The moderating role of managerial entrenchment on the relationship between sustainability performance and audit quality

Purpose This paper investigates the relationship between sustainability performance, audit quality and managerial entrenchment. Specifically, this paper aims to empirically examine the moderating role of managerial entrenchment on the relationship between sustainability performance (SP) and audit quality. Design/methodology/approach This study analyzes a sample of 484 European firms over the period from 2010 to 2022. The data were collected from publicly available financial statements, sustainability reports and governance disclosures. The study uses regression analysis to explore the direct and moderating effects of SP and managerial entrenchment on audit quality, focusing on audit fees as the proxy for audit quality. Findings The results reveal a positive and significant relationship between audit quality and SP. Additionally, this study finds that managerial entrenchment significantly moderates the relationship between sustainability performance and audit fees, suggesting that entrenched managers are likely to increase audit costs due to the complexities in assessing sustainability efforts and management decisions. Practical implications This study provides valuable insights for companies, auditors and regulators. It emphasizes that managerial entrenchment can impact the effectiveness of SP and increase audit costs. For companies, strong governance is crucial to managing these dynamics. Auditors may need to account for higher fees to properly evaluate entrenched management and sustainability efforts. For regulators, the findings highlight the need for policies that mitigate the risks of entrenchment and promote transparency in sustainability reporting and audit quality. Originality/value Unlike prior studies that primarily explore the direct relationship between SP and audit quality, this paper contributes to the literature by examining the moderating role of managerial entrenchment in the association between these variables. The study also opens avenues for future research, particularly in exploring other governance mechanisms that could influence SP and audit quality, and examining the role of managerial entrenchment in different institutional contexts.