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.
The Effects of Firm-specific Earnings Component on Information Asymmetry, Analysts' Earnings Forecasts Bias: Comparing Industry-wide Earnings Components 기업별 이익구성요소 특성이 정보비대칭 및 재무분석가의 이익예측 편의에 미치는 영향: 산업별 이익구성요소 특성과의 비교
박형주 Hyung Ju Park , 조중석 Joong-seok Cho
DOI:10.24056/KAR.2019.11.005 KAR Vol.45(No.3) 1-33, 2020
According to economic theory, the industry-wide earnings component is recognized more in the stock price because it is relatively less volatile and more persistent than firm-specific information. Previous research shows that industry-wide earnings component tend to be more persistent than firm-specific earnings. Based on this, we examine how each earnings component affect firms’ information environments. Specifically, we investigate how industry-wide and firm-specific components are associated with information asymmetry and influence the analysts earnings forecast. Following Hui et al.‘s (2016) methodology, we decompose earnings into industry-wide and firm-specific components. As we hypothesized, we verify that firm-specific component is more related with information asymmetry. Then, we also find that firm-specific component is more related to the forecast bias. As additional robust tests, we control for firm characteristics, operating cycle, and earnings volatility, these results remain consistent. These results suggest the need for market participants to understand the different effects of specific earnings components and to reflect them in their firm valuation. They should pay more attention to a distinctiveness between industry-wide and firm-specific earnings component for their economic decisions. These findings will provide meaningful implications for standards setters and accounting practitioners.
Partner Workloads, Audit Quality, and Rank Hours 파트너 업무량과 감사품질 및 직급시간 사이의 관계
최승욱 Seung Uk Choi , 배길수 Gil S. Bae , 이재은 Jae Eun Lee
DOI:10.24056/KAR.2020.01.001 KAR Vol.45(No.3) 35-61, 2020
We examine whether partner workload is associated with audit quality and the amount and mix of audit labor used. In decentralized human capital intensive audit firms, individual partners play a central role, making every important decision in auditing. Although the primary concern of the regulators seems to be that an excessive partner workload can harm audit quality due to the potential inadequate attention to individual engagements, the relationship between partner workload and audit quality is still being debated. Exploiting the dataset with the partner identity and the amount of total and mix of audit labor used for individual engagements of public and private companies in Korea for the period of 2014-2016, we find that partner workload is positively associated with audit quality measured by three alternative proxies commonly employed in the literature. We also find that partner workload is positively related with audit fees. In addition, we find that partner workload is positively associated with total audit hours, suggesting that busy partners use more labor resources than do their less busy counterparts. When total engagement hours are disaggregated into audit labor rank hours, we find that audit teams led by busy partners spend less partner hours but more senior and junior hours. Lastly, we find that our results are driven mainly by audit partners in the non-Big4 firms.
DOI:10.24056/KAR.2020.03.003 KAR Vol.45(No.3) 63-100, 2020
Thomas and Zhang (2002) document that inventory is the main cause of accrual anomaly reported in Sloan (1996). Management predicts purchase, production, and sale of inventory in accordance with the company's operating policies. The level of inventories at the end of the year will be determined to reflect market situation for the next year, and consequently it consists of target inventory level and deviation from the target (Dechow et al. 1998). The target component of inventory for the current year is related to cost of sales forecasted for the next year, while the error component of inventory is the difference between the sales forecasted and actual sales for the current year. The error component of inventory can include a portion from earnings management. For example, managers can capitalize production costs by increasing goods through intentional overproduction. If external information users anticipate their own inventory level, information asymmetry between management and outsiders may deepen, distorting market's evaluation of the inventory. To examine this, we decompose inventory into normal and abnormal component using Dechow et al. ‘s (1998) model and see which component causes inventory anomaly. This study classifies inventory by type of commodities, products, work in process, and raw materials to identify which type of inventories causes accrual anomaly. For the sample of 9,483 firm-years from 1998 to 2017, we show that the inventory anomaly is mainly caused by the error component rather than the target component. Further, we find that the inventory anomaly is most prominent for product. The results of this study suggest that the resolution of information asymmetry on the details of inventory can help to mitigate market distortions.
The Effect of Ex-Ante Inspection Risk on Financial Reporting Quality 사전적 감리위험이 재무보고 품질에 미치는 영향
최석원 Seok Won Choi , 유용근 Yong Keun Yoo , 이상혁 Sang Hyuk Lee
DOI:10.24056/KAR.2020.03.004 KAR Vol.45(No.3) 101-135, 2020
This study examines how the regulator's thematic audit review policy, which began in year 2013, affected the financial reporting quality of the theme-related firms. The thematic audit review policy is a new regulatory framework that forewarns the nature of the financial statements items, industries, or businesses, i.e., theme, that would be monitored intensively in the following year. The purpose of the thematic audit review policy is to induce the theme-related firms and the auditors to perceive the ex-ante inspection risk and so to improve voluntarily the financial reporting quality. Our empirical evidence, based on the Korean sample of 8,706 observations between year 2012 and year 2017, indicates that the theme-related firms significantly reduced their overall discretionary accruals after the announcement of theme. However, the thematic audit review policy seems to fail to prevent the theme-related firms from conducting their income-increasing earnings manipulation. To our knowledge, this is the first empirical study to examine how the perceived inspection risk affects the financial reporting quality. In addition, this study provides several useful policy implications for the regulators to implement the thematic audit review policy.
Income Shifting and Tax Avoidance using Tax Havens 조세피난처를 이용한 소득이전과 조세회피
고종권 Jong Kwon Ko , 박희진 Hee Jin Park , 윤성수 Sung-soo Yoon
DOI:10.24056/KAR.2020.03.007 KAR Vol.45(No.3) 137-171, 2020
This study examines whether Korean firms with related parties located in tax haven countries lower their tax burdens in the short- and long-term through the transactions with the related parties, by shifting income from high tax countries to low tax countries. Analyzing hand-collected footnote data on the amounts of transactions with individual related parties, in short term analysis, we find that the transactions with the related firms located in the tax haven countries do not reduce sample firms’ short-term tax burden, measured by annual effective tax rates. In addition, the amount of transactions with related parties located in the tax haven countries for the high tax rate firms is not significantly associated with the tax burden. In contrast, long-term analyses over three- and five-year periods suggest that related party transactions with the related firms located in the tax haven countries alleviate tax burden. The reduction of the tax burden is achieved mainly through sales and revenue transactions. In sum, we conclude that the impact of Korean firms’ related party transactions with the related firms located in the tax haven countries on tax avoidance behavior differs across time horizons, firms mostly target long-term tax savings when they set up related firms in the tax haven countries.
조세피난처, 소득이전, 조세회피, 현금유효세율, 특수관계자 거래, tax haven, income shifting, tax avoidance, cash effective tax rates, related party transactions
Does the Adoption of Principle-based IFRS Reduce Earnings Management in Korea?: Time-series Comparison Using Accruals Determinant Factor Model 한국에서 원칙중심 IFRS의 채택은 이익조정행태를 감소시키는가?: 발생액 결정요인 모형을 이용한 시계열 비교
김경순 Kyung Soon Kim , 이진훤 Jin Hwon Lee , 이경진 Kyung Jin Lee
DOI:10.24056/KAR.2020.04.002 KAR Vol.45(No.3) 173-214, 2020
This study investigates the effect of the adoption of principles-based International Financial Reporting Standards (IFRS) on the earnings management behavior in the Korean market. In particular, we compare whether the R2 of the normal accrual determinants model and the size of the abnormal accrual differ between K-GAAP and IFRS adaption periods. The results of this study are summarized as follows. First, we confirm that the standard error rate (1-adjusted R2) of the normal accrual determinants model in the IFRS period is statistically significantly greater than the K-GAAP period. These results suggest that upward and downward earnings management have increased further after the mandatory adoption of IFRS. Second, after controlling the various factors affecting the total accruals (normal accruals determinants, corporate characteristics, macroeconomic factors and industry types), we analyze whether the total accruals differ between K-GAAP and IFRS periods. As a result of analyzing by applying various comparison criteria, we confirm that the regression coefficient of the period dummy variable(with IFRS adaption period defined as one) shows positive (+) or zero (0). This result suggests that the upward earnings management behavior in the IFRS period has not decreased more than at least the K-GAAP period. Overall, the results of this study show that the adoption of principle-based accounting standards in Korea tends to expand rather than reduce managerial discretion.
Disclosure Level of Related Party Transactions and the Accuracy of Analysts' Earnings Forecasts 특수관계자거래 공시수준과 재무분석가 이익예측의 정확성
유승경 Seung Kyoung Yoo , 김병호 Byoung Ho Kim
DOI:10.24056/KAR.2019.12.004 KAR Vol.45(No.3) 215-264, 2020
Following the mandatory adoption of K-IFRS in 2011, the financial information users commented that disclosures about related party transactions in the financial statements were more concise than disclosures in accordance with previous GAAP, which further worsen the information asymmetry between the entity’s management and the financial information users. In response to these comments, the regulator issued a best practice at the end of 2013 that recommended disclosure of related party transactions in greater detail than the level required by the K-IFRS. This study examines whether the regulator’s disclosure recommendations have improved the decision-making of financial information users by evaluating the relationship between the disclosure level of the related party transactions and the accuracy of analysts’ earnings forecasts. An analysis of non-financial listed entities from 2011 to 2016 showed that the recommendations for disclosing related party transactions in detail have improved the accuracy of analysts’ earnings forecasts, indicating that the regulator’s policy has been effective. An analysis of the composition of the regulator’s disclosure recommendations showed that the effect of this policy was that the recommendation to disclose the line item of related party transactions in detail rather than the recommendation to disclose the counterparties of related parties in detail has improved the accuracy of the financial analysts’ earnings forecasts. This is considered to be because the disaggregation of related party transactions into operating and financing activities rather than the effect of providing the information disclosed by the individual related parties has more impact on the accuracy of analysts’ earnings forecasts.
공시수준, 이익예측 정확성, 정보비대칭, 특수관계자거래, 한국채택국제회계기준, disclosure level, earnings forecasts, information asymmetry, K-IFRS, related party transactions
Audit Staff Turnover, Audit Effort and Audit Quality 감사팀 구성원 변동과 감사시간 및 감사품질간의 관계에 관한 연구
임영제 Youngje Im , 양준선 Joonsun Yang
DOI:10.24056/KAR.2020.03.002 KAR Vol.45(No.3) 265-307, 2020
This study examines how audit staff turnover is associated with audit effort and audit quality. Auditing is conducted by an audit team. Individual auditors generally do not work in isolation. Prior studies on auditing have been generally conducted at the audit firm level and the individual auditors level as the unit of analysis. Because an audit team is a hierarchical assemblage of individuals, who perform a discrete part of the audit process for the most appropriate audit opinion, communication and knowledge sharing among team members is vital to an effective and efficient audit. The empirical results are as follows. First, the empirical results reveal that there is a positive relationship between the audit staff turnover and total audit hours. Second, we find that the audit staff turnover is negatively related to audit quality. Additionally, for observations with positive abnormal audit fees, there is no significant association between the audit staff turnover and audit quality, showing that in case the audit team additionally takes more time, the negative relations are less. The contribution of this study is as follows. First, this research concentrates on audit teams and documents the audit staff turnover is associated with audit hours and audit quality, which responds to calls for more research on the audit process and the audit team interactions. Second, the potential availability of the audit staff turnover indicator may help investors to focus on the audit process and evaluate the audit quality with disclosed data.