Do credit ratings influence the demand/supply of audit effort?

© 2020, Emerald Publishing Limited. Purpose: Firm management has an incentive to improve credit ratings to enjoy the reputational and financial benefits associated with higher credit ratings. In this study, the authors question whether audit effort in hours can be considered incrementally increasing with credit ratings. Based on legitimacy theory, the authors conjecture that firms with higher credit ratings will demand higher levels of audit effort to signal audit and financial quality compared to firms with higher levels of credit risk. Design/methodology/approach: The authors conduct empirical tests using a sample of Korean-listed firms using a sample period covering 2001–2015. Findings: The results show that firms with higher credit ratings demand higher audit effort in hours compared to client firms with lower credit ratings. The authors interpret that firms with higher ratings (lower risk) demand higher levels of audit effort in hours to reduce information asymmetry and to demonstrate that financial reporting systems are robust based on audit effort signaling audit quality. The authors also interpret that firms with lower credit ratings do not have incentives to signal similar audit quality. The authors also capture the “Big4 auditor expertise” effect by demonstrating that client firms audited by nonBig4 auditors demand additional audit effort with increasing credit rating compared to Big4 clients. Research limitations/implications: Audit effort is considered a signal of firm risk in the literature. This study’s results show evidence that audit effort is inversely related to firm risk. Practical implications: The results show that audit hour information is informative and likely managed by firm stakeholders. Internationally, it is not possible to capture the audit demand of clients because listing audit hours on financial statements is not a rule. Given that audit hours can be considered informative, the authors believe that legislators could consider implementing a policy to mandate that audit hours be recorded on international annual reports to enhance transparency. Originality/value: South Korea is one of few countries to list audit effort on annual reports. Therefore, the link between audit effort and credit ratings is unique in South Korea because it is one of few countries in which market participants likely monitor audit effort

Mandatory audit firm rotation and Big4 effect on audit quality: evidence from South Korea

In South Korea, due to concurrent financial scandals, Korean legislators implemented two major audit policies in the 2000s; the mandatory audit “partner” rotation policy in 2000 and the mandatory audit “firm” rotation policy in 2006. The mandatory audit “firm” rotation policy was introduced as a mean to improve audit quality based on the auditor entrenchment hypothesis. In this paper, we compare the audit quality of firms subjected to mandatory audit “firm” rotation with two benchmark groups, a sample that adopted the policy voluntarily; the second group consists of the mandatory “firm” rotation sample in years prior, a period firms were subject to mandatory audit “partner” rotation. Using accrual-based measures as proxies for audit quality, we find evidence that audit quality of the mandatory rotation firm sample is lower compared to firms that voluntarily adopted the policy. Furthermore, we find evidence that audit quality of the mandatory rotation firm sample is lower compared to the mandatory audit partner firm sample. Additionally, we also find evidence that the mandatory audit firms rotation sample whose auditors were rotated from Non-Big4 to Big4 are generally associated with lower levels of abnormal accruals consistent with the argument that the audit quality of Big4 accounting firms is superior to Non-Big4 firms. Finally, longer audit tenure and switches to Big4 audit firms generally have a positive effect upon audit quality. These findings suggest that extended audit tenure improves audit quality due to accounting firm’s accumulated client specific knowledge. Thus, our evidence suggests that the mandatory audit firm rotation policy did not have the desired effect in a Korean context

An analysis of audit effort demand based on shareholder ownership power

PurposeAudit hour reporting is rare internationally. Thus, to what extent shareholders have the power to influence audit effort/hour demand is a question left unanswered. This study aims to use unique South Korean data to determine whether the increasing power of the largest foreign/domestic shareholders and blockholders can influence audit hour demand.Design/methodology/approachIn this study ordinary least squares (OLS) regression analysis is conducted using a sample of Korean listed firms over the 2004–2018 sample period.FindingsThe results show: as the percentage equity holding of the largest foreign shareholder and blockholder (>5%) increases, audit hour demand increases. As the shareholding of the largest domestic shareholder increases, audit hour demanded decreases. The association between audit fees/hours is not qualitatively indifferent, after controlling for the audit fee premium effect. Furthermore, the largest foreign shareholder is shown to demand increasingly higher levels of audit hours from Big4 auditors, relative to NonBig4. All results are consistent with audit demand theory.Originality/valueWhilst previous studies offer audit fee/risk interpretations, this study extends the literature by developing a framework to explain why audit hour demands differ for specific groups. Because audit hour information is rare internationally, the study has important policy implications

Conservative reporting and the incremental effect of mandatory audit firm rotation policy: a comparative analysis of audit partner rotation vs audit firm rotation in South Korea

In this paper, we take advantage of Korea's unique experiment with mandatory audit firm rotation (MAFR) and mandatory audit partner rotation (MAPR) to ascertain their influence on audit quality, proxied by conditional conservatism. Overall, we find that the implementation of MAFR did not have the desired effect. Firms that adopted MAFR demonstrate higher levels of conservatism in previous periods under MAPR (or compared to voluntary adopters). Furthermore, we find that audit tenure increases conservatism levels consistent with the auditor expertise hypothesis. However, whilst evidence suggests MAFR decreases audit quality on the whole, we find that firms that switch from non‐Big 4 to Big 4 auditors demonstrate higher conservatism because Big 4 auditors are more likely to demand conservative accounting practices, consistent with Big 4 audit firm knowledge superiority. Overall, the results suggest that MAFR's negative effect on audit quality can be mitigated by Big 4 auditor supervision

From a Year-long Delivery Pattern to a One Semester Delivery Pattern, the Impact on Student Performance in a UK University

Increasingly UK universities are adopting a more US-based approach of teaching subject- matter in modules across semesters This means that the teaching of a particular subject across a whole academic year is now changing to the same subject-matter being compressed into a single module taught in one semester across twelve weeks This study examines the effects of a transition over four years on 2 612 students at a UK university changing teaching methods from a year-long two semesters method of teaching to a more compressed US-style of only one semester long module method The main findings are that overall pass rates stay approximately the same but there is concern that the number of awards at a first class and upper second level has been diminished This is potentially due to the students not having the time to assimilate the course-material develop a deeper learning and understanding of the course material

A comparative analysis of human capital information opaqueness in South Korea and the UK

Design/methodology/approach Using 2018 as a sample period, content analysis is used to evaluate the annual reports of the 25 largest British and 25 largest Korean firms to demonstrate the propensity of British/Korean firms to disclose human capital information as numerical and textual data. Purpose Human capital is considered by many to be a firm's most important asset. However, because no international human capital reporting framework exists, firms can decide to include/exclude human capital details on annual reports. Based on legitimacy theory, firms that disclose high levels of human capital information can be considered congruent with the expectations of society. However, firms can also choose to include human capital information on annual reports for symbolic purposes as an image management strategy. Findings We report that South Korean firms provide high levels of human capital information using narrative and numerical data, including value added human capital elements included on Integrated Reports. British firms on the other hand tend to use primarily positive narrative and limited numerical human capital data to present human capital information. Originality/value The results imply South Korean firms provide robust human capital information on annual reports as a legitimacy strategy. On the other hand, the UK's human capital reporting requirement can be considered as a form of image management. The results therefore have important policy implications for legislators, labour unions and firm stakeholders with incentives to enhance human capital information transparency

An analysis of the positive effect of real earnings management on financial performance

Methodology: Using a sample of Korean listed firms over the 2000-2016 sample period, the study utilizes data envelopment analysis to capture the capability of management to generate sales from resources that are directly under their control. The study then compares the incremental effect that managerial decision making can have on real earnings management (REM), and future firm performance (period t+1 to t+5). Purpose: REM models infer abnormal levels of cashflow from operations (AbCFO), selling, general and admin (AbSGA) and production expenses (AbProd) are opportunistic, based on the supposition that engaging in real activities to meet current earnings targets (t) will negatively influence future performance (t+1). However, from a firm productivity perspective, cost reduction (via AbCFO, AbProd and AbSGA) is interpreted as an efficiency enhancing business strategy. This study therefore differentiates between i) firms with ineffective management that have engaged in AbCFO, AbProd and AbSGA to achieve an optimal resource-cost mix to generate sales (REMF), and ii) firms with effective management that have not (OEF). Findings: The study makes two important contributions. First, consistent with the efficiency/productivity literature, but contrary to seminal REM studies, empirical results shows that AbCFO, AbProd and AbSGA improve firm performance in period t and t+1 (to t+5), demonstrating 'REM' is not opportunistic by default. Second, OEF have higher financial performance compared to REMF, in periods t and t+1. Originality value: The study therefore invokes resource-based theory and data envelopment analysis to integrate managerial effectiveness (human capital) into REM modelling. The study therefore extends the basic REM residual model