Korean Accounting Review

Print ISSN 1229-3288 | Online ISSN 2508-7193

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.

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Vol.49No.52024

Current Issue
Assessing the Investment Impact of IFRS Adoption with an Investment Euler Equation Lee-seok Hwang , Yewon Kim , Woo-jong Lee 49(5) 1-35, 2024 DOI:10.24056/KAR.2024.10.001 Title Assessing the Investment Impact of IFRS Adoption with an Investment Euler Equation Lee-seok Hwang , Yewon Kim , Woo-jong Lee DOI:10.24056/KAR.2024.10.001 KAR Vol.49(No.5) 1-35, 2024 Abstract The financing effect of IFRS adoption is one of the most studied topics in the literature. Firms in IFRS-adopting countries typically experience an increase in stock liquidity and hence a decrease in the cost of raising capital. Although this literature generally indicates capital market benefits of IFRS adoption, how such benefits translate into managers’ investment decisions remains unexplored. We fill this void. We tackle this issue by applying an investment Euler equation with the generalized method of moments (GMM). Specifically, we borrow the investment model to estimate the rate at which managers discount expected payoffs. Analyzing Korean data for the periods from 2008 to 2013, we find that the discount rate imputed in the model significantly decreases post-IFRS. Our results suggest that the change in reporting standards indeed has a discernible effect on corporate financing and hence investment decisions. In doing so, we showcase and highlight the merit of the production-based asset pricing approach in addressing accounting questions. Key Words financial reporting, IFRS, corporate investment, discount rate, investment opportunity
U-shaped Relationship between Cash Conversion Cycle and Financial Distress: Evidence from Unlisted Companies in Korea Sung-kyoo Kim , Mi-ok Kim , Hyung-rok Jung 49(5) 37-70, 2024 DOI:10.24056/KAR.2024.10.002 Title U-shaped Relationship between Cash Conversion Cycle and Financial Distress: Evidence from Unlisted Companies in Korea Sung-kyoo Kim , Mi-ok Kim , Hyung-rok Jung DOI:10.24056/KAR.2024.10.002 KAR Vol.49(No.5) 37-70, 2024 Abstract The cash conversion cycle (CCC) is a value that indicates how much of a firm’s cash is tied up in working capital during the business process, which creates value, and how much time it takes from when sales are generated until those sales are converted to cash. Given that prior studies mostly target listed - rather than unlisted - companies when investigating the relationship between the cash conversion cycle and profitability, this study investigates whether the CCC has a non-linear U-shaped relationship with the financial distress of unlisted companies by adding variables that squared the CCC. It employs unlisted company data from the Korea Credit Guarantee Fund from 2003 to 2015 to estimate the CCC’s critical value where the credit risk of unlisted companies decreases and then increases, given the longer CCC by industry. Moreover, it probes thresholds of CCC components with the changes in financial distress. The results show a U-shaped relationship between the CCC and financial distress. Furthermore, this concave relationship applies to all types of companies, suggesting that unlisted firms can reduce liquidity risk using the variation in the threshold of each component in the CCC. Finally, industry type affects the U-shaped relationship between the CCC and financial distress; thus, the CCC threshold varies by industry type. Notably, the findings empirically demonstrate the U-shaped relationship between the CCC and the default risk of unlisted companies. Moreover, the industry-specific CCC threshold provides a useful indicator for the working capital management of unlisted companies and credit analysis of borrowers in financial institutions. Key Words Cash Conversion Cycle, Working Capital, Financial Distress, Unlisted companies, U-Shaped Relationship
Pricing Efficiency of Audit Fees Given Audit Risk: 1)Comparison between Pre- and Post-New I SA Periods in the Korean Audit Market Kyung Soon Kim , Yun W. Park , Jin Hwon Lee 49(5) 71-133, 2024 DOI:10.24056/KAR.2024.10.003 Title Pricing Efficiency of Audit Fees Given Audit Risk: 1)Comparison between Pre- and Post-New I SA Periods in the Korean Audit Market Kyung Soon Kim , Yun W. Park , Jin Hwon Lee DOI:10.24056/KAR.2024.10.003 KAR Vol.49(No.5) 71-133, 2024 Abstract This study aims to determine if the risk-based auditing approach (New International Standard on Auditing: New ISA) helps make the auditing market more efficient. Since a strong positive relationship between risk and reward implies that contracts are concluded efficiently in the audit market, an enhancement in pricing efficiency likely leads to an improvement in audit quality. For this reason, this study compares the pricing efficiency between audit risk and audit fees in time series to verify the effect of introducing the New ISA. We use accruals quality (Francis et al. 2004, 2005) as a proxy for audit risk and compare the sensitivity of audit fees to audit risk between the pre- and post-New ISA periods. Our findings are as follows: (ⅰ) The sensitivity of audit fees to audit risks significantly increased after the introduction of the New ISA, and these results suggest that pricing efficiency has improved in the audit market. (ii) Audit quality (proxy: earnings management) increases on average after the introduction of the New ISA, and the improvement in audit quality is particularly noticeable in samples with high risk-reward sensitivity. This suggests that the effectiveness of risk-based auditing has a complementary relationship with the pricing efficiency of audit fees. Overall, our results suggest that the effectiveness of the risk-based audit system can be optimized through the implementation of an efficient pricing system that aligns audit fees with risk in the audit market. Key Words new ISA, risk-based audit approach, audit pricing efficiency, accruals quality, earnings management
Opportunistic Earnings Management and Delisting Risk of IPO Firms: Constraint Effects by Market Monitoring and Accounting Standards 기회주의적 이익조정과 IPO 기업의 상장폐지위험: 시장감시와 회계기준에 의한 제약 효과 김경순 Kyung Soon Kim , 김홍렬 Hong Ryeol Kim 49(5) 135-179, 2024 DOI:10.24056/KAR.2024.10.004 Title Opportunistic Earnings Management and Delisting Risk of IPO Firms: Constraint Effects by Market Monitoring and Accounting Standards 기회주의적 이익조정과 IPO 기업의 상장폐지위험: 시장감시와 회계기준에 의한 제약 효과 김경순 Kyung Soon Kim , 김홍렬 Hong Ryeol Kim DOI:10.24056/KAR.2024.10.004 KAR Vol.49(No.5) 135-179, 2024 Abstract This study aims to examine how earnings management around an IPO to increase the sale value of shares held by internal shareholders affects the risk of early delisting. We analyze a sample of 1,174 IPOs listed between 2001 and 2015, and the results are as follows: First, earnings management in the IPO year shows a more sensitive positive relationship with the risk of early delisting than in other years (the previous year and the immediate year). This suggests that earnings management in the IPO year is associated with opportunism to increase insider shareholder sales value after the end of the lock-up period. Second, the relationship between earnings management in the IPO year and the risk of delisting shows a statistically significant positive relationship only in the KOSDAQ market. These results suggest that opportunistic earnings management occurs more in the KOSDAQ market, where market monitoring is relatively less stringent, and consequently, the risk of delisting increases. Finally, the positive relationship between earnings management in the IPO year and the delisting risk of IPO companies is significantly reduced in the period of K-IFRS adoption compared to K-GAAP. These results suggest that the introduction of principles-based IFRS plays a positive role in limiting opportunistic earnings management by improving the financial reporting environment of the IPO market. Key Words 신규상장, 상장폐지, 기회주의적 이익조정, 보호예수기간, 시장감시, 국제회계기준, initial public offering, delisting, opportunistic earnings management, lock-up period, market monitoring, International Financial Reporting Standards
Effect of Internal Accounting Control System Audit on Accounting Quality under COVID-19 Jonghun Ahn , Sumi Choi 49(5) 181-214, 2024 DOI:10.24056/KAR.2024.10.005 Title Effect of Internal Accounting Control System Audit on Accounting Quality under COVID-19 Jonghun Ahn , Sumi Choi DOI:10.24056/KAR.2024.10.005 KAR Vol.49(No.5) 181-214, 2024 Abstract In this study, we examined the impact of COVID-19 on accounting quality and whether the strengthening of certification from review of internal accounting control system (IACS) to audit has a positive impact on accounting quality in the face of such drastic changes in the external environment. Our empirical study demonstrates that despite overall decline in accounting quality after COVID-19, companies subject to IACS audit do not show decrease in accounting quality. Also, a significant decrease in accounting quality was found for companies without IACS audit when conducting overseas business, but no significant decrease in accounting quality was found for companies with IACS audit regardless of whether they conducted overseas business. Similarly, a significant decrease in accounting quality was found for companies without IACS audit when the proportion of inventories was high, but no significant decrease in accounting quality was found for companies with IACS audit regardless of the proportion of inventories. This result suggests that IACS audits positively contribute to maintaining accounting quality amid rapid external changes, such as COVID-19. It emphasizes the importance of sustaining this system to uphold accounting reliability, especially in the current context where regulatory authorities and companies are debating its effectiveness. Key Words COVID-19, internal accounting control system, accounting quality
Composition and Member Qualifications of Audit Committee and Audit Fees: The Different Moderating Effects of Ownership Structure 감사위원회 구성 및 위원 자격과 감사보수: 소유구조의 조절 효과 이상철 Sang Cheol Lee , 윤종철 Jongchul Yoon , 유정민 Jungmin Yoo , 이윤근 Yunkeun Lee 49(5) 215-253, 2024 DOI:10.24056/KAR.2024.10.006 Title Composition and Member Qualifications of Audit Committee and Audit Fees: The Different Moderating Effects of Ownership Structure 감사위원회 구성 및 위원 자격과 감사보수: 소유구조의 조절 효과 이상철 Sang Cheol Lee , 윤종철 Jongchul Yoon , 유정민 Jungmin Yoo , 이윤근 Yunkeun Lee DOI:10.24056/KAR.2024.10.006 KAR Vol.49(No.5) 215-253, 2024 Abstract Using 1,411 non-financial firm-year observations from companies listed on the Korean Composite Stock Price Index (KOSPI) between 2001 and 2012, we analyze various characteristics related to audit committee composition and member qualifications for Korean companies. We classify these characteristics conceptually and aggregate them into a comprehensive measure. We then empirically test the effects of these categorized characteristics and the comprehensive measure on audit fees. Additionally, we investigate how the impact of these characteristics and the comprehensive measure on audit fees varies with different ownership structure characteristics in Korea. Our key findings are as follows: First, the perceived independence and expertise of audit committees have a significantly positive impact on audit fees. Conversely, impaired substantive independence of audit committees negatively impacts audit fees. Notably, perceived independence among the conceptually classified characteristics has the greatest impact on audit fees, underscoring its crucial role in determining audit fees. Second, the comprehensive measure of audit committee composition and member qualifications significantly increases external audit fees. Third, the influence of audit committee independence, expertise, and the comprehensive measure on audit fees is enhanced with higher foreign and institutional investor ownership. In contrast, this influence decreases as the ownership of the largest shareholder increases. Key Words 감사위원회, 구성, 위원 자격, 포괄적 지표, 소유구조, 감사보수, audit committee, composition, member qualification, comprehensive measure, ownership structure, audit fees