기준서 제1호의 시행시기에 회계오류의 중대성과 오류보고방식에 대한 주가반응

Abstract

We examine the price reactions to the reporting of accounting errors in the time of KASB Statement No.1 that prescribes the reporting for accounting errors and estimates. We have two focuses on the study. First, we examine the price reactions to the materiality of accounting errors. The Statement No.1 demand that material errors be reported by way of financial statement restatements, non-material errors in the current income statement. It requires differential reports corresponding to the materiality of accounting errors when they are identified. This implies that the materiality of accounting errors is a basis of financial reporting in the period of the Statement No.1. How capital market responds to these material errors reported can be an empirical question to explore. Reporting accounting errors in this period, in fact, relies on the management discretion, since it does not prescribe the specific guidelines for the materiality of errors. As a result, users are difficult to identify how material reported errors are in what respects. Investors are expected to use any information available to reduce this uncertainty. Thus, we identify multiple qualitative or quantitative materiality factors of accounting errors, measure those separated from restatement itself, and investigate which factors are reflected in the price. The materiality of accounting errors has important implications in financial reporting quality. Material errors, intentional or unintentional, lower financial reporting quality; deteriorating the reliability of financial reporting and increasing the uncertainty of future earnings. Thus we expect negative price responses. If, in contrast to our expectation, market does not respond to the materiality of errors, differential reporting corresponding to the materiality of errors would be not value-relevant, deteriorating the purport of the Statement No.1. In fact, Yoon(2005) suggests that the materiality criterion be eliminated following the international accounting standards(No.8), arguing it as an ambiguous construct. Next, we investigate whether error-reporting methods, financial statement restatements or reporting in the current income statement, lead to the difference of price reactions. Kim et al.(2005) demonstrated that error-reporting methods, reporting in the income statement or in the retained earnings statement, made no price differences. However, their sample period was during 1991-2000, in which managers are forced to report accounting errors with mandatorily single reporting method by sub-periods. Error-reporting in the retained earnings statement at that time is different from that in the restated financial statements at the present from the point of financial reporting quality, which may lead to differential price reactions. Kim et al.(2007) argue that capital market recognizes restatements more seriously in the time of the Statement No.1, but have not provided the empirical evidence. Thus here we attempt to investigate whether error-reporting through restatements relative to through current income statement show differential price reactions. This study is initiated in order to complement the uncertain results of existing prior studies. The first distinctive point in this paper is to expand sample over the period of the Statement No.1 for more generalized results than previous ones. Kim et al.(2007) examined the relation between qualitative or quantitative materiality factors and price reactions. However, their sample was limited to restatement firms only and to the early period of the Statement No.1, and mixed with firms over the period before and after the Statement No.1, resulting in heterogenous sample in incentives to restate. Second, we approach with multi-measures in qualitative or quantitative materiality factors. Sohn and Lee(2004) examined the impact of a quantitative factor(the size of accounting errors) on the price response but did not consider the qualitative factors. Third, we investigate whether error-reporting methods make a differential price response in the period of the Statement No.1. This research tests the price reactions to the several materiality factors of accounting errors and error-reporting methods using event study approach. We see if cumulative abnormal returns from day -5 to day +5 surrounding event date are significantly related to the materiality factors and restatements itself through regression analysis. According to the results, market does not show significant responses to qualitative or quantitative materiality factors, and do show significant responses to restatement itself. These results are consistent with the interpretations of Sohn and Lee(2004) and Kim et al.(2007) that the capital market in Korea responds to restatement itself, not to qualitative or quantitative materiality factors. In addition, these results are also consistent with the argument of Kim et al.(2007) that market response to restatement in the period of Statement No.1 has been magnified. The significantly negative response to restatement itself, as Palmrose et al.(2004) indicated, may be due to management integrity and competence being called into question by investors. No significant market reactions to quantitative or qualitative materiality factors may be attributable to several sources. One possible explanation is that information disclosure about the materiality of errors is not sufficient. The second one is that error-reporting is concurrently disclosed with annual reporting. Another one might be that firms with the past fraudulent earnings management have been recommended by the authority to employ the prior-period error corrections for defense of the class actions that has been effective since 2005. Such may make the stock price response to materiality factors attenuated. However, these results may come from incomplete separation of proxies for quantitative or qualitative materiality factors from restatement. As international accounting standards(No.8) are going to be introduced to Korea, firms are supposed to restate accounting errors irrespective of the materiality of errors. Korean supervisory authority does not seem to recognize restatements as serious as U.S. Financial Supervisory Services in Korea are asked to approach to the reporting of accounting errors with new vision. To upgrade error-reporting quality, there is a need to make provisions and institutions about accounting errors improved.