Managing Expectations: How Assurance Level and Sustainability Reporting Approach Affect Investor and Auditor Confidence

Abstract

We use a set of experiments to examine how a company’s choice of assurance level (reasonable versus limited) affects nonprofessional investor confidence in sustainability information disclosed under two different reporting approaches (investor-oriented and broad-stakeholder) and how these choices contribute to investor-auditor expectation gaps. We find that nonprofessional investors distinguish limited from reasonable assurance, regardless of the reporting approach. However, when we compare investor confidence to auditor confidence, results reveal significant expectation gaps suggesting investors fail to sufficiently adjust for the lower level of assurance that a limited-assurance engagement provides. Specifically, we find investor confidence is significantly higher than auditor confidence when sustainability disclosures receive limited assurance. The expectation gap is no longer observed when reasonable assurance is obtained, and these results are not sensitive to the reporting approach. Our findings have important and timely implications for companies deciding whether and what level of assurance to obtain, for audit firms seeking to expand their assurance services on sustainability disclosures, and for policy makers around the world who are considering whether to mandate assurance over sustainability disclosures and, if so, at what level.