The Effect of Market Competition and Auditor Characteristics on the Association between Review Opinion of ICFR and Earnings Quality －in the KOSDAQ Market－
Asian Tax Journal Vol. 15 No. 6 (2014), pp. 207-236
Abstract
In this study, we investigate whether the market competition, auditors’ expertise and size canmitigate the negative effect of the review opinion of internal control over financial reporting(ICFR)on earnings quality. Although prior research provides evidence that material weaknesses in ICFRdecrease the reliability of financial statement information and increase the risk in auditing, theliterature generally ignores the interaction effect of the firms’ external governance factors. Using 3,957 firm－years samples listed in Kosdaq market over the period from 2006 to 2011, wehypothesize and find that the degree of industry competition, industry specialist auditors and Big4 auditors alleviate the impairment of the accrual quality. These results can be interpreted that theinternal corporate governance and external corporate governance interact in a way to increaseearnings quality. This means that there is need to consider not only the quality of internal controlsystem but also industry competition or auditors’ characteristics as an external factor of firms. This study would be helpful for market participants in assessing the credibility of accountinginformation of firms with weakness on internal control over financial reporting.
Keywords
- Review opinion of ICFR
- Earning’s quality
- Market competition
- Industry specialist auditor
- Big auditor
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