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.
DOI:10.24056/KAR.2022.04.001 KAR Vol.47(No.2) 1-31, 2022
We investigate the association between management overconfident tone and the level of audit effort measured by audit fees and hours. Prior studies suggest that firms led by overconfident managers are likely to initiate risky investments, report low quality financial statements, and have material weaknesses in internal control system. These characteristics, combined together, result in higher audit risk. In addition, auditors assess audit risk based on the credibility of management through client-auditor communications. If auditors perceive overconfident managers as less credible, they assess audit risk higher, leading to more audit effort. In empirical analysis, we first collect the CEO’s letter in each web site of sample firms. We then perform textual analysis using DICTION program to classify the tone in the letter into three different types of managerial overconfidence: activity, optimism, and certainty. We find that activity tone is significantly associated with audit hours and audit fees. Optimistic tone is weakly associated with the audit hours and audit fees in some analyses. In contrast, certainty tone has no significant association with audit hours and audit fees. Our findings are robust to a battery of analyses, including 2-stage least square analysis and control of alternative overconfidence measures. This paper extends prior research on management characteristics in auditing. By showing the usefulness of non-financial information, which is rarely examined in prior studies, this study contributes to auditing literature in various respects.
Economic Uncertainty and Value Relevance of Accounting Information 경제적 불확실성과 회계정보의 가치관련성
최성호 Sung Ho Choi , 강유정 You Jung Kang , 최관 Kwan Choi
DOI:10.24056/KAR.2022.04.002 KAR Vol.47(No.2) 33-67, 2022
Uncertainty, unlike risk, is hard to be predicted and measured. When economic uncertainty increases, it becomes difficult for policy makers and investors to respond and come up with the ambiguous economic situation. The uncertainty not only reduces consumption, investment and employment but also increases volatility of stock price. As an example, recent COVID-19 has increased uncertainty in the global economy. Governments have tried to resolve the uncertainty through active monetary and financial policies, but these policies are not successful but result in widening the gap between the real market and capital market. A few economists recently have developed economic uncertainty index to diagnose and resolve the economic difficulties. They applied textual analysis to measure the index using mass media articles and economic reports of EIU(Economic Intelligence Unit). This study investigates whether the uncertainty affects the value relevance of accounting information using WUI(World Uncertainty Index) developed by Ahir et al. (2018). The results show that EPS and BV of equity lose their value relevance significantly as economic uncertainty increases during the period from 1999 to 2020. The value relevance of accruals and operating cash flow also decrease significantly during high uncertainty period although they have different characteristics. These results show that the economic uncertainty lowers the usefulness of accounting information.
경제적 불확실성, WUI, 텍스트 마이닝, 가치관련성, economic uncertainty, text mining, value relevance
The Association between Comparability of Financial Statements and Dividends and Information Asymmetry in Korea 비교가능성과 배당 사이의 관계와 정보불균형
안혜진 Hyejin Ahn , 오현진 Hyunjin Oh
DOI:10.24056/KAR.2022.04.003 KAR Vol.47(No.2) 69-99, 2022
This study investigates whether financial statement comparability is associated with firm-specific dividends. Although several studies on the comparability, since the seminal work of De Franco et al. (2011) that developed the way to measure the comparability, has been performed frequently, the study that links the comparability with dividends is rare. This study investigates this important but ignored issue empirically with Korean data. We expect that investors and outsiders are more easily monitor management when the comparability is relatively high. Thus, the agency problem of the firms with more comparable financial statements is expected to be low, due to the intense monitoring by outsiders. As a result, we expect that firms with more comparable financial statements are more likely to pay dividends. In contrast, if comparability and dividend payment have a substitutive relation, then the firms with more comparable financial statements are more likely to pay a small dividend. Empirical results are summarized as follows: First, we find a positive association between comparability and firms’ tendency to pay dividends. Second, there is also a positive association between comparability and the amount of dividends paid. Third, we note that these tendencies are more pronounced among the firms with greater information asymmetry, suggesting that comparability plays a more important role when the level of information asymmetry is greater. In sum, these findings provide important implications to academics and other outside information users. In addition, this study contributes to policy-makers to show a way to reduce agency costs by enhancing monitoring mechanism.
비교가능성, 배당, 대리인 문제, 정보불균형, comparability, dividend, agency costs, information asymmetry
Examination on Tax Avoidance Measures and Earnings Management: Focusing on Effective Tax Rates and Discretionary Accruals 조세회피 측정치와 이익조정에 관한 연구: 유효법인세율 및 재량적 발생액을 중심으로
심해린 Haerin Shim , 최기호 Kiho Choi , 유지선 Ji Seon Yoo
DOI:10.24056/KAR.2022.04.004 KAR Vol.47(No.2) 101-141, 2022
In this study, we examine the effects of earnings management on effective tax rates (ETR) which is one of the most widely used tax avoidance measures in tax accounting research. We also test whether an alternative tax avoidance measure of operating cash flow-based effective tax rate (CFO ETR) is more robust from the effects of earnings management than ETR. We lastly recommend the ways to identify the overestimating issue of ETR caused by earnings management when measuring tax avoidance in an empirical analysis. Our analysis using non-financial listed firm-year observations for the period of 2001-2019 yields the following findings. First, we observe the evidence of earnings management from the group of firms that are considered to achieve low ETR due to the increasing denominator (pretax earnings). Second, among components of pretax earnings, operating cash flow is found to have a stronger relationship with taxes paid than accruals, supporting the robustness of CFO ETR. Lastly, based on the re-examination of the previous literature on tax avoidance, we find that the empirical estimates or results could be biased by the effects of earnings management on ETR measures. In this regard, we specifically address the need to identify and control for these effects by using both ETR and CFO ETR, and either eliminating or partitioning the group of observations considered to be affected by earnings management when conducting empirical analysis.
Calendar Effects on Quarterly Earnings and Market Pricing 달력이 분기손익에 미치는 영향과 시장의 평가
강나라 Na Ra Kang
DOI:10.24056/KAR.2022.04.005 KAR Vol.47(No.2) 143-173, 2022
This study investigates the impact of the calendar on quarterly earnings and pricing. I pay attention to the fact that Statistics Korea and the Bank of Korea produce seasonal adjustments, including adjustments to calendar factors, to improve the usefulness of statistics. This study expects that the quarterly business days positively affect quarterly earnings. However, the investors do not consider the number of business days when they interpret the quarterly earnings through the seasonal random-walk model, omitting the business days’ effect. Empirical analyses show that the quarterly business days show a significant positive effect on the change in quarterly earnings, but the investors do not fully understand such an effect. This study extends the concept of calendar adjustment in economic statistics to the area of financial reporting. The public holiday systems in Korea and the British-American countries are very different. As the number of quarterly business days varies significantly in Korea than in British-American countries, the effect of calendar factors on quarterly earnings is insignificant in British-American countries but should be significant in Korea. Therefore, it is not easy to know the effect of calendar factors on financial reporting and capital markets through reviewing foreign literature. It means that research on the Korean capital market is needed.
The Effect of the Accounting Transparency Improvement Plan of Order-made Production Industry on Accounting Transparency and Information Asymmetry 수주산업 회계투명성 제고방안이 회계투명성과 정보비대칭에 미치는 효과
최성호 Sung Ho Choi
DOI:10.24056/KAR.2022.04.006 KAR Vol.47(No.2) 175-201, 2022
Information users requested improvement of the system related to construction contracts to reduce investment risk. Since 2016, Korea regulator has implemented the Accounting Transparency Improvement Plan in the order-made production industry to provide completed and comprehensible information on construction contracts to information users. In particular, it sought to provide transparent accounting information by strictly regulating the arbitrariness of accounting and reinforcing audit and supervision. Moreover, the disclosures were expanded to reduce information asymmetry. This study verified the effectiveness of tightening accounting and disclosures in the order-made production industry. To this end, the decrement of abnormal unbilled construction receivable after implementing the improvement plan was analyzed. Whether there were any significant changes in the effectiveness of abnormal unbilled construction receivable on information asymmetry after implementing the improvement plan was investigated. The results revealed that abnormal unbilled construction receivable after implementing the improvement plan did not decrease significantly compared to the pre-implementation. Furthermore, the effect of abnormal unbilled construction receivable on information asymmetry increase significantly after implementing the improvement plan compared to the pre-implementation. In summary, the effectiveness of the improvement plan was insignificant, contrary to expectations.
수주산업 회계투명성 제고방안, 비정상 미청구공사, 정보비대칭, accounting transparency improvement plan, abnormal unbilled construction receivable, information asymmetry
Internal Audit Function and Preliminary Earnings Quality 내부감사부서와 잠정이익의 품질
신보선 Bosun Shin , 한종수 Jongsoo Han , 박채린 Chairin Park , 현승임 Seung-im Hyun
DOI:10.24056/KAR.2022.04.007 KAR Vol.47(No.2) 203-238, 2022
As one of the fundamental elements of corporate governance, an internal audit function (IAF) can improve the quality of the preliminary earnings by performing a monitoring role that supports the work of the audit (committee) and internal audit practices on a year-round basis. Thus, we posit that if a firm voluntarily establishes an IAF or employs a high-quality IAF, the firm’s preliminary earnings would have high quality and thus be less revised. Then, the difference between preliminary earnings and reported earnings would be reduced. The results are as follows. The difference becomes smaller when a firm has an IAF, when an IAF is exclusively dedicated to internal audit work, and as the head and members of an IAF have more work experience. These results, however, are observed only in the subsample where earnings are overstated. The result suggests that an IAF effectively control the opportunistic behavior of managers who are likely to overestimate earnings, thereby improving the quality of preliminary earnings. This study is the first study that uses disclosure data on IAFs, being reported from 2018. The results of this study suggest that both the existence of IAFs and how IAFs are operated are important determinants of preliminary earnings’ quality. The results also provide important implication that regulators should enforce non-financial firms to install IAFs.
The Effect of Standard Audit Hours Policy on Audit Quality 표준감사시간제도 도입이 감사품질에 미치는 영향
조연주 Yeonjoo Cho , 김민희 Min-hee Kim , 전규안 Kyu An Jeon
DOI:10.24056/KAR.2022.04.008 KAR Vol.47(No.2) 239-277, 2022
In the 「Act on External Audit of Corporations, etc.」 fully amended in 2017 (“New External Audit Act”), standard audit hours policy(“SAHP”) was introduced to improve audit quality. With the introduction of SAHP, it is expected that the audit quality will be improved as SAHP enables auditors to input an appropriate audit hour and fulfill the auditor’s due diligence. This study empirically analyzed the effect of the introduction of SAHP, which has been in effect since 2019, on audit quality. In this study, 5,967 company-year data from 2015 to 2019 of companies listed on the Korea Exchange were used for analysis. Results of this study are as follows. First, the discretionary accrual in 2019 after the introduction of SAHP significantly was decreased compared to that before the introduction of SAHP. Second, it was found that the audit quality was higher in the companies that the actual audit hours(“AAH”) exceeded the standard audit hours(“SAH”) compared to the companies that the AAH were less than the SAH. It was also found that the higher the audit quality the more the AAH exceeded the SAH. Third, the audit quality was higher in the companies that the AAH were less than the SAH before SAHP and then the AAH exceeded the SAH after SAHP. The contribution of this study is to empirically present that the introduction of SAHP was effective in improving the quality of audit work. It is expected that these results can provide meaningful implications for researchers and supervisory authorities.
표준감사시간, 실제감사시간, 외부감사법, 감사품질, standard audit hours, actual audit hours, New External Audit Act, audit quality
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