Abstract

This study investigates whether the audit report review system control the firm's earnings management and increase the earnings persistence or not. The purpose of the audit report review system is to monitor the audit results and eventually to improve accounting transparency. Prior studies suggested that the firms indicated by reviewing the audit report show more highly managed earnings relative to those not indicated. Those indicated firms show higher discretionary accruals, which induce artificial earnings elevation. The earnings management is not persistent in nature. So the earning management is possibly inferred having adverse effects on earnings persistence. In this study, we would like to examine the effectiveness of audit report review system of the Financial Supervisory Service(FSS), especially investigating the relations between the audit report review system and the earnings persistence. Earnings persistence is defined as the covariance between the current year earnings and the next year earnings divided by the variance of current year earnings. As the earnings of the indicated firms are supposed to be managed, the earnings persistence is doubted to be lower. But the earnings management of the indicated firms is expected to be controlled after indication, the earnings persistence would be increased after indication. In order to examine whether the inference be true or not, the paper hypothesizes the earnings persistence would be improved after audit report indication. The sample for the test consists of 176 firm－years ended in December from 2000 through 2009, traded in the Korean Stock Exchange during the period. The test results of the study show that the earnings persistence after indication be significantly improved. The improved earnings persistence of the indicated firms suggests that the audit report review system would control the discretionary accruals and then increase transparency of the financial statements. The conclusion of this paper would be helpful for the FSS setting supervisory policies for successful audit report review system.

Keywords

• audit report review system
• earnings persistence
• earnings management
• audit quality

Related Articles

• Does an Increase in ESG Ratings Improve Earnings Quality?

  Jong-Il Park , Byung-Hee Lee , Yun-Jeong Lee

  25(4) 9-52

  Abstract Full Text for PDF

• Earnings Management Using the Tax Expense, Earnings Persistence, Future Firms Performance, and Firms Value

  Jong-Il Park , shinsangyi

  24(3) 93-145

  Abstract Full Text for PDF

• A Reexamination of Abnormal Audit Fees or Audit Hours and Audit Quality29) －New Data and New Evidence－

  Jong-Il Park

  19(5) 9-53

  Abstract Full Text for PDF

• Earnings Reporting After Supervision of Audit Report10)

  JEONGTAEBEOM

  16(1) 129-154

  Abstract Full Text for PDF

• The Effect of Consolidated Financial Statements Principal Auditors’ Characterist ic on Real Earings Management

  Sook Min Kim

  15(4) 9-45

  Abstract Full Text for PDF