Does Auditing of Internal Accounting Control Systems Improve the Earnings Response Coefficient?

This study investigates whether the phased implementation (in 2019, 2020, and 2022) of internal accounting control system audits for companies of different asset sizes enhances earnings informativeness from investors’ perspective, using the earnings response coefficient (ERC). Listed companies were analyzed from 2017 to 2022, yielding the following findings: Investors recognized improved earnings informativeness after the introduction of these audits, as shown by a significant increase in the ERC relative to stock prices. This improvement was primarily driven by mid-sized companies (asset size between KRW 100 billion and KRW 500 billion) that adopted the audits in 2022. The results were robust across different research model specifications and dependent variable measurements. Regardless of auditor size, audit fee change rates, or information environments, the adoption of these audits led to an increased ERC, especially for mid-sized companies. Collectively, our findings suggest that the phased implementation of these audits by regulatory authorities did not increase the ERC across all asset-size groups. Instead, investors perceived the adoption as enhancing earnings informativeness more for smaller mid-sized companies than for larger ones. This finding offers significant implications for regulatory authorities regarding the efficacy of implementing internal accounting control systems and contributes to the literature by analyzing investors’ reactions to such audits.