Abstract

The entire world is facing the issue of climate change. Due to rapid industrialization, enormous waste generation is aggravating the situation. In this study, we investigate the role of audit quality in promoting sustainable waste management in firms. Using a sample of 8100 firm-year observations for the period 2002–۲۰۱۷ from 34 countries, we provide novel empirical evidence that good audit quality significantly reduces total corporate waste production. Further, our results are robust to alternate proxies of audit quality, and waste management, and only appear with unqualified audit reports. To alleviate the endogeneity issue, we use two different identification strategies; namely, PSM and GMM. Altogether, these findings demonstrate that Big4 auditing firms ensure the credibility and reliability of the non-financial disclosures of their auditees as apparent by their rigorous auditing processes. Moreover, the main implication of our study is that firms are subject to a decrease in their overall waste production when their external assurer is one of the BIG4 auditing firms.

Introduction

The word ‘Sustainability’ has received immense global attention over the last decade, as obvious by its evident visibility in, corporate mission and vision statements (Meppem & Gill, 1998). Hereby, many internationally approved climate agreements, such as the Paris Agreement, and the Sustainable Development Goals (SDGs), etc., have been used as a source for embedding sustainable development in the core strategies of both developed and developing economies (Alam et al., 2019). According to these agreements, immense greenhouse gas (GHG) emissions are regarded as the prime reason for the present environmental degradation (Alam et al., 2019). Besides, these statistics by the World Bank (2012) state that the annual amount of solid waste produced by our global economy amounts to one billion tons, thus highlighting the increased contribution of the waste sector to the increase in global temperatures. Conversely, the United Nations Environmental Programme (2010) in its report on waste and climate change states that the waste sector can move its position from a minor contributor to a major saver of emissions, as it reports only a 3–۵% contribution of the waste sector in GHG emission production. These statistics point toward the development of a circular economy through improvement in the waste management practices of firms in the last 40 years (Romero-Hernández & Romero, 2018).

Moving forward, these global environmental concerns have entailed primary pressure on corporates as they are subject to the generation of a massive amount of waste during the production of goods and services (Gull, Atif, & Hussain, 2022; Hirsch, 2019). Further, firms in response to the pressure entailed by certain internal and external stakeholders are moving towards more sustainable practices, like waste management, recycling, reusing, etc. (Alam et al., 2019). These sustainable business practices are costly to introduce and maintain and therefore depend on the strength of a firm’s governance structure, as strong governance structures predict the level of waste produced by firms (Gull, Atif, & Hussain, 2022; Shahab et al., 2022). For this reason, prior research has extensively highlighted the importance of a firm’s external and internal governance in the promotion of corporate sustainability (Bacha et al., 2020; Earnhart & Harrington, 2021; Hussain et al., 2018; Jo et al., 2015; Saeed et al., 2022).

Conclusion

The immense increase in global temperatures has become a substantial concern and emerged as a real-world phenomenon in recent years (Alam et al., 2019). The increase in global annual waste production further ruins the situation (World Bank, 2012). For this reason, firms have increased their attention toward sustainable development in the face of the pressure entailed by the governments, policymakers, stakeholders, and external assurers of a firm (Alam et al., 2019; Saeed et al., 2022). Prior research has extensively studied the impact of external stakeholders on a firm’s environmental sustainability (Dakhli, 2021; Dicu et al., 2020). As Braam et al. (2016) and Earnhart and Harrington (2021) also analyse the importance of audit quality in enhancing corporate environmental performance. While prior literature lacks to define the role of audit quality in improving several other dimensions of corporate social responsibility such as waste management. Therefore, concerning the importance of waste management, our study fills this void and provides robust empirical evidence on the impact of audit quality on waste management.

This study employs a panel data set of 8100 firm-year observations from 34 countries between 2002 and 2017 and finds a negative relationship between audit quality (BIG4) and total waste generation (T_WASTE) (Earnhart & Harrington, 2021). Our results are robust to the use of several alternate proxies of waste management and audit quality. Moreover, we found our relationship to be more pronounced in firms that constitute CSR committees, have strong governance structures, have low institutional ownership, and are with high CSR intensity. While, in addition, we drive that audit quality is subject to reducing a firm’s overall waste generation only in the case of non-natural industries. Furthermore, to the extent possible, we rule out certain endogeneity concerns through the propensity score matching (PSM) and generalized methods of moments (GMM) techniques and analyse consistent results. Ultimately, our findings indicate that high audit quality plays the role of external governance helps firms to reduce their waste production.