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External
The impact of legitimacy threat carbon
on the choice of external assurance

carbon assurance
Evidence from the US 181
Ragini Rina Datt Received 10 March 2017
Revised 25 October 2017
School of Business, Western Sydney University, 13 December 2017
Parramatta, Australia Accepted 14 February 2018

Le Luo
School of Business, University of Newcastle, Sydney, Australia, and
Qingliang Tang
School of Business, Western Sydney University, Parramatta, Australia

Abstract
Purpose – The purpose of this study is to examine the impact of legitimacy threats on corporate incentive to
obtain external carbon assurance.
Design/methodology/approach – The sample consists of the largest US companies that disclosed
carbon emissions to CDP (formerly the Carbon Disclosure Project) over the period 2010-2013. Based on
legitimacy theory, firms are more likely to obtain carbon assurance when they are under greater legitimacy
threat. Carbon assurance is measured using CDP data. Three proxies are identified to measure legitimacy
threat related to climate change: carbon emissions intensity, firm size and leverage.
Findings – This paper finds that firms with higher levels of emissions are more likely to obtain independent
assurance, and large firms show the same tendency, as they are probably under pressure from their large
group of stakeholders. In sum, the findings suggest that firms with higher carbon emissions face greater
threats to their legitimacy, and the adoption of carbon assurance can mitigate risks to legitimacy with
enhanced credibility of carbon disclosure in stakeholders’ decision-making.
Research limitations/implications – The study has some limitations. The authors have relied on CDP
reports for analysis and focus on the largest companies in the US. Caution should be exercised when
generalising the results to smaller firms, other countries or voluntary carbon assurance information disclosed
in other communications channels.
Practical implications – This study provides extra insights into and an improved understanding of
determinants and motivation of carbon assurance, which should be useful for policymakers to develop
policies and initiatives for carbon assurance. The collective results should be useful for practicing accountants
and accounting firms.
Originality/value – The paper investigates how legitimacy threats affect firms’ choice of external carbon
assurance in the context of US, which has not been documented previously. It contributes to the
understanding of legitimacy theory in the context of voluntary carbon assurance.
Keywords Carbon emissions, Legitimacy theory, Carbon assurance, GHG statement
Paper type Research paper

Accounting Research Journal

1. Introduction Vol. 32 No. 2, 2019
pp. 181-202
Increasing evidence show that information on a firm’s climate change strategies and the © Emerald Publishing Limited
1030-9616
impact of its carbon dioxide (CO2)-equivalent emissions on the environment is vital to DOI 10.1108/ARJ-03-2017-0050
ARJ stakeholders’ decision-making processes (Thornton and Hsu, 2001). Thus, there is a growing
32,2 number of territories where carbon disclosure is compulsory. For example, in Australia,
carbon emissions disclosure is required for some large emitters (Green and Li, 2012). The US
Securities and Exchange Commission (SEC) outlines public companies’ obligations under
securities laws and SEC regulations to disclose material information concerning climate-
related risks and opportunities (CERES and Environmental Defense Fund, 2009). In UK,
182 beginning on 1 October 2013, all quoted companies in the UK must report on their GHG
emissions as part of their annual Directors’ Report. In addition, the reporting of GHGs is
required under the jurisdiction of the various forms of emission trading schemes (ETSs) in
effect in Europe, North America, New Zealand and Japan (Luo and Tang, 2016a).
Furthermore, more and more companies voluntarily disclose their climate change related
information (Luo et al., 2013).
However, the quality and reliability of carbon disclosure remain questionable
because of its discretionary nature, the lack of an internationally recognised protocol,
and managerial incentives to manipulate carbon information (Deegan and Rankin,
1996; Kolk et al., 2008).[1] In view of these issues, there is an increasing demand for
independent carbon verification and assurance to enhance the credibility and validity
of these disclosures (Huggins et al., 2011; Kolk, 2008). In spite of this, carbon assurance
is largely voluntary in most of the world and is recommended as a good practice (Green
and Li, 2012).
Thus, it motivates us to examine why firms would voluntarily purchase expensive
external verification of their emissions reports and what are determinants and
incentives for this voluntary assurance for carbon emissions by an independent party.
This question is important, as carbon reporting and the verification of its validity are
likely to become a norm in a low-carbon economy and can inform stakeholders’
decision-making. This is why the recent Paris Accord on climate change emphasises
the importance of carbon measurement, reporting and verification (MRV) in GHG
management. However, the existing literature on carbon assurance is sparse (Green and
Li, 2012; Green and Taylor, 2013; Simnett and Nugent, 2007; Simnett et al., 2009a; Tang,
2018). Our study can facilitate a more thorough understanding of the demand side of the
burgeoning carbon assurance market.
Our sample consists of large companies in the US that participated in the CDP (formerly
the Carbon Disclosure Project). According to legitimacy theory, firms under a high level of
legitimacy threat are likely to take actions to counter the negative effect of its operation on
the environment so as to show that they care about climate change and their business
activity is congruent with societal values. This argument lead to the expectation that carbon
assurance is more likely to take place when firms are under greater threat to their
legitimacy. The first proxy for legitimacy threat we use is the level of carbon emissions.
Intuitively, firms with high levels of emissions are likely to have more serious climate
change risks and carbon exposure, which will have a negative impact on their image and
legitimacy status. Such firms are likely to be under higher social pressure and scrutiny from
stakeholders and may be the target of various carbon regulations, which exacerbates any
legitimacy crisis. Thus, these firms have a greater incentive to have their GHG data
externally assured. In addition, previous reports suggest that large firms are under more
public scrutiny and extensive media coverage and that they face higher levels of threat to
their legitimacy. Thus, we use firm size as our second empirical proxy. Third, firm leverage
is used as the final proxy for legitimacy threat especially from debtholders. Firms with
higher leverage are required by their debtholders to disclose more comprehensive and
credible information for their monitoring of debt contracts. Higher levels of leverage External
represent greater legitimacy threat from their debtholders. carbon
Our results show that more than 50 per cent of the sample US firms disclose emissions
information and assure their carbon information. In addition, we find that legitimacy threat
assurance
drives the tendency towards external carbon assurance. More specifically, large firms and
firms with greater carbon emissions tend to obtain external carbon assurance. Our results
remain robust when we control for confounding factors, which are potentially correlated
with the propensity for voluntary GHG statement assurance. Note that our sample firms are 183
large and have their financial statements audited by large auditing companies, so their
financial information is deemed transparent. However, transparent financial statements do
not necessarily bring about transparent GHG statements. This is the role played by carbon
verification and assurance which will reduce carbon information asymmetry. There are
many implications for carbon assurance practices, as verifying non-financial reports is new,
so there are many criticisms and unresolved issues in the literature (Gray, 2010; Hopwood,
2009). Our findings suggest that the pursuit of voluntary assurance by a third party may
serve as a legitimising tool that is used to strengthen the confidence of stakeholders and
enhance the status of a firm’s legitimacy. Improved communication between insiders and
outsiders via external validation helps stakeholders understand the non-financial aspects of
a business, which may eventually support its sustainability. As carbon assurance is likely to
become an integrated element of the monitoring mechanism for firms operating in a society
with ever more stringent GHG legislations, our empirical results have significant economic
importance. This is because an enhanced understanding of the factors that related to the
adoption of carbon assurance can help creation of a transparent investment environment
which will heighten the investor’s confidence in green investment.
Our study is different from prior studies in some important dimensions and therefore
makes new contributions to the literature. First, we identify three proxy variables for
legitimacy threat that motivate managers to undertake voluntary external GHG assurance;
this has not been documented previously. Second, we only focus on GHG emissions, not
general environmental issues. GHG emissions differ from other toxic chemical emissions in
that the harm of GHG pollution is essentially global, long-term, and probably irreversible
(Lash and Wellington, 2007). Carbon mitigation, disclosure, and auditing require firm-
specific capabilities guided by different jurisdictional standards and regulations (Liao et al.,
2015; Luo et al., 2013). Corporate social responsibility (CSR) is a multidimensional construct,
and explanatory patterns for it are likely to differ across and within any one jurisdiction
(Chatterji et al., 2009; Strike et al., 2006; Walls et al., 2011). Therefore, we investigate this
complex phenomenon in a tightly focused manner by considering only the GHG dimension.
Third, we choose the US as our research setting, as US firms show different tendencies
towards general sustainability assurance (SA) relative to carbon assurance. The US is the
second-largest GHG-emitting nation (after China) in the world and its local governments
have proposed and implemented many new energy and carbon regulations that increasingly
pressure companies to engage in industry-sponsored emission-abatement programs, such as
voluntary carbon disclosure and independent verification. The use of a single-country
design provides a useful complement to international designs. This setting allows the
incorporation of country-specific controls for other (non-hypothesized) value-drivers to
further isolate the effect of legitimacy threat. Fourth, while prior studies typically use data
from firms’ annual reports or sustainability statements (Ballou et al., 2006; Kolk, 2003), this
study relies on stand-alone CDP reports, which are more comprehensive than alternative
databases (Luo et al., 2012). Stand-alone GHG statements are currently subject to limited
regulation. Although the CDP is voluntary in nature, in the absence of internationally
ARJ accepted standards, it has adopted a set of norms that all participating (i.e. reporting)
32,2 companies must follow, so that carbon information is presented in a consistent manner (Luo
and Tang, 2014b). Fifth, our paper contributes to the literature by extending prior studies of
assurance in a social or sustainability context (Barrett et al., 2005; Curtis and Turley, 2007;
Free et al., 2009; Gendron and Barrett, 2004; Gendron and Spira, 2009; Radcliffe, 2010). We
focus on new audit-type practices, particularly those of a discretionary nature (Free et al.,
184 2009; Power, 2003; Radcliffe, 2010). While prior research largely focuses on public-sector
environments(Gendron et al., 2007; Radcliffe, 2010); but see Free et al. (2009) for an
exception), the discretionary nature of the carbon assurance environment within which this
study is conducted is a unique opportunity to examine the demands of a new assurance
practice within the US capital-market context.
In sum, our study provides additional insight and an enhanced understanding of the
determinants and motivation of carbon assurance, which should be useful for policymakers
in developing policy and initiatives for carbon assurance. The collective results should also
help practicing accountants in this burgeoning and highly promising area better understand
the market and become more effective in marketing and providing carbon-related services.
Specifically, accounting firms can consider opportunities to help organisations better
integrate carbon control and enterprise risk management, quantify the results of carbon
initiatives, narrow information asymmetry, and improve the information quality of reports
by providing assurance services.
The reminder of this paper is structured as follows. Section 2 is a comprehensive
literature review. Section 3 develops the hypotheses. Section 4 presents the research model
and design. Section 5 presents the empirical results, and Section 6 provides a summary and
conclusion.

2. Literature review
In the current literature, there are two streams of studies examining the motivation for SA;
these streams have produced conflicting results. One group of researchers contend that SA
may be used as a “public relations exercise” (Owen et al., 2000) and so is “virtually
worthless” (Gray, 2000) and misleading (Gray, 2001). They hold that SA is simply a
symbolic image of responsibility (Perego and Kolk, 2012) and “a dead end in the chain of
accountability” (Day and Klein, 1987; O’Dwyer, 2011). The other group of studies suggests
that SA, if properly conducted,[2] could enhance the credibility of a firm’s management of its
social and environmental risks (Simnett et al., 2009b) and allow firms to have better access to
resources (O’Dwyer, 2011; Suchman, 1995). In addition, it has been argued that independent
SA can, in addition to enhancing the credibility of external reporting (Pflugrath et al., 2011;
Rhianon Edgley et al., 2010; Wallage, 2000), foster strategic initiatives and improve
organisational control mechanisms, improve strategic decision-making and improve the
efficiency of resource allocation (Knechel, 2007). Further, SA facilitates effective internal
management control, resource allocation, risk management and strategic planning (Ballou
et al., 2006; Gray, 2000; Power, 1997) while also improving information quality (Adams et al.,
2011; Chau, 2006). It can enhance management information systems and other processes
through the identification of weaknesses and opportunities for improvement in an operation
(Darnall et al., 2009; O’Dwyer et al., 2011; Owen et al., 2000; Rhianon Edgley et al., 2010).
Thus, the motivation for SA is still under debate.
In addition, many empirical studies examine the content of SA statements (Cooper and
Owen, 2007; Darnall et al., 2009; Kolk and Perego, 2010; Mock et al., 2007; O’Dwyer and Owen,
2007; Simnett et al., 2009b). Others investigate how SA assurance affects users’ perceptions of
the reliability of sustainability reports (Hodge et al., 2009). O’Dwyer et al. (2011) engage
directly with practitioners and focuses on the processes through which SA assurance External
statements are formulated as part of efforts to legitimise assurance practices with key carbon
audiences. Cheng et al. (2015) adopt an experimental approach to integrating the strategy and
assurance literature and examines how strategically relevant CSR and assurance information
assurance
affects investment decisions. Brown-Liburd and Zamora (2015) use Mercer’s (2004) voluntary
disclosure framework to examine under what conditions investors rate the assurance of CSR
information as important in a case where management is compensated for their CSR
185
performance. Peters and Romi (2015) provide archival evidence on the relationship of
corporate governance mechanisms with the decision to assure CSR information in the US.
Casey and Grenier (2015) conduct exploratory analyses employing a sample of 2,649 US CSR
reports and find that credibility-enhancing CSR assurance is rare in the US and significantly
lags at the international level (KPMG, 2011; Simnett et al., 2009b). Their results also
demonstrate that, unlike their international counterparts, US finance and utilities firms are
not more likely than firms in other industries to obtain CSR assurance, because financial
regulation in the US can be substituted for SA assurance. In addition, highly leveraged firms
are less likely to obtain CSR assurance.
Carbon assurance is normally considered part of SA[3]. However, carbon subject matter
(such as carbon-equivalent emissions) is more explicitly defined than sustainability
reporting and assurance. The subject matter of carbon assurance could be carbon emissions
inventories and footprint, carbon activity, or carbon-reduction performance. The importance
of quality-driven assurance function in this emerging area is highlighted by the commitment
of the International Federation of Accountants through its International Auditing and
Assurance Standards Board to develop an international assurance standard for GHG
emissions statements. After years of consultation, a formal international GHG assurance
standard, ISAE 3410, “Assurance on a Greenhouse Gas Statement”, was released, effective
from 2013.
However, few studies focus on the impact of legitimacy threats on external carbon
assurance in a US setting. For example, Green and Zhou (2013) is among the earliest studies
to examine external carbon assurance practices at an international level. Using a sample of
3,008 firms across 43 countries from 2006 to 2008, they document that firms from Europe
and carbon-intensive industries are more likely to engage in assurance services. Trotman
and Trotman (2015) examine how internal auditors are involved in providing internal
assurance for a firm’s GHG emissions and energy usage.

3. Hypothesis development
We conjecture that legitimacy threat arising from climate change cause firms to undertake
external carbon assurance. Green and Li (2012) focus on GHG statement assurance and
argue that the increasing international awareness of the challenges posed by climate change
has manifested in world leaders placing GHG emissions reductions onto their national
agendas. At this global level, carbon trading through ETSs has emerged as the favoured
mechanism; such schemes are premised on the creation of a carbon market where emission
allowances are traded as a financial commodity (Bebbington and Larrinaga-González, 2008;
Kolk et al., 2008). Thus, carbon emissions have a price that internalises the external cost of
emissions to allow carbon control to enter corporate decision processes. Even without an
explicit ETS, the shadow price of carbon should also affect corporate activity (Luo and
Tang, 2014a). For example, in a low-carbon economy, emissions-intensive products will be
less competitive and gradually become obsolete. This creates pressure for firms to disclose,
and carbon assurance is desirable as a demonstration of good corporate citizenship.
ARJ Managers fear that if they do not disclose they may suffer serious reputational risks and a
32,2 legitimacy crisis.
If this were the case, carbon assurance would be more likely to be adopted in firms with a
high level of legitimacy threat posed by climate change. The underlying intuition is as
follows: if managers are motivated to purchase GHG assurance to mitigate legitimacy
threats, we should observe a significant association between the proxies of legitimacy
186 threats and the incidence of external GHG assurance.

3.1 Carbon emissions

We identify carbon emissions as our first proxy for legitimacy threats. First, high levels of
emissions exacerbate climate change and cause serious concern on the part of stakeholders
and governments. Stakeholders are likely to take action against companies with high levels
of GHG emissions. For example, consumers and business partners may boycott carbon-
intensive products, which diminishes the sales and profitability of the firms responsible for
those products. Governments will introduce more stringent carbon legislation and
regulations to stimulate firms to cut carbon emissions and thus may restrict firms’ normal
business operations. Shareholders and investors may anticipate that companies that pollute
more will ultimately experience serious negative market consequences (Clarkson et al., 2015;
Matsumura et al., 2014). All of these consequences seriously threaten the existence,
continuance, and expansion of a business. Beyond direct effects, excessive carbon emissions
can indirectly exacerbate a crisis of legitimacy via greater information asymmetry (Jung
et al., 2016). Without credible disclosure, large emitters inherently benefit from information
asymmetry. The decision whether to pursue emissions accounting includes as a factor
managers’ estimates of the degree of uncertainty, their assumptions about the data, and the
selection of appropriate technical methods (Luo and Tang, 2016b). Thus, the complexity and
uncertainty of the measurements increase with the quantity of emissions. In addition, heavy
emitters tend to have a greater propensity toward pollution (Bewley and Li, 2000) and are
major users of energy; they can extract non-renewable resources (fossil fuels), resulting in
industrial waste and causing major environmental consequences and community concerns
(Baumert et al., 2005; Brammer and Pavelin, 2006). There is great uncertainty about the
impact of carbon legislation, which may introduce taxes and fees and increase direct energy
costs along with compliance and competitive costs (Al-Tuwaijri et al., 2004). With greater
consumption of energy, and multiple sources of emissions from complex chemical process, a
firm must adopt a robust and sophisticated accounting system to record and calculate GHG
emissions; however, this system is internal and not directly observable by outsiders, who
are usually not professional environmental engineers.
To close the legitimacy gap, firms must first reduce their carbon footprints and then
adequately disclose its emissions and carbon-reduction commitments and efforts. Even if
firms do not achieve their carbon-reduction targets, credible disclosures would still be
demanded by concerned stakeholders. A lack of disclosure would give the impression that
the company was attempting to hide bad news, or would be perceived as evidence of
irresponsible corporate behaviour, heightening any legitimacy crisis. On the other hand,
carbon disclosure is predominately voluntary; some companies may use it for legitimisation,
and they may pick favourable items to disclose to the public. Users are normally unable to
distinguish between true and selective disclosure. Thus, problems with legitimacy may
arise. Therefore, certain mechanisms must be developed to mitigate these legitimate
concerns on the credibility of carbon emissions information. Many large companies in the
world use carbon assurance to increase the usefulness and creditability of emissions data
and thus alleviate concerns about legitimacy. Our first hypothesis is formed as follows:
 H1. All other factors equal, firms that emit a high volume of GHG emissions are more External
likely to have their emissions verified by an external party. carbon
assurance
3.2 Firm size
Simnett et al. (2009b) report that larger firms are more likely to obtain SA. Large firms have
a need to enhance their credibility because of the higher public pressure associated with
visibility and having extensive contractual and social ties to stakeholders (Aerts et al., 2008;
187
Patten, 1992). Larger organisations are also subject to much greater stakeholder scrutiny
and media coverage (Luo et al., 2012; Stanny and Ely, 2008). Thus, we employ firm size as
the second proxy for legitimacy threat. First, large firms usually have a greater GHG
footprint than small firms. Second, we assume that for large firms, there is a higher degree of
GHG information asymmetry between insiders and outsiders and thus higher demands
from stakeholders for more comprehensive and reliable carbon information for their
decision-making. Large entities are likely to have multiple operating facilities, with a variety
of assets and liabilities, providing multiple sources of emissions and potentially greater
information asymmetry regarding carbon emissions. Thus, they often have an inherently
sophisticated organisational structure, adding to the complexity of their emissions
inventories and making emissions more difficult to track. Third, large entities are more
politically visible and are under more pressure to make disclosures that go beyond
mandatory reports. They often engage top-tier auditors to perform financial statement
audits. Thus, large firms are often perceived as being more transparent than small firms.
Thus, we anticipate that larger companies tend to purchase expensive assurance services for
their carbon emissions to contribute to an image of transparency, ecologic concern, and
competence.
In sum, it is expected that large firms are under greater legitimacy pressure and are more
likely to disclose carbon information and have it assured. Hence, our second hypothesis is as
follows:

H2. The probability of external carbon assurance increases with firm size.

3.3 Leverage
Our final proxy for legitimacy threat is the level of a firm’s leverage. Generally speaking, the
legitimacy issue is created by societal groups. Firms are always responsive to silent
stakeholders, which have a large influence on the operating and financing policies of firms.
Debtholders are important stakeholders. If they are not happy with a company’s financial
and non-financial policies, such as its sustainability strategy, they may suspend financing,
which could in turn threaten the continuance of the firm. Thus, the concerns of financial
institutions can create serious problems for firms’ legitimacy. There is growing evidence
that climate-change-related risk exposure affects the operation and financial viability of
business organisations (Luo and Tang, 2014a; Tang and Luo, 2014). Thus, climate policy
and carbon information are becoming increasingly important for many debt providers in
their lending decisions (Jung et al., 2016). They assess the quality of loans using climate
change and carbon emissions data, the reliability and credibility of which are sought from
external carbon assurance. Prior studies provide evidence that leverage is associated with
SA (Chow, 1982; Cormier et al., 2005). To the extent that banks are concerned with credit
risks that are positively related to climate change risks, uncertainty in emissions might be
reduced by assurance. This could create pressure on management to obtain external
ARJ assurance for carbon emissions. However, Casey and Grenier (2015) show evidence that
32,2 firms with higher levels of leverage do not have a higher tendency to obtain SA. They argue
that extensive bank monitoring could substitute for SA, suppressing the demand for
expensive external assurance. Therefore, based on the competing arguments, we put
forward our third hypothesis in a non-directional form as follows:

188 H3. The probability of external carbon assurance is related to leverage.

4. Research design
4.1 Sample selection
Our initial sample consisted of 1,322 US companies that were invited by the CDP to
complete the climate change program survey from 2010 to 2013, and the total number of
firm-year observations was 3316. We deleted observations with duplicate records,
records in the financial sector, and those without complete data for the independent
variables. Additionally, our sample firms did not include firms that participated in an
ETS[4]; because such a scheme is likely to require its participants to submit assured
carbon data, a firm’s carbon assurance may not be voluntary (Green and Li, 2012). In
other words, the decision to obtain GHG assurance could be endogenous within an ETS
setting. We focused on large firms, as such firms are more salient in terms of emissions
and thus have a more significant impact on climate. The final sample included 599 firms
that met all the selection criteria.

4.2 Empirical models

Previous studies typically rely on cross-sectional or pooled datasets to examine factors that
affect firms’ incentives to purchase SA (Simnett et al., 2009b). Since our analysis is based on
4-year unbalanced panel data, it is more appropriate to use panel-corrected standard errors,
namely, fixed effects or random effects models. The use of fixed-effects panel data allows
one to control for unobservable firm-specific effects that are constant over time, such as
corporate culture, environmental strategy, or management capability. If such firm-specific
effects correlate with our explanatory variables, a fixed-effects model is appropriate;
however, if they do not, then a random-effects model is preferred. The results of a Hausman
test[5] suggest that random effects are a more appropriate specification between these two
models. Thus, we use the following random-effects GLS logit regression models to test our
hypotheses:
ASSUREit ¼ b 0 þ b 1 INTit þ b 2 SIZEit þ b 3 ROAit þ b 4 LEVit þ b 5 CAPSit

þ b 6 TOBINQit þ b 7 ENVit þ b 8 INSTit þ b 9 BSIZEit þ b 10 INDEPit

þ b 11 DUALITYit þ b 12 FEMALEit þ b 13 COMPit (1)

ASSURE_SCOPE1it ¼ b 0 þ b 1 INT_SCOPE1it þ b 2 SIZEit þ b 3 ROAit þ b 4 LEVit

þ b 5 CAPSit þ b 6 TOBINQit þ b 7 ENVit þ b 8 INSTit
þ b 9 BSIZEit þ b 10 INDEPit þ b 11 DUALITYit
þ b 12 FEMALEit þ b 13 COMPit (2)
ASSURE_SCOPE2it ¼ b 0 þ b 1 INT_SCOPE2it þ b 2 SIZEit þ b 3 ROAit þ b 4 LEVit External
þ b 5 CAPSit þ b 6 TOBINQit þ b 7 ENVit þ b 8 INSTit carbon
assurance
þ b 9 BSIZEit þ b 10 INDEPit þ b 11 DUALITYit þ b 12 FEMALEit
þ b 13 COMPit (3)
189

4.3 Dependent variables

ASSURE is used as an indicator variable; it is equal to 1 if the company has engaged an
external party to verify either Scope 1 (direct) or Scope 2 (indirect, such as purchased
electricity) GHG emissions and 0 otherwise.
ASSURE_SCOPE1(ASSURE_SCOPE2) is also used as an indicator variable, which is
equal to 1 if the company has engaged an external party to verify Scope 1 (or 2) GHG
emissions and equal to 0 otherwise.

4.4 Major test variables

INT is used as a proxy for carbon emissions, which is measured as the natural logarithm of
the ratio of the total Scope 1 and Scope 2[6] emissions in metric tons to net sales in millions
of dollars. Similarly, INT_SCOPE1 (INT_SCOPE2) is measured as the natural logarithm of
the ratio of the total Scope 1 (Scope 2) emissions by net sales. We scale the emissions with an
operating figure (sales), because the importance of carbon emissions is linked to the scale of
operations[7]. We use Scope 1 and 2 emissions, as they are the most important part of GHGs
and subject to more public scrutiny and institutional influences (e.g. penalties for excessive
emissions). Existing carbon footprint protocols generally focus on Scope 1 and 2 and less on
Scope 3 emissions (other indirect emissions) (Luo and Tang, 2014a).In addition, we use
absolute carbon emissions as our alternative measure. TEMIS is measured as the natural
logarithm of the total Scope 1 and Scope 2 emissions in metric tons. Similarly, SCOPE1
(SCOPE2) is measured as the natural logarithm of total Scope 1 (Scope 2) emissions in
metric tons.
Firm size (SIZE) is calculated as the natural logarithm of total sales. It is generally
accepted that a high ratio of debt to assets is associated with the risk of default and
litigation. If the perceived climate change risk is high, creditors will demand high interest to
protect themselves. Insufficient CO2 information will worsen opacity and further increase
the perceived risks, which in turn will result in enhanced costs of debt financing. Prior
literature suggests that leverage is a determinant of environmental reporting strategy
(Cormier and Gordon, 2001; Cormier and Magnan, 2003) and firms with higher debt tend to
disclose more (Hossain et al., 1995; Jaggi and Lee, 2002; Prado-Lorenzo et al., 2009; Xiao et al.,
2004). (Chow, 1982) reports that leverage is positively associated with demand for a
voluntary financial audit. On the other hand, it can be argued that creditors such as financial
institutions should have greater access than remote external shareholders to private
information held by management. If financial institutions can use non-public information,
they will not rely on public GHG statements, which may weaken the association. In addition,
the monitoring activity of the bank can substitute for assurance, which may reduce the
demand for carbon assurance (Casey and Grenier, 2015). LEV is calculated as total debt
divided by total assets (Dhaliwal et al., 2011).
ARJ 4.5 Control variables
32,2 Existing research demonstrates that financial disclosure increases with financial
performance (Lang and Lundholm, 1993; Magness, 2006; Mahoney and Roberts, 2007;
Ullmann, 1985). Independent carbon assurance is more likely to occur in firms with
higher profitability because such firms have more resources and can therefore afford
the cost of this service (Luo et al., 2013). In addition, they are under more pressure from
190 the public to disclose and verify financial and non-financial information (Magness,
2006). Hence, we use return on assets (ROA) to measure profitability. ROA is
determined by net income before extraordinary items/preferred dividends, divided by
total assets.
CAPS is measured by dividing capital spending by total sales. Firms with higher capital
spending tend to be innovative and proactive in carbon issues, and we expect a positive
relationship between capital spending and the likelihood of external carbon verification.
TOBINQ is used as a proxy for firms’ growth opportunities. TOBINQ is measured as the
total market value of the company based on the year-end price and the number of shares
outstanding, plus preferred stock, the book value of long-term debt, and current liabilities,
divided by the book value of total assets. High-growth firms tend to emphasize economic
development over carbon reduction and are less likely to have their GHG emissions
externally verified.
Besides the above financial control variables, if both the level of carbon emissions
and the choice whether to use external carbon assurance are affected by other omitted
variables such as CEO incentives and corporate governance, then it is hard to attribute
firms’ decisions to use external carbon assurance to the legitimacy threat. To address
this potential endogeneity issue, we add an additional seven control variables to our
empirical model. First, we consider a firm’s environmental proactivity. It can be argued
that the attitude of management or its proactivity toward general environmental
protection may affect its decisions on carbon activity. Thus, we include the variable
ENV to proxy for environmental protection attitude, which is measured as the
environmental pillar score from Thomson Reuters’ ESG Asset4 database (Cheng et al.,
2014; Ioannou and Serafeim, 2012). Next, we consider corporate governance factors. For
example, institutional ownership may be associated with the tendency to control
carbon activity (Elsayih et al., 2017). A firm’s institutional ownership (INST) is
measured as the percentage of issues held by investment banks or institutions among
total shares issued. Liao et al. (2015) found that the number of female directors is related
to carbon disclosure; we therefore control for gender diversity. The proxy is FEMALE,
calculated as the percentage of female directors on the board. Other characteristics of
the board of directors are also included and assessed (Elsayih et al., 2017). BSIZE is
measured as the number of directors serving on the board (Kang et al., 2007; Lim et al.,
2007). INDEP is the proportion of independent directors on the board. DUALITY equals
1 if the CEO simultaneously chairs the board and 0 otherwise. COMP is a proxy for CEO
compensation, which is calculated as the nature logarithm of total senior executives’
compensation. In addition, we also control for sector and year effects by adding sector
and year dummy variables.
All carbon-emissions and carbon-verification data are collected from firms’ CDP reports.
The financial information is obtained from the DataStream database. Corporate governance
data and environmental pillar score are downloaded from ASSET4 database. The
independent variables are winsorised at both the 1 and 99 percentile level to reduce the
impact of extreme observations.
5. Empirical results External
5.1 Descriptive statistics and correlation matrix carbon
Table I presents the descriptive statistics for the variables used in the study and the results
of the t tests comparing the differences in the means of these variables between firms with
assurance
and without assured GHG. As shown in Table I, 52.1 per cent of our sample firms obtained
carbon assurance during the period under investigation. This figure is significantly higher
than the percentage of SA in US firms reported in prior studies. For example, the Casey and
Grenier (2015) sample consists of 2,649 US CSR reports, of which only 230 are independently
191
assured; 13 per cent of 2011 SA reports are assured in KPMG (2011). Other investigations
show similar results (KPMG, 2013; Perego and Kolk, 2012), which suggests that the US
market significantly lags other parts of the world in overall demand for sustainability report
assurance. There are several explanations offered for the low demand in the US for SA.

Variables N Mean Median SD P25 P75 Minimum Maximum

ASSURE 599 0.521 1 0.5 0 1 0 1

ASSURE_SCOPE1 582 0.464 0 0.499 0 1 0 1
ASSURE_SCOPE2 575 0.443 0 0.497 0 1 0 1
INT 599 10.974 10.711 1.93 9.788 11.865 5.176 15.908
INT_SCOPE1 574 9.596 9.202 2.514 7.737 10.717 4.354 15.907
INT_SCOPE2 564 10.062 10.115 1.586 9.287 10.913 3.511 13.989
TEMIS 599 13.079 12.882 2.099 11.713 14.384 6.103 18.26
SCOPE1 574 11.739 11.562 2.722 9.901 13.128 4.682 18.27
SCOPE2 564 12.164 12.204 1.742 11.015 13.322 5.964 16.391
SIZE 599 16.198 16.122 1.124 15.504 16.785 12.08 19.23
ROA 599 0.063 0.062 0.064 0.03 0.101 0.188 0.27
LEV 599 0.24 0.226 0.149 0.14 0.332 0 0.818
CAPS 599 1.875 1.436 1.524 0.772 2.432 0.143 11.289
TOBINQ 599 1.777 1.476 0.961 1.077 2.254 0.68 7.045
ENV 599 74.18 83.7 22.081 63.5 90.79 8.966 94.348
INST 599 9.936 8 9.023 0 16 0 38.25
BSIZE 599 10.871 11 1.823 10 12 5.61 16
INDEP 599 53.987 53.85 17.066 42.86 66.67 11.11 90.91
DUALITY 599 0.741 1 0.438 0 1 0 1
FEMALE 599 17.451 16.67 8.735 11.11 22.22 0 40
COMP 599 16.976 16.979 0.588 16.618 17.335 15.02 18.606

Notes: *, ** and *** are significant at the 0.10, 0.05 and 0.01 levels, respectively (two-tailed). ASSURE = a
dummy variable coded 1 for firms that had their Scope 1 or Scope 2 GHG emissions assured by a third
party and 0 otherwise; ASSURE_SCOPE1 (ASSURE_SCOPE2) = a dummy variable coded 1 for firms that
had their Scope 1 (Scope 2) GHG emissions assured by a third party and 0 otherwise. INT = total Scope 1
and Scope 2 emissions divided by net sales; INT_SCOPE1 (INT_SCOPE2) = total Scope 1 (Scope 2)
emissions divided by net sales; TEMIS = is measured as the natural logarithm of the total Scope 1 and
Scope 2 emissions in metric tons; SCOPE 1 (SCOPE 2) is measured as the natural logarithm of total Scope 1
(Scope 2) emission in metric tons; SIZE = natural logarithm of total sales; ROA = net income before
extraordinary items/preferred dividends divided by total assets; LEV = total debts divided by total assets;
CAPS = capital spending divided by total sales; TOBINQ = the total market value of the company based on
the year-end price and the number of shares outstanding, plus preferred stock, the book value of long term
debt, and current liabilities, divided by the book value of total assets; ENV = measured as the
environmental pillar score from Thompson Reuters’ ESG Asset4 database; INST = the percentage of issues
held by investment banks or institution among total shares issued; BSIZE = the number of directors
serving on the board. INDEP = the proportion of independent directors on board; DUALITY = equals 1 if
the CEO simultaneously chairs the board or 0 otherwise; FEMALE = the percentage of female directors on Table I.
the board; COMP = nature logarithm of total senior executives compensation Descriptive statistics
ARJ Simnett et al. (2009b) speculate that it could be attributable to litigation concerns on the part
32,2 of accounting firms owing to the lack of established criteria. Yet accounting firms are
making significant investments in their sustainability practices. The lack of demand is also
consistent with Simnett et al. (2009b)’s finding of lower demand in countries (e.g. the US)
with shareholder orientations, as firms in stakeholder-oriented countries must establish
credibility with more parties. US firms may also feel that their reporting is not developed
192 enough for SA (Chau, 2006). Thus, there would be considerable risk in issuing unassured
reports in the highly litigious US capital market. Simnett et al. (2009b) also predict lower
demand in countries with strong legal systems (Choi and Wong, 2007). At the firm level,
Casey and Grenier (2015) find that firms that are small, are less profitable, or have higher
leverage are less likely to obtain SA. A review of this line of literature motivates us to
consider whether the low demand for SA also occurs in the case of carbon assurance. The
examination of the discrepancy between the two types of assurance and its underlying
reason is potentially interesting, because it will help us better understand the role carbon
assurance plays.
Pearson and Spearman correlation matrices for results pooled for 2010–2013 are
presented in Table II. As shown in the table, TEMIS, INT, SIZE, and CAPS are all positive
and are significantly correlated with the dependent variable ASSURE, suggesting that firms
that had their emissions verified tend to have more absolute and intensity Scope 1 and
Scope 2 carbon emissions, to be larger, and to have higher capital spending. These findings
are generally consistent with our expectations and with prior carbon disclosure studies
(Adams et al., 1998; Haniffa and Cooke, 2005; Simpson and Kohers, 2002; Stanny and Ely,
2008; Waddock and Graves, 1997). They are also consistent with our argument that higher
degrees of carbon emissions threaten firms’ legitimacy that incentivise management to
purchase GHG statement assurance. SIZE is negatively correlated with INT, suggesting
that these two variables are distinct proxies for legitimacy threats. A relatively high and
significant Spearman correlation coefficient between TOBINQ and ROA is found (0.73;
p < 0.01), suggesting that growth companies are more profitable.

5.2 Panel-data logit regression

Table III presents random-effects GLS regression results for panel data. Models 1–3 present
regression results based on intensity of carbon emissions, that is, GHG emissions relative to
sales revenue, while Models 4–6 report regression results based on absolute carbon
emissions. H1 states that firms with large emissions are exposed to higher risks and
uncertainty. Thus, total intensity and Scope 1 and Scope 2 intensity emissions are used
separately to test their effects on respective carbon assurance determination. The dependent
variable for Models (1) and (4) is ASSURE, which is coded 1 for the use of external
verification of either Scope 1 or Scope 2 emissions and 0 otherwise. The dependent variable
for Models (2) and (5) is ASSURE_SCOPE1, while the dependent variable for Models (3) and
(6) is ASSURE_SCOPE2. We hypothesise that higher emissions will lead to greater pressure,
such that managers are more likely to purchase assurance. This prediction is supported by
the results shown in Table III, which indicate that the coefficient of INT and TEMIS in
Models (1) and (4) is positive and significant ( b = 0.238, p < 0.05 in Model (1); b = 0.243,
p < 0.05 in Model (4))[8]. The results suggest that perceived carbon information risk drives
firms to decide to have their emissions assured externally to reduce the inherent uncertainty
and mitigate the perceived legitimacy threat. The results also show that the coefficients of
INT_SCOPE2 and SCOPE2 are all positive and significant for both the intensity and
absolute measures at the conventional level ( b = 0.308 in Model (3); b = 0.305 in Model (6)).
Regarding INT_SCOPE1 and SCOPE1, the coefficients are all positive, as predicted for both
Variables ASSURE INT TEMIS SIZE ROA LEV CAPS TOBINQ ENV INST BSIZE INDEP DUALITY FEMALE COMP

ASSURE 1.00 0.10** 0.19*** 0.20*** 0.02 0.02 0.09** 0.02 0.15*** 0.00 0.02 0.03 0.01 0.07 0.14***
INT 0.13*** 1.00 0.76*** -0.17*** 0.31*** 0.37*** 0.07 0.34*** 0.03 0.03 0.10** 0.03 0.06 0.08* 0.18***
TEMIS 0.20*** 0.82*** 1.00 0.26*** 0.28*** 0.34*** 0.28*** 0.43*** 0.12*** 0.11*** 0.32*** 0.06 0.13*** 0.04 0.23***
SIZE 0.19*** 0.13*** 0.28*** 1.00 0.36*** 0.16*** 0.35*** 0.33*** 0.15*** 0.29*** 0.26*** 0.10** 0.02 0.08* 0.66***
ROA 0.04 0.25*** 0.21*** 0.38*** 1.00 0.33*** 0.43*** 0.73*** 0.06 0.15*** 0.09** 0.06 0.06 0.01 0.15***
LEV 0.02 0.30*** 0.29*** 0.14*** 0.28*** 1.00 0.27*** 0.32*** 0.07 0.01 0.17*** 0.06 0.12*** 0.11** 0.03
CAPS 0.05 0.09** 0.26*** 0.35*** 0.37*** 0.31*** 1.00 0.60*** 0.11** 0.12*** 0.23*** 0.03 0.17*** 0.11*** 0.00
TOBINQ 0.02 0.31*** 0.38*** 0.30*** 0.61*** 0.24*** 0.65*** 1.00 0.03 0.10** 0.17*** 0.08* 0.09** 0.02 0.02
ENV 0.15*** 0.02 0.12*** 0.14*** 0.05 0.09** 0.14*** 0.01 1.00 0.01 0.11*** 0.03 0.04 0.05 0.11**
INST 0.01 0.02 0.11** 0.31*** 0.13*** 0.02 0.09** 0.10** 0.01 1.00 0.06 0.03 0.05 0.01 0.19***
BSIZE 0.05 0.07* 0.32*** 0.28*** 0.07 0.13*** 0.20*** 0.16*** 0.13*** 0.07* 1.00 0.04 0.21*** 0.11** 0.30***
INDEP 0.05 0.02 0.04 0.08* 0.03 0.07 0.02 0.05 0.02 0.07 0.01 1.00 0.19*** 0.02 0.04
DUALITY 0.01 0.05 0.12*** 0.02 0.06 0.13*** 0.11** 0.09** 0.07 0.06 0.20*** 0.19*** 1.00 0.13*** 0.20***
FEMALE 0.06 0.07 0.06 0.10** 0.00 0.11*** 0.09** 0.01 0.04 0.01 0.17*** 0.06 0.14*** 1.00 0.14***
COMP 0.14*** 0.15*** 0.23*** 0.66*** 0.13*** 0.03 0.04 0.00 0.08* 0.20*** 0.34*** 0.01 0.20*** 0.17*** 1.00

Notes: *, ** and *** are significant at the 0.10, 0.05 and 0.01 levels, respectively (two-tailed); Pearson (Spearman) correlation coefficients are in the lower (upper)
triangle; Financial data are in million US dollars; ASSURE = a dummy variable coded 1 for firms that had their Scope 1 or Scope 2 GHG emissions assured by a
third party and 0 otherwise; INT = total Scope 1 and Scope 2 emissions divided by net sales; TEMIS = is measured as the natural logarithm of the total Scope 1
and Scope 2 emissions in metric tons; SIZE = natural logarithm of total sales; ROA = net income before extraordinary items/preferred dividends divided by total
assets; LEV = total debts divided by total assets; CAPS = capital spending divided by total sales; TOBINQ = the total market value of the company based on the
year-end price and the number of shares outstanding, plus preferred stock, the book value of long term debt, and current liabilities, divided by the book value of
total assets; ENV = measured as the environmental pillar score from Thompson Reuters’ ESG Asset4 database; INST = the percentage of issues held by
investment banks or institution among total shares issued; BSIZE = the number of directors serving on the board; INDEP = the proportion of independent
directors on board; DUALITY = equals 1 if the CEO simultaneously chairs the board or 0 otherwise; FEMALE = the percentage of female directors on the board;
COMP = nature logarithm of total senior executives compensation

Correlation matrix
193
assurance
carbon

Table II.
External
 32,2
ARJ

194

Table III.

regression results
Random-effects GLS
VARIABLES (1) (2) (3) (4) (5) (6)
ASSURE ASSURE _ SCOPE 1 ASSURE_ SCOPE 2 ASSURE ASSURE _ SCOPE 1 ASSURE _ SCOPE 2
Intensity of Carbon Emissions Absolute Carbon Emissions
INT 0.238** (2.102)
INT_ SCOPE1 0.232* (1.781)
INT_ SCOPE2 0.308*** (2.964)
TEMIS 0.243** (2.162)
SCOPE1 0.232* (1.733)
SCOPE2 0.305*** (2.996)
SIZE 0.670** (2.381) 0.836** (2.371) 0.397* (1.823) 0.867*** (3.110) 1.028*** (3.051) 0.658*** (2.938)
ROA 0.128 (0.041) 0.197 (0.054) 0.069 (0.026) 0.637 (0.201) 0.662 (0.180) 0.619 (0.231)
LEV 0.118 (0.090) 0.384 (0.223) 0.208 (0.197) 0.224 (0.171) 0.486 (0.279) 0.075 (0.070)
CAPS 0.093 (0.463) 0.001 (0.004) 0.072 (0.437) 0.005 (0.026) 0.078 (0.342) 0.041 (0.251)
TOBINQ 0.021 (0.073) 0.103 (0.271) 0.179 (0.731) 0.017 (0.060) 0.092 (0.244) 0.168 (0.693)
ENV 0.008 (1.019) 0.021* (1.786) 0.002 (0.343) 0.009 (1.069) 0.022* (1.812) 0.003 (0.422)
INST 0.032* (1.763) 0.025 (1.163) 0.024* (1.673) 0.031* (1.721) 0.024 (1.114) 0.024 (1.603)
BSIZE 0.086 (0.880) 0.111 (0.930) 0.033 (0.393) 0.082 (0.839) 0.107 (0.901) 0.031 (0.362)
INDEP 0.007 (0.653) 0.006 (0.521) 0.007 (0.794) 0.007 (0.669) 0.007 (0.526) 0.007 (0.801)
DUALITY 0.103 (0.252) 0.086 (0.174) 0.289 (0.857) 0.099 (0.242) 0.083 (0.167) 0.274 (0.813)
FEMALE 0.015 (0.736) 0.031 (1.205) 0.009 (0.540) 0.015 (0.778) 0.032 (1.225) 0.010 (0.605)
COMP 0.043 (0.102) 0.107 (0.238) 0.001 (0.003) 0.008 (0.018) 0.080 (0.177) 0.040 (0.121)
Constant 15.029** (2.549) 16.640** (2.486) 12.353*** (2.701) 18.312*** (2.901) 19.641*** (2.728) 16.422*** (3.333)
Year effect Control Control Control Control Control Control
Sector effect Control Control Control Control Control Control
Observations 599 574 564 599 574 564
The number of unique firms 247 230 240 247 230 240
Likelihood 333.1 312.6 342.4 333.1 312.7 342.6
Chi square 59.93 35.74 44.87 59.48 35.21 44.51

Notes: *, ** and *** are significant at the 0.10, 0.05 and 0.01 levels, respectively (two-tailed); ASSURE = a dummy variable coded 1 for firms that had their Scope
1 or Scope 2 GHG emissions assured by a third party and 0 otherwise; ASSURE_SCOPE1 (ASSURE_SCOPE2) = a dummy variable coded 1 for firms that had
their Scope 1 (Scope 2) GHG emissions assured by a third party and 0 otherwise; INT = total Scope 1 and Scope 2 emissions divided by net sales; INT_SCOPE1
(INT_SCOPE2) = total Scope 1 (Scope 2) emissions divided by net sales; TEMIS = is measured as the natural logarithm of the total Scope 1 and Scope 2 emissions
in metric tons sales; SCOPE 1 (SCOPE 2) is measured as the natural logarithm of total Scope 1 (Scope 2) emission in metric tons; SIZE = natural logarithm of total
sales; ROA = net income before extraordinary items/preferred dividends divided by total assets; LEV = total debts divided by total assets. CAPS = capital
spending divided by total sales; TOBINQ = the total market value of the company based on the year-end price and the number of shares outstanding, plus
preferred stock, the book value of long term debt, and current liabilities, divided by the book value of total assets; ENV = measured as the environmental pillar
score from Thompson Reuters’ ESG Asset4 database; INST = the percentage of issues held by investment banks or institution among total shares issued;
BSIZE = the number of directors serving on the board; INDEP = the proportion of independent directors on board. DUALITY = 1 if the CEO simultaneously
chairs the board or 0 otherwise; FEMALE = the percentage of female directors on the board; COMP = nature logarithm of total senior executives compensation
Models (2) and (5), but the significance is somewhat lower than the conventional level. Taken External
as a whole, the results are generally consistent with the prediction of H1. carbon
We find strong support for H2: firm size is significantly and positively associated with
the probability of purchasing external carbon assurance for all models. The evidence is
assurance
largely consistent with our argument that large firms tend to experience a great deal of
public pressure about their carbon emissions and carbon activity, although they are
probably more financially transparent than small firms. Thus, GHG assurance seems to be a
device to “raise the carbon veil” (i.e. increase transparency). The reduced legitimacy threat 195
associated with GHG assurance may decrease media scrutiny and regulatory pressure
(Mohd Ghazali, 2007; Watts and Zimmerman, 1986), as well as legitimising a firm’s
operations and contributing to the creation of a green image (Hossain et al., 1995).
Regarding the impact of leverage on carbon assurance, the coefficient of LEV is found to
be negative but insignificant for all models (Table III). These results suggest that firms with
high levels of leverage are not more likely to obtain carbon assurance than low-leverage
firms. This result appears consistent with the results of a prior study (Casey and Grenier,
2015) that shows that high-leverage firms do not tend to obtain more SA. It is unlikely that
carbon information is unimportant to such firms. A more plausible explanation would be
that this is because bank monitoring substitutes for the function of assurance, reducing
demand for the service (Barrett et al., 2005; Casey and Grenier, 2015). Another possibility is
that banks that provide finance to these firms have access to carbon data via other sources.
These financial institutions should be able to demand carbon information directly, rather
than relying on publicly disclosed information. Finally, the control variable ROA is
generally not significant, suggesting that profitability is not a key factor determining
managerial incentives to purchase GHG assurance. In sum, we find that US firms purchase
external carbon assurance to respond to pressure with respect to carbon pollution.
Furthermore, to test whether firms in carbon-intensive sectors are more likely to have
their carbon reports externally verified by an assurance provider, we replace the individual
sector dummy variables with only one dummy variable. INTENSIVE equals 1 if a firm
operates in the energy, materials, or utilities sector and 0 otherwise. We do not find any
significant result (untabulated) for intensive sectors, which suggests that not only do
stakeholders in carbon-intensive firms demand the credible disclosure of carbon emissions
information, but also those in less carbon-intensive firms are concerned with this
information. In other words, the directors of the non-carbon intensity firms also feel pressure
that motivates them to provide assured carbon reporting to their stakeholders. In sum, after
controlling for all of these potential influences, our results remain robust and our main
inferences are not altered, in spite of our alternative research design.

6. Conclusions and future research

In response to continuing calls to extend examinations to new types of audit, particularly
those of a discretionary nature (Barrett et al., 2005; Cohen et al., 2004; Curtis and Turley, 2007;
Gendron and Spira, 2009, 2010; Parker et al., 2008), we examine the impact of legitimacy
threat on the choice of external carbon assurance. Based on a sample of large US companies
over the period of 2010-2013, we show that carbon assurance is a response to perceived
legitimacy threat arising from more stringent carbon legislation and growing public
awareness. More specifically, we find that firms with greater carbon intensity tend to adopt
the practice of external carbon assurance, as they are liable for the negative impact of carbon
emissions, and assured emissions information would probably ease the concerns of potential
stakeholders. In addition, large firms are more likely to obtain external carbon assurance, as
they are prone to public criticism (Aerts et al., 2008; Deephouse and Carter, 2005) and may
ARJ need to enhance their credibility because of their visibility and their extensive contractual
32,2 and social ties to stakeholders (Cormier et al., 2005; Deephouse and Carter, 2005; Patten, 1992;
Simnett et al., 2009b). Overall, our results provide theoretical and practical insights into the
idea of auditing in domains outside the field’s traditional roots in the financial realm and
regarding SA in general. Our empirical evidence has significant economic implications, as
carbon assurance is an important part of carbon control and management system and a
196 better understanding of the factors associated with the practice should assist to establish a
more transparent institution encouraging low carbon investment. Our findings should be
also useful for regulators concerned about the quality of carbon information, and for
accountants, who face the challenge of implementing the first version of the International
Standards for GHG statement assurance (effective from September 2013).
However, a few caveats are worth noting. First, we only consider large firms; thus,
caution should be exercised in generalising our findings to medium-sized or small
companies. Second, this study focuses on only one country (the US). Future research could
extend this analysis to other countries, such as those within the European Union. Third, we
only use data on firms that participated in the CDP, and for the most part, we use carbon-
related variables from the CDP database. However, firms may choose other channels (e.g. a
company website) to communicate their carbon information. Fourth, we do not examine
actual CDP statements and related assurance reports, so there is no guarantee that the
contents of the CDP reports are complete and accurate, even with assurance.
There are many research opportunities in SA and in carbon assurance in particular.
First, our study could be extended to examine the determinants of choice of carbon
assurance provider (accounting firm or non-accounting firm). Second, it should be noted that
our study covers the period before international standards for GHG assurance will become
effective; we assume that the issuance of the standards will affect managerial incentives. A
future study might examine the impact of the implementation of such standards on the
practice of GHG assurance. Third, the evolution of carbon constraints presents an additional
avenue for future research. For example, future work could examine the impact of other
firm-related characteristics and institutional factors, e.g. carbon management systems,
carbon-reduction actions, and corporate governance. Finally, an examination of the
association between firm value and carbon activity, including assurance, is necessary.

Notes
1. ISAE 3410, Assurance Engagements on Greenhouse Gas Statements, was issued in 2012 by the
International Auditing and Assurance Standards Board (IAASB). ISAE 3410 is a topic-specific
assurance standard, under the umbrella of ISAE 3000, which provides requirements and
guidance specific to engagements on GHG statements. ISAE 3410 did not become effective until
30 September 2013.
2. Currently there are several international standards for sustainability reporting and assurance,
including the G4 reporting standards (GRI 2013), the International Integrated Reporting
Committee’ framework for connecting CSR with financial reporting (IIRC 2011) and the
Accountability 1000 (AA1000) and ISAE 3000 and 3410 assurance standards.
3. Sustainability is often used interchangeably with CSR (for a discussion of subtle differences
between the terms, see O’Dwyer and Owen [2005] and O’Dwyer and Owen [2007]).
4. An ETS is a market mechanism for emissions control at relatively lower costs. Under an ETS,
participating firms are allowed to trade surplus emissions permits, allowances or certificates.
5. We run both the fixed-effects and random-effects models based on equation (1) without industry and
year dummy variables. In a Hausman test, the chi-square was 16.1 and the p-value was 0.2437 > 0.1.
 6. The measurement of Scope 1 and 2 emissions requires considerable estimation and the External
application of emissions factors that may vary between companies and over time because of carbon
different production methods used at the source of the consumed electricity (Green and Li, 2012). assurance
The level of inherent uncertainty in the collection and reporting of emissions highlights the need
for independent assurance to add credibility to reported emissions disclosures.
7. For example, companies A and B both emitted one million tons of carbon. A has sales revenue of $100m,
but B only has $10m of sales. B’s emissions are therefore more salient than those of A, as B has much 197
lower carbon productivity. If the industry average is one million tons of carbon generated per $50m in
sales, A would have less concern regarding carbon issues because of its high level of carbon efficiency.
8. The following is a technical interpretation of the statistical results. For every one tone per
million-dollar increase in carbon emission intensity, we expect a 0.238 increase in the log-odds of
carbon assurance, holding all other independent variables constant. For every one tone increase
in absolute carbon emissions, we expect a 0.243 increase in the log-odds of carbon assurance,
holding all other independent variables constant.

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Further reading
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and New York, NY.
Stern, N. (2006), The Stern Review on the Economics of Climate Change, Cambridge University Press,
Cambridge.

Corresponding author
Ragini Rina Datt can be contacted at: r.datt@westernsydney.edu.au

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