The Effect of Audits of Internal Control over Financial Reporting on Earnings Management：The Role of Internal Accounting Personnel
Asian Tax Journal Vol. 23 No. 2 (2022), pp. 125-152
Abstract
This study investigates the effectiveness with introduction of the ‘external audit of the internal control over financial reporting (hereafter, ICFR)’ that was designed to strengthen viability of internal control upon amendments to ‘the Act on External Audit of Stock companies (The External Audit Act)’ in Oct, 2017. Following study specifically examines the impact of introduction of the audit of the ICFR first introduced in 2019 and 2020 respectively on the earnings management and the effect on relationship between introduction of audit and earnings management according to levels of internal accounting personnel. This study each selected 294 firms between 2018 and 2019, 462 firms between 2019 and 2020, 312 firms in 2019 and 2020 as samples to respectively prove effectiveness of external audit of the ICFR on KOSPI listed firms for 2019, 2020, and compare among firms that newly introduced the external audit of the ICFR in 2019 and 2020 combined. The main empirical analysis results in this study are as follows. First, firms that introduced the external audit of the ICFR in 2019 were found to have suppressed earnings management according to the levels of internal accounting personnel of the firms audited due to the introduction of the external audit of the ICFR. Second, firms that introduced the external audit of the ICFR in 2020 had no difference in their impact on earnings management according to the levels of internal accounting personnel. It can be interpreted that the higher the excellence of internal accounting personnel for firms that introduced the external audit of the ICFR in 2019, the more the quality of earnings management improves, whereas the introduction of the audit in 2020 with related the reformed legislation and regulation related to the New External Audit Act were observed as external factors suppressing earnings management. Third, as a result of analyzing the company that first introduced the external audit of the ICFR in 2019 and the company that first introduced it in 2020, there was no difference in the relationship between the level of internal accounting personnel and earnings management. The implications of this study are as follows. First, the effectiveness of introducing the external audit of the ICFR was verified as a difference in the effect on earnings management according to the level of internal accounting personnel. It is also meaningful to analyze the score (SCORE) that comprehensively reflects the human resource characteristics of the external audit of the ICFR as a variable. Second, in sequentially introducing external audit of the ICFR by asset size, the differences by audit introduction period were analyzed. The introduction of external audit of the ICFR is only in its infancy, and the implementation of the system will gradually expand. In order for changes in the external audit of the ICFR to be settled, regulators, companies, and auditors were presented with the results that policies needed to be applied according to the environment, size, and timing of the company. Third, unlike previous studies, it is meaningful in that it uses Difference in Differences methods in terms of research methodology to exclude differences in characteristics among firms and year－effects over time maturity and verify the effect of institutional change to its highest capability.
Keywords
- Audits of Internal Control over Financial Reporting
- Earnings Management
- Internal Accounting Personnel
- Human Resource Characteristics
- Earnings Quality
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