Estimation of Audit Quality Improvement by Period after the Periodic Auditor Designation Adoption
Asian Tax Journal Vol. 21 No. 5 (2020), pp. 165-191
Abstract
The revision of the Act on External Audit of Stock Companies, etc. (the AEASC) in 2017 introduced a periodic auditor designation system that limits the period of free appointment of auditors to six years；and the designation of auditors began in 2020 amid expectations of improved independence and concerns over a drop in professionalism caused by replacement. Unlike previous studies under a similar auditor replacement system before 2010, this study analyzed the changes in auditors’ pre－response and audit quality for each period from the time the introduction of the periodic auditor designation system was confirmed to the moment immediately before its actual application. As of the end of 2019, listed companies that have been subject to continuous audits of the same auditor for over 6 years were divided into those that are expected to be applied for the first time to the periodic auditor designation system；and differentiated responses to the system were identified by measuring the audit quality as a discretionary accruals. Discretionary accruals for each company were estimated through time series analysis over the past 10 years；and the changes were measured compared to the previous year to derive changes in audit quality for each period from 2017 to 2019. The results are as follows. First, when companies that are expected to apply the periodic designation are compared with those of non－applying, discretionary accruals decreased significantly in 2018；and discretionary accruals of all listed companies decreased in 2019, so no discrimination was found. Second, the 2018 sample showed a significant decrease in discretionary accruals was found only in Non－Big 4 auditors, which indicated that the extent of improvement in audit quality varies depending on the auditor. Third, the analysis of 2019 showed no significant improvement in audit quality of the actual designated companies compared to those whose designation was postponed. This study suggests that the pre－effect of introducing a periodic auditor designation system has improved the audit quality of a long－term continuous auditor. As the system implementation is nearing, it shows that independence, which has been degraded by long－term continuous audits, can be improved；and audit quality can be maintained above a certain level within the future replacement cycle. It also presents major considerations in operating the system by presenting differences in quality improvement according to the auditors.
Keywords
- Periodic Auditor Designation System
- Audit Quality
- Independence
- Non－Big 4
- Discretionary Accruals
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