CSR and Earnings Management in India: Does Auditor’s Opinion on Internal Control Matters?

Abstract

This study investigates Corporate Social Responsibility (CSR) and Earning Management (EM) relationship following the enactment of mandatory CSR reporting through Companies’ Act, 2013 in India. Additionally, it investigates the moderating role of Internal Control Quality (ICQ) on the relationship between CSR and EM variables such as CSR have been measured through CSR Expenditures made by sample companies during the year while EM has been measured through two proxies Jones and Modified Jones model. Based on descriptive analysis, results report that average prescribed spending as per Companies Act 2013 criteria is higher and there is less actual spending from companies in 2015. However actual spending in 2016 is higher as compared to prescribed spending. Based on regression analysis, study shows that companies that have higher compliance with CSR activities have been found to be less engaged in EM. Additional analysis also reports that there is no positive relationship between CSR and EM. Thus results report that CSR engagement has a negative influence on EM practices. These results inferred that companies in mandatory CSR environment tend not to use CSR activities for manipulating earnings irrespective of the presence of auditor opinion on internal control quality.