms
that are more socially responsible (Green & Peloza, 2011). Therefore, firms have an incentive to make
CSR disclosures to consumers as these messages can provide more favorable perceptions of all a firms
products (Brown & Dacin, 1997; Madden, et al., 2012), and make consumers more willing to purchase
products from these firms (berseder, et al., 2013; Webb, et al., 2008). For this reason, CSR disclosures
to consumers can impact measures of performance by increasing sales and profitability.

Herzig and Schaltegger (2006) conclude that disclosure of non-financial information signals a
willingness to communicate organizations role in society at large and to enhance their legitimacy. This
means that interest groups will change their view of organizations that produce this non-financial
information and therefore there should be an interest in the quality of these reports as they do attempt to
change attitudes and behavior toward firms. Because quality of information is important, both the reports
for investing and non-investing stakeholders should be free of material misstatements. This is critical if
the users of these reports are to evaluate the board and managements decisions and actions to achieve the
objectives relevant to each of the groups.

13
The same independent review of the CSR statements is missing (or not mandatory) and
therefore the quality of a firms internal control processes and the review of these controls can be critical.
Parties that provide assurance on CSR reports will base their judgment about the reliability of
information in the report not only on the accuracy of the data, but also on the firms control systems
(Adams & Narayanan, 2007; O'Dwyer, 2011).14 The review of ICFR is part of the overall financial
statement and therefore is limited to those controls over financial reporting. It has been suggested that
disclosures about their adequacy should address internal controls broadly, rather than being limited to
financial accounting controls over the recording and reporting of financial information (Cangemi &
Singleton, 2003). The credibility of reports, other than financial statements, that are related to the
objectives of stakeholders would increase if they were audited by external auditors (Holm & Birkholm-
Laursen, 2007). This approach has been long adopted by corporations in continental Europe, and in Japan
where corporate governance aims to harmonize the interests of a wide range of stakeholders. However, it
seems problematic for some reasons. First, there are no generally accepted standards for sustainability or
13
It is true that there are certain standards of engagement such as AT 101 (AICPA 2001a) for attestation of non-financial
information and AT 201 (AICPA 2001b) for agreed-upon procedures.
14
There is evidence that third party assurance providers of CSR reports are increasingly reviewing internal control
effectiveness to collect and compile information on the data which is included in CSR reports (Lloyd's Register Quality
Assurance, Inc., 2013; Manetti & Becatti, 2009; Moss Adams, LLC, 2013).

social responsibility reports. Second, in contrast to the financial statements audit report, which is
primarily prepared for shareholders, CSR reports are prepared for stakeholders whose expectations and
interests are diverse and therefore may conflict with each other. Third, much of the data in sustainability
reports is qualitative in nature requiring special skills to interpret (Schneider, et al., 2012). These may be
the reasons for the low readership of CSR reports (Brown, et al., 2009)15
Considering the complexity and the qualitative nature of these CSR reports, Akisik and Gal
(2014) focused on the relationship between the reviews provided for these reports and financial
performance. They determined that the type of review had a significant relationship with financial
performance. In this paper, we expand on their study to determine whether stakeholders decisions are
influenced by the review of internal controls required by the SOX legislation and third party reviewed
CSR reports, created using the GRI guidelines as evidenced by their support for the firm.
3. Hypotheses Development
As noted previously, customers and employees, who are considered primary stakeholders, have
the considerable influence on financial performance of firms (Maignan, et al., 2005; Prado-Lorenzo, et
al., 2009). In this section, we will examine the effects of these primary stakeholders, measured by sales
revenue and number of employment, on financial performance, and how these effects of these relations
on financial performance are influenced third party reviews of CSR reports and effective ICFR.
15
Who should provide the assurance service? According to Delfgaauw (2000), it is not necessary that assurance be provided
by accountant auditors. He argues that their skills and competencies are not sufficient to perform such a service, and therefore
verification of sustainability reports may be performed by other expert organizations and consultants. This view is supported
by Wallage (2000) who argues that the verification requires multidisciplinary cooperation although financial auditors have the
necessary skills in reviewing information systems, verification of data, and in the reporting of information to those outside the
organization.

3.1. Stakeholders Relations, Third Party Reviews of CSR Reports, Internal Controls and the
Persistence of Superior Financial Performance
Customers want firms to deliver high quality products that satisfy their complex needs and wants.
One aspect of satisfying complex needs and wants is being socially responsible (Freeman, et al., 2010;
Polonsky, 1995; Spencer & Rinaldi, 2010). 16 Superior financial performance could result from valuable
innovations that satisfy unmet customer demands (Freeman 1984, Porter 1990; 1985). Although the
returns to the firms from each innovation may diminish over time, innovations ensure that, overall, firms
maintain a high performance position (Roberts, 1999). Prior research has documented that CSR has an
impact on customers purchase intentions, loyalty, and satisfaction, and that customers take firms
commitments to CSR initiatives into account when evaluating firms and their products (Madden, et al.,
17
2012; Smith & Brower, 2012). Therefore, firms need to pay attention to customers views of CSR
given the central role of customers in marketing (berseder, et al., 2013). Communication of CSR
activities to stakeholders is considered as an attempt to gain legitimacy by creating awareness and
reducing stakeholder skepticism (Chaudhri, 2014; Du, et al., 2010). Positive customer perceptions about
product quality are likely to lead to increased sales (Waddock & Graves, 1997). Dhaliwal et al (2012)
argue that in a market where customers have a high level of awareness about CSR activities, superior
CSR performance is likely to improve brand value and legitimacy of firms, which in turn increases the
demand for firms products (Brown & Dacin, 1997; Coors & Winegarden, 2005; Mohr, et al., 2001), and
the willingness of customers to promote the products and to pay more for them (Homburg, et al., 2005;
Ittner & Larcker, 1998; Mooradian & Olver, 1997).18 However, if firms cannot adequately and effectively
16
Customers as an important stakeholders group are crucial for attaining long-term goals of firms. Vlachos et al. (2009) argue
that corporate survival requires retaining customers, which implies that the success in the long run cannot be achieved without
attaining short-term goals.
17
Previous studies show that higher levels of customer satisfaction lead to greater customer loyalty, which in turn has a
positive effect on profitability (Homburg, et al., 2005).
18
CSR induced revenue increases can result from additional sales due to increases in sales quantities, prices or margins
(Weber, 2008; Murphy, et al., 2005).

communicate CSR issues, their legitimacy and financial performances are likely to be adversely
affected.19
Gaining trust in the information source is critical for the success of CSR communication
(Maignan & Ferrell, 2001; Pomering & Dolnicar, 2009; Clarkson, 1995; Preston & O'Bannon, 1997).
Third party reviews of CSR reports will not only enhance recognition, trust and credibility, but also help
communication with stakeholders to improve (GRI 2013). As one of the objectives of an internal control
system is to meet various reporting objectives (COSO 2013) a good internal control system may impact
the trust in CSR reports. From the corporate communication perspective, it can be argued that when a
CSR report is seen as credible it may contribute to creating a positive image, or halo effect (Chaudhri,
2014), so that customers and employees are prepared to a greater extent to buy their products and do
business with firms (Hooghiemstra, 2000). According to a survey conducted by APCO Worldwide
(2004), people are receptive and responsive to proactive CSR communication and this communication
directly impacts consumer behavior. This survey indicated that customers reacted to positive and
negative interpretations of firms CSR activities, which in turn affected their purchasing decisions.
Besides third party reviewed CSR reports, internal control systems themselves might have an
impact on consumer behavior. Lixin, Zhao, and Zhou (2014) find evidence that weakness in internal
controls affects customers perceptions of the firms ability to provide quality products. As previously
argued, in addition to shareholders other stakeholders may obtain benefits of effective internal controls.
While customers can be assured that firms operations are capable of producing high quality products,
employees can be assured that business operations are efficient (Kinney, 2000). Firms with a good
19
For example, Shells sales revenue dropped by nearly 70 percent in some countries because of the companys decision to
dump an oil platform in the Atlantic and the subsequent call by Greenpeace for a boycott of Shell in June 1995 (Werther Jr. &
Chandler, 2005).

reputation may also possess a cost advantage because employees prefer to work for high reputation firms,
should therefore work harder, or possibly for lower remuneration (Roberts & Dowling, 2002).
In light of the views above, we propose the following hypotheses in alternative form:
H1a: Any effect of sales of the previous period on superior financial performance (return
on assets or Tobins Q) is positively influenced by third party reviews of CSR reports of
the previous period (H1a: 5 > 0).
H1b: Any effect of sales of the previous period on superior financial performance (return
on assets or Tobins Q) is positively influenced by effective internal control of the previous

period (H1b: 10 > 0).
H1c: Any effect of employment of the previous period on superior financial performance
(return on assets or Tobins Q) is positively influenced by third party reviews of CSR
reports of the previous period (H1c: 5 > 0).
H1d: Any effect of employment of the previous period on superior financial performance
(return on assets or Tobins Q) is positively influenced by effective internal control of the
previous period (H1d: 10 > 0).
H1e: Third party reviews of CSR reports of the previous period positively influence the
persistence of superior financial performance (return on assets or Tobins Q)
(H1e: 6 and 6 > 0).
H1f: Effective internal control of the previous period positively influences the persistence
of superior financial performance (return on assets or Tobins Q) (H1f: 11 and 11 > 0).
3.2. Stakeholders Relations, Third Party Reviews of CSR Reports, Internal Controls and the
Persistence of Inferior Financial Performance
Is failure unavoidable for businesses that are performing poorly? Prior research suggests that
there could be several strategies that help poorly performing firms to improve their profitability. In other

words, a poor performing firm is not doomed to failure (Thitart, 1988). It is argued that a good
reputation enhances and supports efforts to improve sales, innovations, and recovery strategies in the
event of crises (Roberts & Dowling, 2002; Slatter, 1984). Good stakeholders relations built on trust and
loyalty in previous periods would not only contribute to the superiorly performing firms, but also help
inferiorly performing firms recover more quickly from their disadvantaged situations (Choi & Wang,
2009).
To recover, firms with inferior financial performance need to adjust their business level strategies,
by for example, redesigning their products, improving their operational processes, and organizational
decentralization (Arogyaswamy, et al., 1995; Thitart, 1988). Already established good stakeholders
relations may facilitate combining knowledge and capabilities that are scattered within firms and
contribute to the integration of internal and external resources needed for such strategic adjustments in
order to recover from inferior performance (Choi & Wang, 2009; Hillman & Keim, 2001). Arogyaswamy
et al. (1995) argue that many inferior performing firms have declining sales revenue as the demand for
firms products or services deteriorates due to an industry contraction or the defection of customers to
competitors. However, third party reviewed CSR reports may reduce or even offset this negative impact
by gaining trust and loyalty of stakeholders. 20
Firms can undertake many actions which can have either positive or negative impact on
stakeholders relations, some of which will be included in their CSR reports (Lee, et al., 2013; Waddock
& Graves, 1997). When a firm undertakes operations that are socially responsible, there is evidence that
individuals are more interested in seeking employment at that firm (Vlachos, et al., 2009), as prospective
20
As discussed previously, the credibility of reports that are related to objectives of stakeholders other than shareholders
would increase if they were audited by external auditors (Holm & Birkholm-Laursen, 2007). According to GRI (2013),
organizations seek assurance for several reasons. Benefits of third party review of CSR reports include 1) increased
recognition, trust and credibility by stakeholders, 2) reduced risk and increased value, 3) strengthened internal reporting and
management systems, and 4) improved board and CEO level engagement, and 5) improved stakeholder communication.
Further the decision to have a third party review may be done to enhance the firms reputation (Simnett, et al., 2009) and to
signal to all stakeholders the importance management places on being a socially responsible member of society.

employees find the firm more attractive (Turban & Greening, 1996). There is also evidence that
individuals that work for firms which are seen as more socially responsible will be more loyal and
committed and are more satisfied working at the firm (Gond, et al., 2010; Turker, 2009; Valentine &
Fleischman, 2008). Examples of actions that can have a positive impact on employee relations include
strong worker involvement within firms, good union relations, generous profit sharing plan, good health
and safety record, and good retirement benefits (Carroll, 1991). There are also actions that will have a
negative impact on employee relations such as unfavorable labor union relations, a poor health and safety
record, and a poorly funded retirement plan. While the evidence indicates that employees will be more
satisfied with socially responsible firms and will find socially responsible firms more attractive, the
impact on financial performance may be positive or negative (Sinke, 2011). For example, good union
relations may increase productivity, but the financial performance may be adversely affected due to
higher labor costs (Abowd, 1989; Bird, et al., 2007; Sinke, 2011). In addition, CSR disclosures may
influence employee commitment and satisfaction reducing turnover and thus training costs.
Incorporating sustainable and socially responsible actions into the firms operations might
indicate that the firm is in a better position for long term success. Additionally, well run companies will
have effective and efficient operations, which is related to a high quality internal control systems.
Kinney (2000) argues that employees will view firms with high quality internal controls systems as better
firms both to work for and to seek employment with. This is similar to the arguments that employees
will seek out firms with better CSR disclosures. Taken together, these arguments suggest that employees
will seek out socially responsible and well controlled firms. Even if higher levels of employment may
increase labor costs which will negatively impact financial performance (Becker-Blease, et al., 2010),
some of this negative impact could be mitigated as employees obtain other types of satisfaction working

in firms with quality CSR activities and that are well controlled. Based on these arguments, we express
following hypotheses in alternative form:
H2a: Any effect of sales of the previous period on inferior financial performance (return
on assets or Tobins Q) is negatively influenced by third party reviews of CSR reports of
the previous period (H2a: 5 < 0).
H2b: Any effect of sales of the previous period on inferior financial performance (return
on assets or Tobins Q) is negatively influenced by effective internal control of the
previous period (H2b: 10 < 0).
H2c: Any effect of employment of the previous period on inferior financial performance
(return on assets or Tobins Q) is negatively influenced by third party reviews of CSR
reports of the previous period (H2c: 5 < 0).
H2d: Any effect of employment of the previous period on inferior financial performance
(return on assets or Tobins Q) is negatively influenced by effective internal control of the
previous period (H2d: 10 < 0).
H2e: Third party reviews of CSR reports of the previous period negatively influence the
persistence of inferior financial performance (return on assets or Tobins Q) (H2e: 6 and
6 < 0).
H2f: Effective internal control of the previous period negatively influences the persistence
of inferior financial performance (return on assets or Tobins Q) (H2f: 11 and 11 < 0).
4. Methodology
4.1. Data
Our data came from two sources. We obtained third-party reviewed CSR reports for North
American firms from the GRI website. Firms are not required to have their GRI reports reviewed, but

can engage either GRI or some third party review providers, such as independent auditors, to check their
conformity with GRI guidelines. However, the procedures applied by third party review providers are not
formally endorsed by GRI. There are also firms that do not use these options. Such firms declare by
themselves that they follow the GRI Guidelines. Note that some firms included in the sample do not
disclose that they have used any of the three types of reviews; although they apply GRI guidelines to
their operations. In addition, firms do not consistently use these types of reviews; that is, in some years a
firm may choose GRI review while in other years a review was provided by a third party. Finally, there
are also years for which no reviews have been reported (Brown, et al., 2009). Our second source of data
consists of financial data from Compustat North America. As noted in the introduction, we conduct our
analysis starting with 2006 because GRI reporting for North American firms was not widespread in the
periods prior to this year.
4.2. Econometric Model

In order to test our hypotheses, we use the following first-order autoregressive models with cross
sectional time series data (Choi & Wang, 2009; Geroski & Jacquemin, 1988; McGahan & Porter, 1999).
(1) roa it = 0 + 1 csraud i (t-1)+ 2 sales i (t-1)+ 3 persistence i (t-1)+4 controls i (t-1)
+5 csraud i (t-1)*sales i (t-1) +6 csraud i (t-1)* persistence i (t-1)
+7 sales i (t-1) * persistence i (t-1) +8 csraud i (t-1) *controls i (t-1) +9 auopic i (t-1)
+10 auopici (t-1)*sales i (t-1) +11 auopici (t-1)*persistence i (t-1) +12 auopic i (t-1)*controls i (t-1)
+13 controls i (t-1)* persistencei (t-1) +14 industry i (t-1) + it
(2) tobinq it = 0 + 1 csraud i (t-1)+ 2 sales i (t-1)+ 3 persistence i (t-1)+4 controls i (t-1)
+5 csraud i (t-1)*sales i (t-1) +6 csraud i (t-1)* persistence i (t-1)
+7 sales i (t-1) * persistence i (t-1) +8 csraud i (t-1) *controls i (t-1) +9 auopic i (t-1)
+10 auopici (t-1)*sales i (t-1) +11 auopici (t-1)*persistence i (t-1) +12 auopic i (t-1)*controls i (t-1)
+13 controls i (t-1)* persistencei (t-1) +14 industry i (t-1) + it
(3) roa it = 0+ 1 csraud i (t-1)+2 employ i (t-1)+ 3 persistence i (t-1)+4 controls i (t-1)

+5 csraud i (t-1) *employ i (t-1) + 6 csraud i (t-1) * persistence i (t-1)
+7 employ i (t-1) * persistence i (t-1) +8 csraud i (t-1)*controls i (t-1) + 9 auopic i (t-1)
+10 auopici (t-1)*employ i (t-1) +11 auopic i (t-1)*persistence i (t-1) + 12 auopic i (t-1)*controls i (t-1)
+13 controls i (t-1)* persistence i (t-1) + 14 industry i (t-1) + it
(4) tobinq it = 0+ 1 csraud i (t-1)+2 employ i (t-1)+ 3 persistence i (t-1)+4 controls i (t-1)
+5 csraud i (t-1) *employ i (t-1) + 6 csraud i (t-1) * persistence i (t-1)
+7 employ i (t-1) * persistence i (t-1) +8 csraud i (t-1)*controls i (t-1) + 9 auopic i (t-1)
+10 auopici (t-1)*employ i (t-1) +11 auopic i (t-1)*persistence i (t-1) + 12 auopic i (t-1)*controls i (t-1)
+13 controls i (t-1)* persistence i (t-1) + 14 industry i (t-1) + it
4.2.1. Dependent Variable: Financial Performance

In the model, we use log values of industry-adjusted financial performance measured by return on
assets (roa) and Tobins q (tobinq) as the dependent variable because each industry has different profit
potentials (Bresser et al., 2005; Porter, 1980). Following Choi and Wang (2009) and Villalonga (2004),
we created two subsamplessuperior performance (above zero) and inferior performance (equal or below
zero) firms.21 So, multivariate analyses were conducted using three samples: 1) total sample, 2) superior
performance firms, and 3) inferior performance firms.
4.2.2. Independent Variables

All of the independent variables are used in one year lagged values in estimations. Also, we use
log values of independent variables except for csraud i (t-1), auopic i (t-1) and industry i (t-1). csraud i (t-1) is a
dummy variable for third party reviewed CSR reports. sales i (t-1) refers to the natural logarithm of sales
revenue in millions of US dollars. persistencei (t-1) is the one year lagged value of financial performance
21
Industry-adjusted financial performance is computed as financial performance minus the median financial performance of
the firms in Compustat in a given four-digit SIC industry and year (Choi & Wang, 2009). roa is a measure of how efficient
assets are used to generate profits (Rassiers & Earnhart, 2010; Eccles, et al., 2012). Tobins q (tobinq) is a statistic used as a
proxy for the firms value from investors perspective. Consistent with prior research, we measure tobinq as (book value of
assets book value of equity deferred taxes + market value of equity) / book value of assets (Morck, et al., 1988; Servaes &
Tamayo, 2013).

when there is no influence from other factors (i.e., when 6, 7, 11, 13, 6, 7, 11 and 13 = 0). csraud i (t-
1)*sales i (t-1) is the interaction of sales i (t-1) with csr i (t-1). auopic is a dummy variable that represents the
auditors opinion of the effectiveness of the companys internal control over financial reporting. auopici (t-
1)*sales i (t-1) is the interaction of auopici (t-1) with sales i (t-1). employ i (t-1) refers to the natural logarithm of
the number of employment. While csraud i (t-1) *employ i (t-1) indicates the interaction of csraud i (t-1) with
employ i (t-1), auopici (t-1)*employ i (t-1) is the interaction of auopici (t-1) with employ i (t-1). The control
variables are the debt ratio computed as the ratio of total debts to total assets (debtratio i (t-1)), current ratio
computed as current assets/current liabilities (currentrt i (t-1)), capital intensity computed as total
assets/total employees (capitalintens i (t-1)), and efficiency computed as cost of goods sold/sales (efficiency
i (t-1)) (Servaes & Tamayo, 2013). industry i (t-1) is a dummy variable for industries.
<< Insert table 1 about here>>
5. Results of Empirical Analyses

5.1. Univariate Analyses
<< Insert Table 2 about here>>
Table 2 presents the descriptive statistics for the total sample between 2006 and 2012. The mean
of the industry-adjusted roa is 0.007 while industry-adjusted tobinq has a mean of 0.090. csraud has a
mean of 0.215, suggesting that less than 25 percent of firms in the sample have an independent third
party review of their CSR reports. auopic has a mean value of 0.857 indicating that most (85.7%) of the
firms have effective ICFR. Our main variables of interest that are used as proxy for stakeholderssales
and employ have mean values of 25,915.88 and 50.922 respectively, indicating that average sales
revenue is approximately 26 billion dollars and average number of employees is 51,000.
Table 3 reports the Pearson and Spearman correlations among dependent and independent

variables. Nearly, all of the independent variables are significantly correlated with roa and tobinq. Both
roa and tobinq are significantly negatively correlated with csraud [ = -0.0758; = -0.1647]. The
positive and significant Spearman correlation between auopic and roa [ = 0.1386] suggests that
effective internal control with respect to financial reporting has a strong positive correlation with this
measure of financial performance. Although correlations do not show the direction of the relationship,
the positive significant correlations of csraud and auopic with sales suggest that both third party
reviewed CSR reports and effective internal control are likely to increase sales. [ = 0.1254, 0.4734,
0.1445 and 0.4184]. Finally, there is a positive and significant correlation between auopic and employ [
= 0.2494, 0.2126].
5.2. Multivariate Analyses

Table 4 presents the results of first order autoregressive panel data estimations. Estimations (1a),
(1b), and (1c), where the log of roa is used as dependent variable, includes csraud, auopic, and their
interactions with sales (csraud x sales; auopic x sales), and also persistence and its interactions with
csraud and auopic. In estimation (1b), we find that for superiorly performing firms sales is significantly
and positively associated with roa, and that csraud reduces this positive association, as suggested by the
negative coefficient on the interaction variable (csraud x sales) contrary to our hypothesis H1a. While
sales is significantly and positively associated with roa, its interaction with auopic turns out to be
positive consistent with H1b. The coefficient on the interaction term (csraud x persistence) is
significantly positive, suggesting that third party reviewed CSR reports contribute to the persistence of
superior financial performance, providing support for H1e.
As we predict in H2a and H2b, in estimation (1c), we find that although sales sustain inferior
financial performance, both third party reviewed CSR reports and effective internal control help firms to
recover from this disadvantaged position as suggested by negative coefficients on the interaction

variables (csraud x sales; auopic x sales). Accordingly, it can be argued that customers would increase
their demand for products based on trust and credibility provided by third party reviews of CSR reports
and effective ICFR (GRI, 2013; Mohr, Webb, and Harris, 2001; Simnett, Vanstraelen, and Chua., 2009).
The quality of internal controls is important in order for firms to achieve their goals and keep their
legitimacy in the eyes of stakeholders. In accordance with SOX, all financial reports must include an
internal control report, indicating that management is responsible for the adequacy of internal control,
and that the external auditor attests to the accuracy of managements assertion that internal control is in
place, adequate, operational, and effective. While any negative findings of internal control may damage
the image of companies in the eyes of stakeholders, positive ones may enhance their image. 22
In estimations (2a), (2b), and (2c), we replicate our analysis using the log of tobinq as the measure
of financial performance. In estimation (2b), sales is negatively and significantly associated with
financial performance for superiorly performing firms, and third party reviewed CSR reports appear to
reinforce the negative impact of sales on financial performance as suggested by a negative coefficient on
the interaction variable (csraud x sales), contrary to H1a. While we find a significant negative
relationship between sales and tobinq for superiorly performing firms, the association of the interaction
term (auopic x sales) with tobinq is significantly positive, suggesting that the negative effect of sales on
performance is reduced by effective internal control, consistent with H1b. In estimation (2c), sales is
negatively associated with financial performance, though not to a significant extent for inferiorly
performing firms and third party reviewed CSR reports enhance this negative effect as suggested by the
negative coefficient on the interaction term (csraud x sales). Furthermore, the negative association of
sales with inferior financial performance is enhanced by auopic as suggested by the negative coefficient
on the interaction (auopic x sales).

22
Lixin, Zhao and Zhou (2014) find that sales growth declines after companies disclosures of internal control weaknesses
(see also: Karpoff, Lee and Martin 2008).

This supports H2b suggesting that effective internal control that would create more efficient
operations is likely to help inferiorly performing firms to recover from this disadvantaged position by
enabling them to deliver quality products and improve the return for a particular level of sales (Pickett &
Pickett, 2005). For the sake of brevity, estimation results of control variables are not included in the
tables. Un-tabulated results show that debtratio, efficiency, currentrt, capitalintens, and also their
interactions with csraud, auopic, and lagged financial performance are significant.

In addition to customers, employees are another primary group of stakeholders that directly
contribute to the success of companies (Bauman & Skitka, 2012; Harrison & Freeman, 1999). Table 5
reports the results of estimations in which the log of the number of employment (employ) is used as the
variable of main interest. As in Table 4, financial performance is measured by roa in estimations (3a),
(3b) and (3c), while the measure of financial performance for (4a), (4b), and (4c) is tobinq. In estimation
(3b), the interaction term (auopic x employ) is significantly positively associated with financial
performance, consistent with H1d.
In contrast to the positive relationship between auopic x employ and superior financial
performance, in estimation (3b), an increase in employment appears not to help superiorly performing
firms with CSR activities (csraud x employ), contrary to H1c. Moreover, we find that effective internal
control contributes to the persistence of superior financial performance (auopic x persistence), consistent
H1f. In estimation (3c), although employ is positively significantly related to inferior financial
performance, both third party reviewed CSR reports and effective internal control alleviate this positive
effect as suggested by the negative coefficients on interaction terms (csraud x employ; auopic x employ ).
These results, which support H2c and H2d, imply that both third party reviewed CSR reports and

effective ICFR help inferiorly performing firms to recover from this unfavorable situation as a
consequence of an increase in employment. Moreover, as we predict in H2e and H2f, the negative
coefficient on the interaction terms (csraud x persistence; auopic x persistence) indicate that third party
reviewed CSR reports and effective ICFR help inferior performance firms to recover from this
disadvantaged situation. As noted previously, an effective internal control system will likely contribute to
financial performance and also motivates people that work in alignment with the organizational
objectives (Pfister, 2009, p. 73). Mohrman and Mohrman (1983) argue that in declining organizations, a
successful implementation of employee involvement including better internal control systems helps
organizations to recover from unfavorable situations.
As noted previously, effective internal control is critical to the success of companies. In addition
to ensuring the reliability of financial reporting, internal controls should also ensure the efficiency and
effectiveness of operations, and compliance with laws and regulations, which could also impact CSR and
sustainability. Adhering to laws and regulations, internal policies, corporate and ethical values
communicated by the assurance of internal controls would positively affect financial performance by
enhancing motivation and productivity of employees. So, auditors are required to attest the accuracy of
managements internal control evaluation with regard to environmental and social responsibility
disclosures to the extent that these disclosures are required by regulatory organizations such as FASB and
SEC. There have been long-standing debates about the role of the SEC in corporate social disclosure.
Williams (1999) argues that SEC has the authority to require an expanded social disclosure, which would
provide additional information on how profits are generated, in addition to financial information stating
the level of profits. According to Williams (1999), expanded social disclosure would include information
about the products that companies produce, the countries where they do business, the information on
global labor practices, and the environmental effects. This argument is interesting, suggesting that

securities regulation should be designed for the benefit of not only shareholders, but also non-investor
stakeholders. While the internal control review performed by independent auditors is restricted to those
controls over financial information for financial reporting, it includes an examination of entity-level
controls and compliance with existing regulations. So, there is reason to believe that if effective, these
controls will impact controls in other areas of the firm. For instance, deficiencies in controls in one area
may indicate deficiencies in controls over operational efficiency and in the overall governance of the firm
(Ogneva, et al., 2007). Thus a quality internal control review could produce a halo effect and provide
assurance of due diligence in other processes, such as the review of supply chains.
In estimations (4a), (4b) and (4c) we use log of tobinq as the measure of financial performance. In
estimation (4b), although an increase in employment adversely affects the superior performance, third
party reviewed CSR reports and effective internal controls reduce this negative impact as suggested by
the positive coefficients on both interactive variables (csraud x employ; auopic x employ). Therefore,
hypotheses H1c and H1d are supported. This could be due to higher labor productivity as a result of
increased commitment and motivation based on the firms CSR activities. Prior research finds that
prospective employees prefer business organizations with whom they perceive conformity between their
values and organizations values (Albinger & Freeman, 2000; Judge & Cable, 1997). There are numerous
papers arguing that CSR enhances companies ability to attract and keep top talent employees while
reducing turnover as a result of job satisfaction (Albinger & Freeman, 2000; Gond, et al., 2010; Riordan,
et al., 1997).23 Socially responsible companies may not only attract high quality employees, but also
increase their morale and motivation, which in turn increases productivity and profitability. Backhaus,
Stone and Heiner (2002) provide evidence that potential job seekers are interested in CSR records of
23
Bauman and Skitka (2012) argue that there are four basic psychological needs through which CSR can affect employees
relationship with companies, namely: 1) a sense of security and safety that their material needs will be satisfied, 2) self-esteem
that results from a positive social identity, 3) feelings of belongingness and social validation of important values, and 4)
existential meaning and a deeper sense of purpose at work.

companies when considering them as prospective employers. Good ratings in areas of community
involvement and employee relations enhance the prestige of firms in the eyes of potential employees
(Backhaus, et al., 2002; Turban & Greening, 1996)24.
In estimation (4c) for inferiorly performing firms, we find that one year lagged financial
performance (persistence) is significantly negatively associated with financial performance, and that both
third-party CSR reports and effective ICFR enhance this negative association, as suggested by the
negative coefficient on the interaction terms (csraud x persistence and auopic x persistence). This
implies that both third party reviewed CSR reports and quality ICFR can assist inferiorly performing
firms to improve their financial performance.
To sum up, the results of regression analyses provide evidence that customers and employees,
proxied by sales and employ, influence financial performance through third party reviewed CSR reports
and effective ICFR.
5.3 Robustness Tests

We conducted a number of additional analyses to determine whether our results are robust. They
are not reported for the sake of brevity. First, we re-estimate our models using current year values of
independent variables including third party reviewed CSR reports (csraud) and effective internal control
(auopic) instead of one-year lag values. Moreover, the results have been replicated using growth rates of
financial performance measures (roa and tobinq). Un-tabulated results are similar to those estimations
where natural logarithms of financial performance measure variables are used. The interactions of csraud
and auopic with sales and employ are found again to be significantly related to financial performance
measures in all estimations. Finally, we replicate our estimations with three year average of roa and
24
Carroll (1991) argues that social responsibility can only become a reality if more managers become moral instead of amoral
or immoral. While immoral management views employees as factors of production to be used and exploited for gain of the
firm, amoral management treats employees only to the extent that the law requires, but moral management considers
employees as a human resource that must be treated with respect and dignity.

tobinq (Cochran & Wood, 1984). Again, the results turn out significant and consistent with previous
estimations.
6. Conclusions
Corporate governance is a process whereby board of directors establish a set of objectives for the
firm and then monitor managements activities as they direct the firm toward achieving these objectives.
Stakeholders require information about these activities, so they can assess whether the firm is making
progress toward the objectives they consider relevant, and decide whether or not to support the firm.
Customers can take actions such as purchasing firms products, and employees can decide whether to
seek employment with the firm. Each of these actions will impact certain measures of financial
performance. Stakeholders are also interested in the types of assurance provided for the information they
receive about the firms actions and their progress toward meeting the relevant objectives.
In this study, we examine whether third-party reviewed CSR reports and the assurance on the
quality of internal controls over financial reporting are value relevant for customers and employees. We
contribute to the literature about the importance of information on sustainability and management control
for decisions made by various stakeholder groups concerning whether to support firms. Our study
provides evidence that customers will support firms that have third party reviewed CSR reports and better
internal controls. Moreover, we find that the effect of employment on financial performance is influenced
by both third party reviewed CSR reports and internal control, in high and low performing firms.
This work is limited by the number of North American firms that provide CSR reports in
compliance with GRI guidelines. Another limitation is that firms are not required to provide assurance
for these reports, which also reduced our sample size. In the future, as more firms provide information
on their CSR activities in agreed-upon formats, it would be possible to expand the analysis. Future

studies that would examine the extent to which internal control reviews, provided as part of a financial
audit, reduce the cost of providing CSR information could provide interesting results.

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Acknowledgements: We are grateful to Nikolaos Artavanis, Christopher F. Baum, Sleyman zmucur,
three anonymous reviewers, and the editor of the Journal for their valuable comments and suggestions.

Table 1: List of Variables
Dependent variable Description
performance Natural logarithm of return on assets (roa) (ebit/avg. total assets)
and Tobins q (tobinq) [(book value of assets book value of
equity deferred taxes + market value of equity)/(book value of
assets)].
Independent variables
of main interest
csraud One year lagged dummy variable getting the value of 1 for third
party review of corporate social responsibility reports and 0
otherwise.
auopic One year lagged dummy variable getting the value of 1 if ICFR is
effective (no material weakness) and 0 otherwise. This variable
represents the auditor's opinion of the effectiveness of the

company's ICFR in conjunction with auditing a company's
financial statements.
sales Natural logarithm of one year lagged sales revenue in millions of
US dollars. It represents gross sales (the amount of actual billings
to customers for regular sales completed during the period) reduced
by cash discounts, trade discounts, and returned sales and
allowances for which credit is given to customers, for each
operating segment.
employ Natural logarithm of one year lagged number of employees in
thousands.
persistence One year lagged industry-adjusted financial performance measures
in natural logarithm (roa and tobinq)
Control variables
debtratio Natural logarithm of one year lagged ratio of total debts to total
assets.
currentrt Natural logarithm of one year lagged current ratio measured as the
ratio of current assets to current liabilities
efficiency Natural logarithm of one year lagged efficiency computed as cost
of goods sold to sales.
cintensity Natural logarithm of one year lagged capital intensity computed as
total assets to total employees.
Table 2: Descriptive Statistics
2006-2012
Variable Obs. Mean Std. Dev. Min. Max.
roa 735 0.007 0.062 -0.440 0.371
tobinq 649 0.090 0.627 -1.684 4.292
sales 735 25915.88 53589.55 0.401 433526
employ 735 50.922 72.150 0.051 434.246
csraud 735 0.215 0.411 0 1
auopic 735 0.857 0.350 0 1
debtratio 735 0.193 0.134 0 1.142
currentrt 735 1.893 1.134 0.215 9.327
efficiency 735 1.397 14.020 0.053 301.464
cintensity 735 2010.980 9576.082 1.608 146252
Table 3: Correlations Matrix

2006-2012
roa tobinq csraud auopic sales employ debtratio cintensity efficiency currentrt
roa 1.0000 0.4256* -0.0758* 0.1386* 0.1346* 0.0162 -0.1418* 0.0867* -0.2767* 0.1070*
tobinq -0.5030* 1.0000 -0.1647* 0.0205 -0.0691 -0.070 -0.1807* -0.0072 -0.2114* 0.1177*
csraud -0.0020 0.0723* 1.0000 0.0421 0.1254* 0.0497 0.0257 0.2249* -0.0768* -0.0221
auopic 0.0952* -0.1311* -0.0041 1.0000 0.4734* 0.2494* 0.2458* 0.1792* -0.0054 -0.1913*
sales 0.2704* -0.1348* 0.1445* 0.4184* 1.0000 0.6729* 0.0933* 0.1854* 0.1138* -0.4336*
* *
employ 0.0583 -0.0787* 0.0288 0.2126 0.6274 1.0000 0.0139 -0.4166* 0.0232 -0.2345*
* *
debtratio -0.2302* 0.7576* 0.0443 -0.0958 0.1321 0.0243 1.0000 0.0291 0.0957* -0.3276*
cintensity 0.1792* -0.2297* 0.1885* 0.1999* 0.2481* -0.3699* 0.0512 1.0000 -0.2601* -0.0472
efficiency -0.3739* 0.0007 -0.0488 -0.0439 -0.3860* -0.095* 0.0105 -0.1375* 1.0000 -0.2756*
* *
currentrt 0.0830* -0.1276* -0.0119 -0.2026 -0.3999 -0.1837* -0.2876* -0.1162* -0.0032 1.0000
Upper panel: Spearman correlations, lower panel: Pearson correlations; (*) 5 % level of significance
Table 4: First Order Autoregressive Regression Results; 2006 2012

performance it = 0+1 csraud i (t-1)+2sales i (t-1)+3persistence i (t-1)+4 controls i (t-1)+5 csraud i (t-1)*sales i (t-1) +6 csraud i (t-1)* persistence i (t-1)
+7 sales i (t-1) * persistence i (t-1) +8 csraud i (t-1) *controls i (t-1) + 9 auopic i (t-1) +10 auopici (t-1)*sales i (t-1) +11 auopici (t-1)*persistence i (t-1)
+12 auopic i (t-1)*controls i (t-1) +13 controls i (t-1)* persistence i (t-1) +14 industry i (t-1) + it
(1a) (1b) (1c) (2a) (2b) (2c)
Total Superior Inferior Total Superior Inferior
sample performance performance sample performance performance
persistence 0.733* 1.091*** 0.300** 0.068 -0.479 -0.019

(0.400) (0.368) (0.128) (0.102) (0.608) (0.148)
csraud 0.143** 0.018 0.127*** 0.024 -0.038 0.033
(0.071) (0.072) (0.052) (0.068) (0.119) (0.104)
sales 0.075*** 0.053** 0.047*** -0.214** -0.502*** -0.163
(0.020) (0.024) (0.012) (0.090) (0.113) (0.125)
csraud x sales 0.016* -0.001* -0.014*** -0.076** -0.143*** -0.093**
(0.008) (0.001) (0.005) (0.037) (0.042) (0.043)
csraud x persistence -0.248*** 0.114* 0.070 0.102 0.269 -0.068
(0.080) (0.087) (0.122) (0.104) (0.209) (0.126)
sales x persistence 0.060* 0.056** 0.050** 0.040** 0.031 -0.001
(0.033) (0.024) (0.025) (0.020) (0.039) (0.026)
auopic 0.401*** -0.021* 0.326*** 2.508*** -0.037 3.002***
(0.105) (0.013) (0.069) (0.950) (0.205) (1.040)
auopic x sales 0.055*** 0.072*** -0.003* -0.061 0.151** -0.150*
(0.016) (0.026) (0.001) (0.080) (0.068) (0.092)
auopic x persistence 0.013 -0.003 -0.065 -0.281** -0.646** -0.119
(0.120) (0.133) (0.118) (0.140) (0.287) (0.178)
constant -0.205* 0.187** -0.327*** 2.492*** 5.368*** 2.229**
(0.106) (0.083) (0.085) (0.735) (1.446) (0.944)
time fixed effect yes yes yes yes yes yes
firm fixed effect yes yes yes yes yes yes
Observations 735 378 357 623 323 300
R2 0.55 0.60 0.52 0.21 0.24 0.28
Adj. R2 0.53 0.56 0.48 0.17 0.18 0.22
Wald test (Prob > Chi2) 0.00 0.00 0.00 0.00 0.00 0.00
Notes: Robust standard errors in parentheses [*** p<0.01, ** p<0.05, * p<0.1]. Dependent variable for estimations (1a), (1b), and (1c) is the log of industry-adjusted roa. For
estimations (2a), (2b), and (2c), the log of industry-adjusted tobinq is used as dependent variable. Control variables (debtratio, currentrt, efficiency, capitalintens and industry) are
included in regression analysis, but not shown in the table for the sake of brevity. For the description of variables see Table 1.
Table 5: First Order Autoregressive Regression Results, 2006 - 2012

performance it = 0+ 1 csraud i (t-1)+2 employ i (t-1)+ 3 persistence i (t-1)+4 controls i (t-1)+5 csraud i (t-1) *employ i (t-1) + 6 csraud*persistence i (t-1)
+7 employ i (t-1)* persistence i (t-1)+8 csraud i (t-1)*controls i (t-1)+9 auopic i (t-1) + 10 auopici (t-1)*employ i (t-1) +11 auopic i (t-1)*persistence i (t-1)
+ 12 auopic i (t-1)*controls i (t-1) +13 controls i (t-1)* persistence i (t-1) + 14 industry i (t-1) + it
(3a) (3b) (3c) (4a) (4b) (4c)
Total Superior Inferior Total Superior Inferior
sample performance performance sample performance performance
persistence -0.129* 2.061*** -0.232 -0.196* -0.129 -1.441***

(0.080) (0.462) (0.153) (0.110) (0.256) (0.411)
csraud 0.087* -0.015** 0.105* 0.039 -0.092 -0.790
(0.048) (0.007) (0.064) (0.065) (0.252) (0.695)
employ 0.029** 0.011 0.053*** -0.462*** -0.394*** -0.187**
(0.012) (0.013) (0.014) (0.144) (0.075) (0.094)
csraud x employ 0.013** 0.041 -0.036** -0.123*** 0.036* -0.085
(0.006) (0.032) (0.019) (0.039) (0.020) (0.289)
csraud x persistence -0.218*** 0.100 -0.257** -0.037 -0.159** -0.263*
(0.081) (0.081) (0.124) (0.111) (0.081) (0.160)
employ x persistence 0.136* 0.338*** -0.015 -0.171** 0.013 -0.330*
(0.081) (0.118) (0.126) (0.066) (0.061) (0.200)
auopic 0.124 -0.026 -0.072 3.231*** 0.017 -0.241**
(0.080) (0.020) (0.083) (0.765) (0.103) (0.120)
auopic x employ -0.018** 0.049*** -0.037** -0.171*** 0.061** 0.040
(0.008) (0.016) (0.017) (0.066) (0.027) (0.113)
auopic x persistence 0.161 0.298* -0.245* -0.318* -0.063 -0.166**
(0.139) (0.168) (0.141) (0.177) (0.155) (0.081)
constant 0.146** 0.506*** 0.076 2.035*** 2.987*** 1.180*
(0.069) (0.104) (0.079) (0.607) (0.613) (0.677)
time fixed effect yes yes yes yes yes yes
firm fixed effect yes yes yes yes yes yes
Observations 739 382 357 632 292 340
R2 0.44 0.46 0.51 0.25 0.39 0.30
Adj. R2 0.42 0.42 0.47 0.23 0.34 0.23
Wald test (Prob > Chi2)
Notes: Robust standard errors in parentheses [*** p<0.01, ** p<0.05, * p<0.1]. Dependent variable for estimations (3a), (3b), and (3c) is the log of industry-adjusted roa. For
estimations (4a), (4b), and (4c), the log of industry-adjusted tobinq is used as dependent variable. Control variables (debtratio, currentrt, efficiency, capitalintens and industry)
are included in regression analysis, but not shown in the table for the sake of brevity. For the description of variables see Table 1.

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Sustainability Accounting, Management and Policy Journal

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Oxley (SOX) legislation (United States Congress, 2002).

of ICFR on financial performance through a halo effect on stakeholders.3

responsible to be more or less synonymous. The stakeholder approach to corporate governance

coalition of stakeholders including shareholders, customers, employees, suppliers, as well as

achieve higher profitability.

and effective internal control enable the persistence of financial performance.

The Impact of Corporate Social Responsibility and Internal Controls on 10 | P a g e

current employees changing their behaviors toward the firms.

The Impact of Corporate Social Responsibility and Internal Controls on 11 | P a g e

aspects of the CSR disclosures.

The Impact of Corporate Social Responsibility and Internal Controls on 12 | P a g e

the impact of the stakeholders actions must be measureable.

The Impact of Corporate Social Responsibility and Internal Controls on 13 | P a g e

policies (AICPA 1949).

The Impact of Corporate Social Responsibility and Internal Controls on 14 | P a g e

result of a well-functioning internal control system.

The Impact of Corporate Social Responsibility and Internal Controls on 15 | P a g e

for compliance with regulations.

The Impact of Corporate Social Responsibility and Internal Controls on 16 | P a g e

The Impact of Corporate Social Responsibility and Internal Controls on 17 | P a g e

are seen as socially responsible are discussed.

2.3. Socially Responsible Activities and Their Benefits to Stakeholders

The Impact of Corporate Social Responsibility and Internal Controls on 18 | P a g e

to monitor progress toward these objectives.

support for the firm.

The Impact of Corporate Social Responsibility and Internal Controls on 19 | P a g e

to consumers can impact measures of performance by increasing sales and profitability.

The Impact of Corporate Social Responsibility and Internal Controls on 20 | P a g e

objectives relevant to each of the groups.

The Impact of Corporate Social Responsibility and Internal Controls on 21 | P a g e

The Impact of Corporate Social Responsibility and Internal Controls on 22 | P a g e

activities to stakeholders is considered as an attempt to gain legitimacy by creating awareness and

The Impact of Corporate Social Responsibility and Internal Controls on 23 | P a g e

The Impact of Corporate Social Responsibility and Internal Controls on 24 | P a g e

on assets or Tobins Q) is positively influenced by effective internal control of the previous

The Impact of Corporate Social Responsibility and Internal Controls on 25 | P a g e

by gaining trust and loyalty of stakeholders. 20

The Impact of Corporate Social Responsibility and Internal Controls on 26 | P a g e

The Impact of Corporate Social Responsibility and Internal Controls on 27 | P a g e

following hypotheses in alternative form:

previous period (H2b: 10 < 0).

The Impact of Corporate Social Responsibility and Internal Controls on 28 | P a g e

periods prior to this year.

4.2. Econometric Model

The Impact of Corporate Social Responsibility and Internal Controls on 29 | P a g e

+13 controls i (t-1)* persistence i (t-1) + 14 industry i (t-1) + it

+13 controls i (t-1)* persistence i (t-1) + 14 industry i (t-1) + it

4.2.1. Dependent Variable: Financial Performance

performance firms, and 3) inferior performance firms.

4.2.2. Independent Variables

The Impact of Corporate Social Responsibility and Internal Controls on 30 | P a g e

<< Insert table 1 about here>>

5. Results of Empirical Analyses

revenue is approximately 26 billion dollars and average number of employees is 51,000.

<< Insert Table 3 about here>>

The Impact of Corporate Social Responsibility and Internal Controls on 31 | P a g e

5.2. Multivariate Analyses

superior financial performance, providing support for H1e.

The Impact of Corporate Social Responsibility and Internal Controls on 32 | P a g e

on the interaction (auopic x sales).

The Impact of Corporate Social Responsibility and Internal Controls on 33 | P a g e

<< Insert Table 4 about here>>

persistence 0.733* 1.091* 0.300 0.068 -0.479 -0.019