지정 감사인의 감사품질과 품질관리수준의 관계

Abstract

Recently, a series of accounting scandals including many savings banks, Tongyang group, Hyosung group, and Moneual, has raised serious concerns about audit quality and transparency of financial reporting of firms. To address the demand for improvement in audit quality and transparency of financial reporting, the government reformed the auditor designation system. The academics and the media have argued that audit failures in Korea are mainly due to excessive competition among auditors, which in turn leads to audit fee discounts and impairment of auditor independence. The auditors designated by the regulatory authority is likely to be more independent of clients than the auditors chosen by the clients and therefore provide higher quality audit. Prior research documents ample evidence that the auditor designation system improves audit quality. By the end of 2014, the auditor designation system was reformed to substantially expand the scope of auditor designation. Under the new auditor designation system, more companies are subject to auditor designation and how to assign auditors to those firms is very important for the successful implementation of the new system. Since the purpose of the expansion of auditor designation is to improve audit quality by appointing independent auditors, the assignment criteria need to consider factors reflecting audit quality. Prior research shows that the accounting firms which receive favorable ratings in the quality control inspections by the Financial Supervisory Service (FSS) or the Korean Institute of Certified Public Accountants provide higher-quality audit than other accounting firms(Kim and Cheon 2010; Paek and Yoo 2011; Hwang et al. 2011). Thus, our study explores whether the strength of quality control systems of accounting firms can be considered as part of the assignment criteria by examining the relationship between the quality control strength of designated auditors and audit quality. On the one hand, designated auditors with strong quality control systems are likely to provide high-quality audit, consistent with the findings of previous studies. On the other hand, auditor designation safeguards auditor independence and therefore all designated auditors may provide high quality audit regardless of the strength of their quality control systems. If the latter is the case, the quality control strength of designated auditors may not be significantly associated with their audit quality. Therefore, this study investigates the relationship between the audit quality of designated auditors and their quality control strength in order to understand whether it is reasonable to consider the quality control strength of accounting firms in assigning auditors to companies subject to auditor designation. Our sample consists of 222 firm-years audited by designated auditors during 2005-2013. During the sample period, 62 designated auditors underwent quality control inspections by FSS. We measure the quality control strength of audit firms using the FSS inspection results. The major findings of the study are as follows: First, we find that designated auditors generally provide higher quality audit than non-designated auditors, which corroborates the findings of prior research. This result suggests that the expansion of auditor designation is likely to contribute to improvement in audit quality and thereby accounting transparency. Second, we do not find the significant relationship between the quality control strength of designated auditors and their audit quality for the overall sample. However, when we incorporate reasons for designation into our analysis, we observe different results. The quality control strength of accounting firms is positively associated with audit quality and significant for auditors designated for the reason of GAAP violations. Contrarily, the quality control strength of accounting firms is not significantly related to audit quality when auditors are designated for other reasons. These findings suggest that the quality control strength of accounting firms affects audit quality only when designated audits involve high audit risks such as GAAP violations. To the best of our knowledge, this is the first study that empirically examines the relationship between the quality control strength of designated auditor and audit quality. In addition, our study contributes to the literature by providing evidence that the relationship between the audit quality of designated auditors and quality control strength differs across the reasons for auditor designation. Our findings suggest that it is worthwhile to consider the quality control strength of accounting firms as one of auditor assignment criteria. In addition, our results suggest that quality control strength, if the regulator decides to employ it as one of auditor assignment criteria, should be considered along with the reasons for auditor designation.