Hyun-Young Park, Ho-Young Lee and Jin Wook Kim
Based on 3,775 firm-year observations from 2009 to 2013 using publicly available disclosure data for Korean listed firms, this study examines whether and how firm-level governance…
Abstract
Purpose
Based on 3,775 firm-year observations from 2009 to 2013 using publicly available disclosure data for Korean listed firms, this study examines whether and how firm-level governance characteristics are associated with investment in internal auditing proxied by compensation and the number of statutory internal auditors.
Design/methodology/approach
The authors investigate the association between governance characteristics and investment in internal auditing proxied by compensation and the number of statutory internal auditors.
Findings
The authors find that firms with greater ownership of the largest shareholders and with a higher proportion of outside directors invest more in internal auditing. These results indicate that firms with higher incentive and demand for monitoring are more likely to invest more in internal auditing. The authors further find that the positive effect of the largest shareholder ownership (board independence) on investment in internal auditing is attenuated in firms with greater board independence (ownership of the largest shareholders) suggesting that the complementary effect of the two governance mechanisms associated with internal auditing weakens as they function simultaneously.
Research limitations/implications
The results provide regulators and investors with a clear picture of the governance characteristics of firms associated with investment in internal auditing. The results imply that both the largest shareholders and the outside board of directors play a significant role in resource allocation in internal auditing within a firm. The effect of allocation, however, can be attenuated contingent upon the combined characteristics of governance mechanisms.
Originality/value
Using large amounts of public archival data, this study adds to the extant literature on firm characteristics associated with investment in internal auditing. This study also contributes to the literature by expanding the scope of research on executive compensation to the locus of statutory internal auditors.
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Minjung Kang, Sangil Kim and Ho-Young Lee
This study aims to examine the effects of allocation of audit hours to year-round audits and audit partners on audit quality when a new partner is appointed.
Abstract
Purpose
This study aims to examine the effects of allocation of audit hours to year-round audits and audit partners on audit quality when a new partner is appointed.
Design/methodology/approach
Using proprietary data of partners’ names and audit hours in the year-round context, the authors build a model testing input factors related to audit production and new partner assignment in 1,209 Korean listed firms during the period of 2015–2018.
Findings
The results show that in the partner rotation, the more audit hours spent, the more audit hours are allocated to the year-round audit, or more nonpartners’ audit hours are allocated to the year-round audit, the higher the audit quality. Subsample analyses show that these findings are concentrated in firms with longer audit tenure or low audit risk.
Research limitations/implications
The findings may provide regulatory authorities with practical guidelines concerning partner rotation and how to allocate audit hours to different audit stages and ranks (partner vs staff).
Originality/value
To the best of the authors’ knowledge, this study provides the first evidence of the joint effects of partner rotation and audit hour allocation on audit quality.
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Yong-Sang Woo, Minjung Kang and Ho-Young Lee
Audit firm bankruptcy can have significant negative impacts on the stock prices of client firms. The purpose of this paper is to identify determinants of audit firm bankruptcy…
Abstract
Purpose
Audit firm bankruptcy can have significant negative impacts on the stock prices of client firms. The purpose of this paper is to identify determinants of audit firm bankruptcy risk as measured by costs of debt.
Design/methodology/approach
Using audit firm data publicly available in Korea, this study empirically examines whether client portfolio, financial, and organizational characteristics are associated with the weighted average interest rates assumed by auditors.
Findings
The authors find empirical evidence that audit firms’ client portfolio characteristics, including the incidence (or number) of lawsuits against the auditor, the proportion of audit clients under surveillance, the proportion of initial audit engagements, and the proportion of listed companies of audit clients, are positively associated with the cost of debt. The authors also find several financial and organizational characteristics associated with the cost of debt.
Practical implications
The findings of this study suggest that client portfolio characteristics as well as financial and organizational characteristics are important determinants of the cost of debt in audit firms, and that these characteristics are different from those of firms in other industries. Identifying the determinants of audit firms’ cost of debt provides insight to regulators, client firms, and capital market participants.
Originality/value
This study examines the default risk of audit firms that play an important monitoring role in capital markets. By utilizing unique data about audit firms available in Korea, this study is the first study to empirically examine the effect of detailed audit firm characteristics on audit firm’s default risk.
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Ho-Young Lee and Hyun-Young Park
Using 5,055 sample firm-years in Korea between 2009 and 2013, this paper aims to examine the association between the characteristics of the internal audit and the number of…
Abstract
Purpose
Using 5,055 sample firm-years in Korea between 2009 and 2013, this paper aims to examine the association between the characteristics of the internal audit and the number of external audit hours as a proxy for audit efficiency.
Design/methodology/approach
This study is motivated by the International Standard on Auditing No. 610: “Using the work of internal auditors”. This auditing standard guides external auditors in using the work of internal auditors to obtain audit evidence and consult internal auditors for direct assistance. The authors expect that external audit efficiency will increase when the work of competent internal auditors is used.
Findings
The authors find that the number of internal auditors relative to the number of employees is associated with the number of external audit hours. This result suggests that the greater the availability of internal auditors, the greater their contribution will be to the financial statement audit and the more efficient the audit. The authors find evidence that external auditors use the work of internal auditors with accounting and legal expertise to improve audit efficiency. They also find some evidence that the work of internal auditors with greater availability is more effective during initial external audit engagements.
Originality/value
This study adds to the extant literature on the contributions of internal auditors to external audits by using archival data and by measuring audit effort using a large database of audit hours. In addition, our findings have practical implications for firms and external auditors who are evaluating the role and value of using the work of internal auditors. The authors also believe that the findings will be of interest to regulators or auditing standards boards.
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Sangil Kim, Minjung Kang, Ho-Young Lee and Vivek Mande
This paper aims to examine how the allocation of audit hours to the year-round procedures, based on the risk of material misstatements in financial statements, impacts audit…
Abstract
Purpose
This paper aims to examine how the allocation of audit hours to the year-round procedures, based on the risk of material misstatements in financial statements, impacts audit quality.
Design/methodology/approach
Using a data set on audit hours spent on year-round and year-end procedures, the authors build an empirical model for testing the effectiveness of year-round auditing of Korean public firms during the period of 2014–2018.
Findings
The initial tests do not show that proportionate increases in year-round procedures increase audit quality. However, after the authors control for the risk of material misstatements, the authors find that proportionate increases in year-round audit hours generally increase audit quality, except for high-risk firms where audit quality increases only as year-end hours proportionately increase. For high-risk firms, the results suggest that increases in year-round audit procedures occur at the cost of the essential year-end work. Similarly, except for high-risk firms, the authors find that the allocation of more audit effort to year-round procedures improves audit efficiency.
Originality/value
To the best of the authors’ knowledge, this study provides some of the first empirical evidence showing how a risk-based approach to allocating audit effort over the duration of an audit can impact audit quality and efficiency. Regulatory bodies, such as the International Auditing and Assurance Standards Board and Public Company Accounting Oversight Board, which consider the proper allocation of audit hours as a key audit quality indicator, should find the results useful.
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From 1953 to 1961, the South Korean economy grew slowly; the average per capita GNP growth was a mere percent, amounting to less than $100 in 1961. Few people, therefore, look for…
Abstract
From 1953 to 1961, the South Korean economy grew slowly; the average per capita GNP growth was a mere percent, amounting to less than $100 in 1961. Few people, therefore, look for the sources of later dynamism in this period. As Kyung Cho Chung (1956:225) wrote in the mid‐1950s: “[South Korea] faces grave economic difficulties. The limitations imposed by the Japanese have been succeeded by the division of the country, the general destruction incurred by the Korean War, and the attendant dislocation of the population, which has further disorganized the economy” (see also McCune 1956:191–192). T.R. Fehrenbach (1963:37), in his widely read book on the Korean War, prognosticated: “By themselves, the two halves [of Korea] might possibly build a viable economy by the year 2000, certainly not sooner.”
Moon-Kyung Cho, Ho-Young Lee and Hyun-Young Park
– The purpose of this paper is to examine the effect of the characteristics of statutory internal auditors on operating efficiency.
Abstract
Purpose
The purpose of this paper is to examine the effect of the characteristics of statutory internal auditors on operating efficiency.
Design/methodology/approach
This study investigates three characteristics pertaining to statutory internal auditors, namely, compensation, activity and expertise, based on 1,340 firm observations from 2009 to 2010 using publicly available disclosure data for Korean listed firms.
Findings
The authors find no evidence that statutory internal auditors’ compensation is positively associated with operating efficiency. This implies that compensation data on statutory internal auditors in Korea may not directly reflect their competence and ability to enhance operating efficiency. On the other hand, the authors find evidence for a positive association between full-time status for statutory internal auditors and operating efficiency and a positive association between the attendance at board meetings for statutory internal auditors and operating efficiency. The results also show a decrease in operating efficiency when statutory internal auditors are newly appointed. Finally, expertise of statutory internal auditors in financial or legal matters provides no advantage in terms of operating efficiency.
Practical implications
This study contributes to the extant literature on internal audit by examining the advisory role of statutory internal auditors and its effect on operating efficiency, which is one of the objectives established by the Committee of Sponsoring Organizations of the Treadway Commission.
Originality/value
While most prior research on internal audit depends on survey data from statutory internal auditors or experimental data based on a limited sample of firms, this study is based on a large sample of publicly available data of the Korean market.
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Dan‐Bee Song, Ho‐Young Lee and Eun‐Jung Cho
The purpose of this paper is to examine whether earnings management is related to incidence of fraud and the amount of misappropriated assets. By examining the research question…
Abstract
Purpose
The purpose of this paper is to examine whether earnings management is related to incidence of fraud and the amount of misappropriated assets. By examining the research question, this study seeks to improve our understanding of using the accrual basis of accounting in identifying the misappropriation of assets.
Design/methodology/approach
This study analyzes 173 sample firms that announced asset misappropriation in the period from 2006 to 2010 in Korea. The study utilizes logistic and linear regressions to test the hypothetical relations set up in the study using discretionary accruals as a proxy of the earnings management. Additionally, the authors performed the robustness test using estimated accruals as a supplementary proxy of the earnings management.
Findings
The authors find that misappropriation of assets has a significant positive association with discretionary accruals. Interestingly, this relationship only holds for firms with negative discretionary accruals. The results suggest that the accrual basis of accounting provides a clue towards uncovering management's misappropriation of assets and thus, plays an important role in reducing existing information asymmetry.
Practical implications
The authors' findings would assist practitioners in detecting asset misappropriation through financial reporting quality and investors and auditors should be more alert to negative discretionary accruals.
Originality/value
There are some studies that examine asset misappropriation. However, most of them are focused on the relation between asset misappropriation and corporate governance. To the best of the authors' knowledge, this is the first study that examines the association between financial reporting quality (i.e. discretionary accruals) and asset misappropriation. The authors' findings provide evidence of the usefulness of accrual basis of accounting in detecting fraud and enhance the understanding of income‐decreasing earnings management.
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Neil Fargher, Ho‐Young Lee and Vivek Mande
This paper aims to examine the effect of audit partner tenure (PARTEN) on client managers' accounting discretion.
Abstract
Purpose
This paper aims to examine the effect of audit partner tenure (PARTEN) on client managers' accounting discretion.
Design/methodology/approach
The authors contend that, when a new audit partner is from the same audit firm as the outgoing audit partner (audit partner rotation), audit quality increases because the new audit partner brings “fresh eyes” to the engagement.
Findings
The results confirm this conjecture. The authors find that, in the initial years of tenure of a new audit partner, client managers' accounting discretion decreases when the new partner is from the same audit firm as the outgoing partner. However, when the new audit partner is from a different audit firm as the outgoing partner (audit firm rotation), it is found that client managers' accounting discretion increases in those initial years.
Originality/value
The results provide support for recent legislation in the US restricting audit PARTEN and should be of interest to other regulatory bodies contemplating mandatory audit partner rotation.