Abstract
PurposeThis study aims to examine the impact of mandatory corporate social responsibility (CSR) regulations on audit fees, using Section 135 of India's Companies Act, 2013, as a quasi-natural experiment. The regulation mandates firms exceeding specific financial thresholds to allocate 2% of their net profits to CSR. Unlike voluntary CSR, which often signals strong governance, mandatory CSR imposes compliance obligations that may increase audit complexity, risk and costs. While prior research has focused on voluntary CSR's impact on audit fees, this study explores how mandatory CSR influences firm level outcomes, offering insights into the distinct effects of regulatory compliance on audit practices.Design/methodology/approachThe study uses a quasi-natural experimental design, using difference-in-differences (DiD), instrumental variable (IV) and regression discontinuity (RD) methodologies to analyze the impact of Section 135. Firms subject to the regulation were compared to unaffected firms, while accounting for prior CSR engagement. The analysis identifies audit fee changes attributable to mandatory CSR, distinguishing them from voluntary CSR effects. Robustness checks ensure reliability of the results across various methodological frameworks.FindingsMandatory CSR significantly increased audit fees for newly compliant firms due to heightened compliance and agency costs. Firms already engaged in voluntary CSR before the regulation showed no significant fee changes, underscoring the regulatory driven nature of the audit fee premium. These findings highlight that mandatory CSR imposes external obligations that increase audit complexity, unlike voluntary CSR, which signals governance strength and reduces audit risk. The study offers valuable insights for policymakers and auditors navigating the compliance challenges of CSR mandates.Research limitations/implicationsThis study focuses on India's Section 135 CSR mandate, making it a single country case study. While this provides a unique regulatory context to examine mandatory CSR, it limits the generalizability of findings to other institutional settings. In addition, the study centers specifically on audit fees, leaving other firm-level outcomes unexplored. Future research should investigate broader consequences of CSR mandates, such as their impact on operational efficiency and stakeholder relationships.Social implicationsThis research highlights the social implications of mandatory CSR regulations, emphasizing their role in promoting corporate accountability and societal welfare. By identifying the compliance costs associated with mandatory CSR, such as increased audit fees, the study underscores the need for balanced regulations that achieve social goals without imposing excessive burdens on firms. It also raises awareness of the challenges faced by newly compliant firms, encouraging policymakers to support smoother transitions. The findings contribute to understanding how regulatory mandates can shape corporate behavior, fostering a more sustainable and socially responsible business environment.Originality/valueThis research provides original insights into the under explored area of mandatory CSR and its implications for audit fees. While prior studies primarily focus on voluntary CSR and its signaling effects on governance and risk, this study highlights the distinct compliance driven costs of mandatory CSR.
By leveraging India's Section 135 CSR mandate as a quasi-natural experiment, the research identifies significant audit fee premiums for newly compliant firms, offering a nuanced understanding of regulatory impacts. The study contributes to both stakeholder and agency theory, providing valuable implications for policymakers, auditors and firms navigating the challenges of CSR regulations.