Korean Accounting Review (KAR) is the official journal of the Korean Accounting Association. The Korean Accounting Association (KAA) is the largest and oldest academic organization of accounting scholars and practitioners in Korea. It aims to create a fertile environment for innovation and collaborative research, to foster and improve research for the development and the promotion of accounting, and to develop a powerful network among scholars, practitioners, and authorities concerned with political decision making in this field.
Timing Role of Accruals and Conservatism 발생액의 시차조정 역할과 보수주의
백원선 Wonsun Paek
DOI: KAR Vol.45(No.4) 1-39, 2020
This study examines the effect of the timing role of accruals on conservatism or asymmetric earnings timeliness. It is well known that accruals play a role to mitigate the timing and matching problems of operating cash flows. In performing this role, two types of accruals have been used: one is deferral entries that are reflected in earnings after cash receipt or disbursement, and the other is accrual entries that are included in earnings before cash receipt or disbursement. Note that future cash flows should be predicted when recording accrual entries, but not deferral entries. Thus, accrual entries are more likely to be associated with conservatism than deferral entries are. I estimate Dechow and Dichev’s (2002) model to decompose current accruals into three portions associated with previous-period, current-period, and next-period operating cash flows. Then I used Basu’s (1997) model to examine which portion of current accruals are related to conservatism. Empirical result shows that the portion of current accruals associated with next-period operating cash flows obtains positively significant asymmetric timeliness while the portion of current accruals associated with previous-period operating cash flows has insignificant asymmetric timeliness. Further, the positive asymmetric timeliness is more prominent for current expense accruals than current sales accruals. This study contributes to the literature by providing deep understanding of the relation between the timing role of accruals and conservatism in the perspective of future cash flow prediction related to accrual entries.
발생액의 시차조정 역할, 보수주의, 비대칭적 적시성, 미래현금흐름, timing role of accruals, conservatism, asymmetric earnings timeliness, future cash flows
The Effect of Tax Risk on Real Earnings Management, Cash Holdings, and Future Cash Taxes Paid 세무위험이 실제 이익조정, 현금보유 및 미래 법인세부담에 미치는 효과
박종일 Jongil Park , 신상이 Sangyi Shin
DOI: KAR Vol.45(No.4) 41-92, 2020
In this study we examine whether higher levels of tax risk are positively associated with real earnings management upward, higher cash holdings, and future cash taxes outflows. We also examine their relation compared to tax avoidance. Prior research has examined the concept of tax uncertainty and provides some evidence for potential economic effects. For instance, Hanlon et al. (2017) find that firms with uncertain tax position (e.g., unrecognized tax benefits (UTBs) as a proxy for tax uncertainty) hold more precautionary cash. Ciconte et al. (2016) document that there is a positive relation between the UTBs and future cash tax outflows. Unlike the previous studies, we use the volatility of the cash effective tax rates (cash ETR volatility) rather than UTBs. Following Guenther et al. (2017), we calculate the standard deviation of annual cash ETRs over five prior years period t-4 to t as a proxy for tax risk. This is an intuitive measure for tax uncertainty, as uncertain tax positions lead to more volatile tax payments over time (Neuman 2016; Amberger 2017). Our sample consists of firms in KOSPI and KOSDAQ listed during fiscal years 2003-2016. In our main tests, inconsistent with our hypotheses, we could not find that the volatility of cash ETRs statistically have a positive association with real earnings management, cash holdings, and future cash tax outflows. In contract, we find a significant and positive association between tax avoidance (as measured by the long-run cash ETRs) and respectively, real earnings management and future cash taxes outflows. Overall, these results suggest that the volatility of cash ETRs as a proxy for tax risk does not capture underlying tax uncertainty regarding a firm’s future cash outflows. These results are also inconsistent with findings in Ciconte et al. (2017) and Hanlon et al. (2017). Thus, our findings provide new evidence to the tax risk/tax uncertainty related literatures.
세무위험, 조세회피, 실제 이익조정, 현금보유, 미래 법인세부담, tax risk, tax avoidance, real earnings management, cash holding, future cash taxes outflows
Why is Executive Compensation not Responsive to Firm Performance? - The Effect of Tax Avoidance on Pay-Performance Sensitivity -
Soojin Kim , Jongkook Park , Youngeun Hong
DOI: KAR Vol.45(No.4) 93-129, 2020
Previous studies have shown that there is a significant positive correlation between corporate performance and compensation. However, recent studies have shown that there is no significant relationship between corporate performance and executive compensation, or the relationship only exists in specific cases. The purpose of this study is to clarify why performance and compensation are not linked properly. Desai and Dharmapala (2006, 2009) argue that tax avoidance has a complementary relationship with managerial private benefit pursuits, as the likelihood of tax avoidance decreases corporate transparency and the use of corporate resources for managerial pursuits. In particular, the incentive to pursue managerial private benefits will increase even when managerial compensation is not given. If an enterprise adopts an aggressive tax avoidance strategy, the uncertainty about their financial information will increase, and the proportion of noise will also increase in evaluating their performance. This is expected to reduce the performance-repair sensitivity of firms that have aggressive tax avoidance because the weight of the performance measures is reduced in concluding a compensation contract. This study expects that aggressive tax avoidance of the firm causes lowered the weight of the performance measures and therefore lowered ‘pay-performance sensitivity (PPS)’ in an incentive compensation contract. As a result, the PPS of the corporations with aggressive tax avoidance lower than that of the corporations with less aggressive tax avoidance in various combinations of manager’s compensation and corporate performances. Thus, it has been proven through this study that tax avoidance is one of the causes lowering the PPS.
The Self-contagion Effect of Audit Quality Causing Stock Price Crash Risk 주가급락 기업 감사인의 타 기업 감사품질에 대한 self-contagion 효과
윤선주 Seonju Yoon , 고재민 Jaimin Goh
DOI: KAR Vol.45(No.4) 131-174, 2020
This paper examines the relationship between the stock price crash on other firms and the focal firm’s audit quality by the same auditors, representing a self-contagion effect of a low-quality audit. It has been reported that the opacity of financial statements brings about stock price crash. Not only managers but also auditors are responsible for this opacity because auditors should find out the bad news that managers tend to withhold. This paper, therefore, predicts that discretionary accruals of focal firms would be great when stock price crash occurs in other auditee firms of their auditor, taking advantage of the fact that auditors provide similar audit quality. The results are as follows. First, we find that discretionary accruals of focal firms are positively related to stock price crashes on other auditee firms of the same auditor. Second, however, we cannot find this relationship when the focal firms experience stock price crashes as well. These two findings show that the self-contagion effect of low-quality audits works differentially according to firms’ opacity. This study finds the indirect evidence that auditors are one of the main reasons for stock price crash risk and it can be new criteria for audit quality such as big4 or industry-specialist auditors. Also, the results have a practical implication that investors should pay attention to unknown bad news when the stock price crash occurs in other auditee firms of the same auditor.
주가급락 위험, 정보이전효과, 전염효과, 감사품질, stock price crash risk, information transfer effect, self-contagion effect, audit quality
Partners’ Abnormal Audit Hours on the Subsidiaries of Conglomerate Group and Audit Qualities 기업집단 소속 피감사 기업의 파트너 감사시간과 감사품질
김상일 Sang-il Kim , 김경태 Kyung-tae Kim
DOI: KAR Vol.45(No.4) 175-208, 2020
This study tests the possibility of external audit partner’s audit quality impairment according to the expected audit fees of other affiliates of the specific audit clients. For empirical analysis, we adopt four types of discretionary accruals to measure audit qualities for 2,007 firm-year observations listed on KSE and KOSDAQ market during 2015 to 2018. The empirical results are summarized as follows. First, the higher expected audit fees of other affiliates in the same conglomerate group lead to the abnormal audit hours of the audit partner for the audit client. Second, the higher the expected audit fee of other affiliates in the same conglomerate group, the partner's abnormal audit hours lead to lower audit quality. The finding suggests that audit partners care for other affiliates of the conglomerate group and lower audit quality to attract more clients from the conglomerate group. In addition, the regulation related to the prohibition of the simultaneous provision of audit and non-audit services among affiliate firms in a conglomerate group, enforced in 2017, weakens the documented association.
Sustainable Tax Strategies, Firm’s Future Performance, and Future Firms Value 지속적인 세무전략과 미래의 기업성과 및 기업가치
박종일 Jongil Park , 신상이 Sangyi Shin
DOI: KAR Vol.45(No.4) 209-252, 2020
Prior research confirms that firms with sustainable tax strategies have more persistent earnings and more transparent information environments (i.e., McGuire et al. 2013; Neuman et al. 2013). Thus, Prior research argues that the sustainability of a firm’s tax strategy providing unique information about earnings persistence and signaling managers’ expectations about future earnings. Therefore, we extend this line of research by providing evidence on an alternative tax planning focus, sustainability, and we investigate whether the sustainability of a firm’s tax strategy provides information about the predictive ability of a firm’s future performance and future firm value as both one- and two-year ahead. Specifically, we also examine their relation compared to minimization tax strategy (i.e., tax avoidance). We find that firms with more sustainable tax strategies exhibit significantly higher one- and two-year ahead operating incomes, net incomes, and cash flows from operating activities, whereas we find that firms with more minimization tax strategies exhibit significantly lower one- and two-year ahead firm performance We also find that firms with more sustainable tax strategies exhibit significantly higher one- and two-year ahead firm value, whereas we do not find a significant relation between future firm value and minimization tax strategies. In sum, we show that the sustainability of a firm’s tax strategy provides information about the predictive ability of one- and two-year ahead financial performance as well as firm value, which suggest that these firms have better future performance and/or firm value, compared to firms focusing on minimization tax strategies. Therefore, these findings are consistent with Scholes et al.’s (2014) theory, which suggests that effective tax planning balances tax and other considerations to maximize after-tax returns and firm value.
지속적인 세무전략, 조세회피 세무전략, 미래 기업성과, 미래 기업가치, sustainable tax strategies, tax avoidance, future firms performance, future firms value
안혜진 Hyejin Ahn , 최세라 Sera Choi , 박선영 Sunyoung Park
45(4) 253-290, 2020
The Effect of Managerial Ability on Financial Statement Comparability in Korea 경영자의 능력이 재무제표의 비교가능성에 미치는 영향
안혜진 Hyejin Ahn , 최세라 Sera Choi , 박선영 Sunyoung Park
DOI: KAR Vol.45(No.4) 253-290, 2020
This study investigates the relation between managers’ ability and financial statement comparability. Based on the findings in prior studies, we propose two competing predictions. On the one hand, prior studies document that firms with more competent managers tend to manage accruals less, resulting in higher financial reporting quality. In addition, competent managers are more likely to put their efforts to improve the performance of the firms and try to convey the performance accurately to the outsiders. Therefore, it is likely that competent managers produce financial statements with greater comparability. On the other hand, we may expect the opposite result suggesting that more competent managers prepare less comparable financial statements. When it comes to disclosure, able managers will determine the level and quality of disclosure by comparing the benefits and costs of disclosure. If they determine that the disclosure costs associated with financial reporting, in particular the proprietary costs, are higher than the benefits, they will strategically decide to disclose only part of their firm’s financial information, resulting in less comparable financial statements. Using 8,360 firm-year observations of Korean listed firms collected over the period from 2004 to 2016, we empirically test the above predictions. We find that both high-ability managers and low-ability managers, compared with those in the middle, tend to have low financial statement comparability, resulting in a non-linear, inverted U-shape association between managerial ability and financial statement comparability. Additionally, the extent of financial statement comparability of firms with low-ability managers decrease more when these managers try to manipulate earnings, while for firms with high-ability managers, its financial statement comparability decrease more when the proprietary costs of financial reporting is high. These findings provide an important implication for the consequence of managerial ability to several interested parties, including researchers and practitioners.
김경순 Kyung Soon Kim , 박선영 Seun Young Park , 이진훤 Jin Hwon Lee
45(4) 291-332, 2020
The Conditional Effects of Abnormal Audit Fees on Audit Quality 비정상감사보수가 감사품질에 미치는 조건부 효과
김경순 Kyung Soon Kim , 박선영 Seun Young Park , 이진훤 Jin Hwon Lee
DOI: KAR Vol.45(No.4) 291-332, 2020
This study investigates whether audit quality is associated with abnormal audit fees, and if so whether the association between the two is asymmetric in the Korean market. In particular, we focus on the specific situations that would influence the relationship between audit fees and audit quality. Our empirical results using the absolute value of discretionary accruals as a proxy for audit quality are as follows: First, the association between abnormal audit fees and audit quality is negative when the abnormal audit fees are positive (i.e., when actual audit fees are higher than the normal audit fees). Second, further investigation reveals that the negative association between the two is mainly observed in the firms with low stock returns, without analyst followings or with a low level of institutional investors’ influence. The evidence is consistent with the notion that the abnormal audit fees in Korea are indicative of economic rents rather than a measure of audit effort. Moreover, we show that the audit fees can be used to measure the level of economic bonding between the clients and the auditors, which is likely to increase in the firms with a relatively poor external monitoring mechanism and thus is also likely to impair the auditors’ independence.