Abstract

The small and medium enterprises(SMEs) which do not receive the external audit have fewer interested parties for the accounting information than the large listed and audited companies. This study analyzes whether non－audited firms in Korea are motivated to engage in upward earnings management to facilitate borrowing loans from financial institutions. Specifically, this study uses non－audited firms’ observation of year 2004 to year 2010, and investigates the extent of accrual earnings management by the type of confirmation on financial statements(tax agent’s confirmation vs tax government’s certification) and by income types. Empirical findings of this study show that upward earnings management tendency of tax agent’s confirmation on financial statements of non－audited firms is stronger than tax government’s certification on financial statements of non－audited firms. Furthermore, tax agent’s confirmation on financial statements of loss incurred companies show upward earnings management than tax government’s certification on financial statements of loss incurred companies. The results of this study indicate that non－audited firms conduct earnings management via accruals to achieve loan borrowing goals. It provides clues to suspect the accounting transparency of non－audited firms. It will be helpful for academics and practitioners for understanding the earnings management of non －audited firms by the type of confirmation and certification on financial statements.

Keywords

• Non－audited Firms
• Accrual Earnings Management
• Confirmation on Financial Statement
• Certification on Financial Statement

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