Sustainable Firms Gain Advantage Through Audit Transparency

Sustainable companies that adopt transparent audit practices early enjoy significant fiscal benefits and market performance, according to new research. A study from Nagoya University in Japan reveals that businesses with strong environmental, social, and governance (ESG) credentials perform markedly better under rigorous auditing norms compared to their peers. 

The findings focus on the voluntary adoption of Key Audit Matters (KAMs) — detailed disclosures about the most critical issues an auditor faced. The research provides compelling evidence that ESG leadership and voluntary financial disclosure work in tandem to build market trust and reduce long-term costs.

The Link Between Sustainability and Voluntary Audit Disclosure

The study, published in the Managerial Auditing Journal, examined the relationship between corporate sustainability practices and the early adoption of KAMs. Following a 2015 recommendation from the International Auditing and Assurance Standards Board (IAASB), Japan allowed publicly traded companies to voluntarily adopt KAM reporting in 2019 before making it mandatory in 2020.

This timeline created a unique “natural experiment.” Researchers from Nagoya University analysed data from 1,065 Japanese enterprises between 2009 and 2023. They found that only a select group of non-financial companies chose to adopt the more transparent audit disclosures before being required to do so. Crucially, these early adopters were consistently characterised by higher ESG scores, indicating a pre-existing commitment to robust sustainability practices.

Market Earnings for Credible Signals

The study indicates that the market interprets early KAM adoption by sustainable enterprises as a highly credible signal. According to the study’s co-author, Hu Dan Semba, an associate professor at Nagoya University, “The market appears to view ESG practices and KAMs reporting as a kind of two-factor authentication.” When a company with genuine sustainability credentials also invests in transparent auditing, investors see it as a sign of underlying organisational strength and quality.

This combined signal translates into tangible earnings. The study found that enterprises with higher ESG scores that adopted KAMs early experienced a positive market response. Importantly, these companies were willing to pay more for audit and consultancy services during the voluntary phase, treating transparency as a strategic investment rather than a burden.

Strategic Benefits and Reduced Long-Term Costs

The early adoption of transparent audit reporting delivered a clear fiscal advantage for sustainable companies. The research indicates that by voluntarily disclosing KAMs, these enterprises were able to identify, disclose, and mitigate audit risks well before the regulation took effect.

This forward-looking approach paid off when the rules changed. Once KAM reporting became mandatory for all enterprises, early adopters — particularly those with strong ESG foundations — saw their subsequent audit and non-audit fees decline. In contrast, companies that delayed adoption likely faced higher costs as they rushed to comply with the new requirements. This pattern highlights a key insight from the research: transparency is not simply a compliance cost but a strategic investment that can enhance credibility and manage expenses.

A Conclusive Case for Integrated Reporting

The Nagoya University study offers a strong conclusion for the corporate world. Credibility cannot be bought simply by hiring expensive auditors. Rather, it is built through a demonstrated, long-term commitment to sustainable practices. When this commitment is reinforced by a voluntary move towards greater audit transparency, the market recognises and rewards the integrity of the signal.

The research confirms that robust sustainability practices and financial transparency are deeply connected pillars of modern corporate governance. For business leaders, the message is clear: building authentic ESG quality positions an organisation to leverage transparency initiatives for market advantage, transforming what is often seen as a regulatory obligation into a source of strategic strength and investor confidence.