Abstract

It is significantly important accounting burden for Korean firms to introduce the IFRS (International Financial Reporting Standards) which require entirely reorganization of firms' financial reporting system. Especially, consolidated financial reporting system, which is a basic element of IFRS, will ask for Korean firm's full-scale conversion of financial reporting and accounting environments. By checking the issue which is needed in conversion process, our study will suggest a complementary element that is required for more useful financial reporting system before fully introduction of IFRS. We guess that the conversion of consolidated financial reporting system can improve timeliness and reliability of financial reporting when different auditors of separate departments which compose the consolidation entity is corresponded. If the degrees of auditor unity in the separate financial reporting environments could have a significant effect on financial reporting delay and propriety of equity method adaptation, this would be a crucial evidence for our research. The performances of all separate departments that compose accounting entity add up to the investor by equity method. In the process of adding up, audit delay of investees (e.g. subsidiary companies) might affect the audit schedule of investor (e.g. parent company). If so, the auditor of investor might need to control audit schedule properly to prevent or reduce the audit delay of investees. However, if each departments which compose accounting entity are audited by same auditor, the tuning of whole audit schedule would be easier. In other words, if each departments which compose accounting entity are audited by other auditors, it would be difficult to control the audit schedule of each department audited by other auditors. This may cause audit delay of investees and eventually audit delay of investor. The audit delay of investees may be avoided by irregular applying of equity method with non-audited financial statements. Such irregular applying of equity method also causes discrepancy in earnings applying equity method with audited financial statements. After all, we expect that the audit delay of investees would induce that of investor and also a discrepancy between earnings applying equity method with audited financial statements and earnings applying equity method with non-audited financial statements. We tried to prove these two expectations by presenting empirical evidence. After controling the general determinants of audit delay and earning discrepancy, we investigated 352 firms listed on Korean stock market from 2001 to 2006 fiscal year(1,796 firm-years) which report consolidated financial statements and empirically tested. We are assured that dependence of other auditor's work is the significant determinants that explain the audit delay of the accounting entity and the discrepancy between a consolidated earnings and parent-only earnings with non-audited financial statements. This is mainly because of audit delay and irrelevant adaption of equity method. Our findings suggest that different aditors in accounting entity are required to be united for the improvement in the timeliness and the reliability of financial reporting in consolidated financial reporting system asking for IFRS which will be put into practice.

Keywords

• earnings discrepancy
• audit delay
• equity method
• other auditor

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