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 Effect of Supply Chain Common Auditor on Audit Quality
Sehee Kim , Ahrum Choi
DOI: KAR Vol.46(No.2) 1-36, 2021
Client-specific knowledge is essential for auditors to plan audits effectively, to assess related audit risks and to interpret audit evidence properly. One of the important sources of such knowledge is information about the client’s major customers that contribute significant proportions of revenues and operating profits. Thus, auditors with privileged access to information about the client’s major customers can provide higher-quality audits than those without such access. This paper investigates whether auditors who audit both supplier firms and their major customer firms at the same time, which we refer to as supply chain common (SCC) auditors, exhibit higher audit quality than non-SCC auditors. We find that SCC auditors are better able to constrain opportunistic earnings management using accruals and thereby provide high audit quality. SCC auditors also reduce the possibility that their clients restate financial statements in the future to correct previously inflated earnings. Our results are robust even after controlling for possible endogeneity with respect to SCC auditor choice. The finding suggests that auditing along the supply chain allows auditors to accumulate client-specific knowledge, which in turn helps them to provide high-quality audit service.
audit quality, common auditor, information advantage, supply chain
Sohee Park , Natalie Kyung Won Kim , Jae Yong Shin , Sun-moon Jung
46(2) 37-71, 2021
The Role of the Executive Pay Cap: Evidence from Korea
Sohee Park , Natalie Kyung Won Kim , Jae Yong Shin , Sun-moon Jung
DOI: KAR Vol.46(No.2) 37-71, 2021
Korean firms are required to obtain shareholder approval on their executive pay cap―the maximum possible amount of total compensation for all executives. This paper investigates the efficacy of the executive pay cap requirement by analyzing the determinants and implications of the executive pay cap of Korean firms. We document that the executive pay cap is not a boilerplate figure and is associated with corporate governance and economic factors. We find that the executive pay cap is adjusted according to changes in firm performance and that a significant portion of sample firms revise their executive pay cap downwards. However, we only observe this phenomenon when foreign ownership is high, largest shareholders’ ownership is high, a controlling shareholder is a board member, and the firm is a non-chaebol firm. Thus, we find that the external and internal monitoring mechanisms affect whether the executive pay cap is better aligned with firm performance. Our results also suggest that the executive pay cap is used as an anchor for determining executive compensation. We do not find support for the alternative possibility that firms could signal future firm performance through the executive pay cap.
Cost Stickiness of Private and Public Firms: Some Mediation Analyses
Sera Choi , Iny Hwang , Moony Lee , Woo-jong Lee
DOI: KAR Vol.46(No.2) 73-117, 2021
This paper extends prior literature on cost behavior by providing evidence of whether and how access to public financing affects the degree of SG&A cost stickiness. Based on a comprehensive dataset covering both public and private firms in Korea, we document that the degree of cost stickiness is, in general, greater for private firms than it is for public firms. Furthermore, we identify four candidate mediators for the association between listing status and cost stickiness: demand uncertainty, financial risk, reporting incentives, and ownership wedge. Mediation analyses reveal that demand uncertainty mainly accounts for the difference in cost stickiness between private and public firms. This finding suggests that public firms better address uncertainty by diversifying idiosyncratic risk in the capital market than private firms do and hence exhibit lower asymmetry in SG&A costs. Overall, we present evidence that access to equity financing influences operations and consequently affects cost behavior.
The Effect of Big 4 Audit Firms on the Association between Accruals Quality and Split Bond Ratings
Catherine Heyjung Sonu , Sunyoung Park
DOI: KAR Vol.46(No.2) 119-154, 2021
This study examines the effect of Big 4 auditor choice on the relation between accruals quality and disagreement among credit rating agencies, namely split bond ratings. If credit rating agencies value the information provided by Big 4 auditors due to higher competence and independence, their rating decisions may greatly reflect the information in the financial statements audited by Big 4 auditors. As for non-Big 4, if credit rating agencies presume non-Big 4 auditors to provide relatively lower quality audit, then the potential costs of failing to predict default risk are perceived to be increase when they rely their rating decisions primarily on financial statements audited by non-Big 4 auditors. Given that credit rating agencies use both quantitative and qualitative information when formulating the rating of a firm’s financial condition, information other than audited financial information will be greatly incorporated in the decisions of credit rating agencies when the firm is audited by a non-Big 4 auditor. Under this viewpoint, credit rating agencies will rely on the accounting information of financial statements when they are audited by Big 4 auditors. Consistent with this argument, we find that the impact of accruals quality on split bond ratings is only prevalent when firms are audited by Big 4 auditors for the period 2011-2018. This suggests that there is a perceived difference in the information quality between Big 4 and non-Big 4 auditors from the credit rating agencies’ perspectives.
accruals quality, credit rating agency, Big 4 audit firms, split bond ratings
Audit Market Competition and Audit Clients’ Use of Accrual-based versus Real Earnings Management
Meeok Cho , Hyejin Ahn
DOI: KAR Vol.46(No.2) 155-185, 2021
This study investigates how the level of audit market competition influences audit clients’ use of earnings management tools. Specifically, this study examines whether clients use more or less accrual-based earnings management than real earnings management when the competition among auditors intensifies. We use 16,793 firm-year observations collected from Korean stock market for the empirical analyses, and the audit market competition is measured by the number of auditors providing audit service in a specific year and industry. The results are summarized as follows: First, clients use more accrual-based earnings management as audit market competition intensifies, suggesting that auditors allow clients’ aggressive earnings management to overcome intense competition. Because there is a substitutive relation between accrual-based and real earnings management, the magnitude of real earnings management decreases as the competition intensifies. Second, we find that the fierce audit market competition is more likely to decrease real earnings management and increase accrual-based earnings management when the client firms have strong incentive to manipulate earnings. The findings clearly show the detrimental role of intense audit market competition. Based on the findings of this study, regulators should be more careful to set up policies to promote more competition in the audit market.
The Comparability of IFRS Accounting Information: Evidence from Korea
Kwon Il Choi
DOI: KAR Vol.46(No.2) 187-222, 2021
The purpose of this study is to examine whether the international convergence of Korean accounting information improves via the adoption of International Financial Reporting Standards (IFRS) in the year 2011. To achieve this purpose, I empirically examine whether the international and domestic comparability of Korean firms’ accounting information improves after IFRS adoption. In addition, I investigate whether the degree of improvement in comparability varies depending on corporate governance scores. I draw samples from 15 European Union (EU) firms adopting IFRS, United States (US) firms applying US GAAP, and Korean firms adopting IFRS. I employ the comparability measures developed by De Franco et al. (2011) and the corporate governance score provided by the Korea Corporate Governance Service (KCGS). The results suggest that not only the comparability between EU and Korean firms but also the comparability between US and Korean firms improve after IFRS adoption, and the degree of improvement is greater for firms with poor corporate governance in both. The results also suggest that the comparability among domestic firms improves after IFRS adoption, and the worse the corporate governance, the greater the degree of improvement. Overall, these findings provide empirical evidence that Korean firms secure the international convergence of accounting information, the main purpose of adopting IFRS, as expected. I also find evidence that firms with poor corporate governance experience the greater effect of IFRS adoption. However, my findings do not infer that accounting information quality has necessarily improved by IFRS adoption. This is because accounting information quality improves only when both external auditing and accounting supervision operate properly, together with enhancing accounting standards quality.
IFRS, comparability, corporate governance, information asymmetry
The Impact of Foreign Ownership on Firms’ Audit Opinion Shopping Behavior
Heesun Chung , Yewon Kim
DOI: KAR Vol.46(No.2) 223-257, 2021
This study examines whether foreign investors influence firms’ opportunistic auditor choices for a better audit opinion. Foreign investors that are typically institutional investors and have global portfolios of equity shares are regarded as more sophisticated than domestic investors. Thus, they are more likely to perceive investing firms’ opinion shopping behavior than domestic investors. However, due to less informal channels through which they can communicate with insiders (e.g., CEO, board members and controlling shareholders), foreign investors may not exert influence on such managerial decisions. Our empirical findings reveal that firms tend to change (retain) the existing auditors when the probability of receiving a modified audit opinion is lower (higher) from a new auditor, implying the evidence of successful opinion shopping in our sample firms. More importantly, we find that firms’ opinion shopping activities decrease significantly with foreign ownership. These findings suggest that foreign investors play a significant role in deterring managerial opportunistic decisions on auditor choices, which enhances auditor independence. Our findings are robust when we control for the firm characteristics that attract foreign shareholders. These findings provide helpful insights to researchers, regulators and practitioners.
Managerial Ability and Accounting Conservatism - US Evidence
Eunggil Kim , Soongsoo Han , Tony Kang , Gun Lee
DOI: KAR Vol.46(No.2) 259-283, 2021
In this study, we investigate whether the managerial ability is associated with accounting conservatism and how demand for accounting conservatism affects the association. While prior literature in the area of accounting conservatism has largely focused on firm-specific characteristics, we investigate manager-specific effects using the measure of managerial ability. Using a sample of US firms for the period of 1988-2019, we find that firms with high ability managers are less likely to use conservative accounting. More importantly, we show that the association becomes weaker when the usefulness of accounting conservatism is the most - i.e., when firms are highly leveraged. Overall, our result suggests that high ability managers are more likely to resolve uncertainty in their performance by their operational ability so that they have less incentive to use conservative accounting. In addition, although managerial ability could be a substitute for conservative accounting to some extent, conservatism is still a useful mechanism to alleviate information asymmetry, especially when demand for conservatism is higher. This paper shed new light on the role of managerial ability in the choice of the level of conservatism.
managerial ability, accounting conservatism, operational ability, information asymmetry
Korean Accounting Review
Address: 911, Metrodiovil, Baekbeom-ro 199, Mapo-gu, Seoul, Republic of Korea [Zipcode: 04195]