TY - JOUR
T1 - Comparison between Periodic Auditor Designation System and Free Contract System
T2 - Focusing on Audit Quality
AU - Park, Jong Il
AU - Jung, Sun Moon
AU - Lee, Yun Jeong
N1 - Publisher Copyright:
© 2023, Korean Accounting Association. All rights reserved.
PY - 2023
Y1 - 2023
N2 - With the amendment of the Act on External Audit of Stock Companies, a periodic auditor designation system has been implemented since 2020 to secure auditor independence and improve audit quality. This study examines whether periodic auditor designation improves audit quality compared to the case of free auditor contract. Furthermore, this study examines the second-year’s audit quality after auditor replacement, above and beyond the initial year’s audit quality after replacement under periodic auditor designation system. Based on the sample period from 2018 to 2021, we first find no evidence that the audit quality of the initial and the second year after auditor replacement was higher for periodic designation compared to free contract cases. Second, we find little evidence that the initial audit under the periodic designation system result in improved audit quality compared to two years before the replacement or the year immediately before the replacement. Third, audit quality is found to improve in the second year of audit after periodic designation compared to two years before replacement or the year immediately before replacement. However, even in the case of free auditor contract, the audit quality improvement effect was found in the second year of audit, indicating that the improvement effect in the second year was not a unique effect of periodic designation. The difference-in-difference test results indicate that audit quality improvement effect is significantly smaller for periodic designation compared to free contract cases. We provide policy implications for authorities to judge the effectiveness of periodic auditor designation on audit quality.
AB - With the amendment of the Act on External Audit of Stock Companies, a periodic auditor designation system has been implemented since 2020 to secure auditor independence and improve audit quality. This study examines whether periodic auditor designation improves audit quality compared to the case of free auditor contract. Furthermore, this study examines the second-year’s audit quality after auditor replacement, above and beyond the initial year’s audit quality after replacement under periodic auditor designation system. Based on the sample period from 2018 to 2021, we first find no evidence that the audit quality of the initial and the second year after auditor replacement was higher for periodic designation compared to free contract cases. Second, we find little evidence that the initial audit under the periodic designation system result in improved audit quality compared to two years before the replacement or the year immediately before the replacement. Third, audit quality is found to improve in the second year of audit after periodic designation compared to two years before replacement or the year immediately before replacement. However, even in the case of free auditor contract, the audit quality improvement effect was found in the second year of audit, indicating that the improvement effect in the second year was not a unique effect of periodic designation. The difference-in-difference test results indicate that audit quality improvement effect is significantly smaller for periodic designation compared to free contract cases. We provide policy implications for authorities to judge the effectiveness of periodic auditor designation on audit quality.
KW - Audit quality
KW - Auditor replacement
KW - Difference-in-difference test
KW - Discretionary accruals
KW - Free auditor contract
KW - Periodic auditor designation
UR - http://www.scopus.com/inward/record.url?scp=85163013366&partnerID=8YFLogxK
U2 - 10.24056/KAR.2023.04.002
DO - 10.24056/KAR.2023.04.002
M3 - Article
AN - SCOPUS:85163013366
SN - 1229-3288
VL - 48
SP - 33
EP - 86
JO - Korean Accounting Review
JF - Korean Accounting Review
IS - 2
ER -