잠재적 소송비용이 내부 회계 · 공시전문인력 보유와 외부 감사인선임에 미치는 영향

Abstract

It is required for managers to prepare for the potential litigation since the potential litigation costs have been significantly increased after the adoption of class-action suits against financial institutions in 2007, mangers feel more concern about controlling the potential litigation costs properly. An increase in the potential litigation costs is positively related to the size of expected future losses. When the potential litigation costs are realized, they can beget enormous losses and force a company into bankruptcy, such as occurred in the Enron and Worldcom. Henceforth, managers have made an persistent effort to control the potential litigation costs properly. It has been noticed that most of the lawsuits against companies are related to accounting issues. It is an interesting issue to investigate whether companies recognize the potential litigation costs properly and reflect them in their management behavior regarding accounting issues because the potential litigation costs have grown with the adoption of class-action suits. Unfortunately there have been few studies on this issue based on empirical data. Using a sample of firms excluding financial institutions listed on the Korea Stock Exchange between 2000 and 2006, this study verifies the relationship between the potential litigation costs and management behavior with the process of assigning external auditors and hiring internal specialists of accounting practice and disclosure. One main result of this study is that a company with high potential litigation costs has a tendency toward assigning high-quality auditors. Assigning external auditors with good reputation can be interpreted an effort to reduce litigation risks by utilizing the experience and the expertise of external auditors and send a signal to stake holders that the managers are considering duty of care. The other result is that a company with the high potential litigation costs tend to hire specialists of internal accounting practice and disclosure. It implies that the company strives to reduce potential litigation costs by hiring specialists. The contributions of this study can be summarized as follows: The study presents a positive framework for analyzing litigation risk under domestic conditions which have a relatively short history of litigation against companies and a small number of cases of litigation in South Korea. Particularly, ex post litigation risk such as the number of lawsuits or litigation probability is difficult to measure within domestic circumstances because of the limited litigation history and cases. Applying questionnaire research or experimental research is not appropriate to represent litigation risk, even if they have been used in other studies. To analyze the relationship between the potential litigation costs and assignment of external auditors and specialists of internal accounting practice and disclosure, this study uses Director & Officer (D&O) premiums as a proxy for litigation risks which insurance companies professionally measure to reflect potential litigation risk. Insurance companies selling D&O liability insurance are experts on estimating D&O litigation risk. D&O premiums are reckoned by expected ex post litigation costs and litigation possibility. Therefore, D&O premiums can be a score reflecting all costs caused by potential litigation. Since insurance companies are specialized in measuring risk, D&O premiums are a rational and distinctive value. This paper can be differentiated from other researches by employing D&O premium as a proxy for potential litigation risk. This study is expected to provide useful information to practitioners. It is an interesting issue to investigate whether companies recognize the potential litigation costs properly and reflect them in their management behavior, because the potential litigation costs have grown with the adoption of class-action litigation. Since there have been few studies analyzing the relation between potential litigation cost and accounting information, the results of this paper have meaningful policy implication to accounting regulatory bodies.