ATJ Asian Tax Journal

Asian Tax Journal

Print ISSN 1738-3323 Online ISSN 2733-9270

The Effect of Changes in the External Audit Regulations on Accounting Conservatism

  • Soo Yeol Choi Soongsil University
  • Min－hee Kim Department of Accounting, Graduate School, Soongsil University
  • Hee Chun Roh Department of Accounting, Soongsil University

Asian Tax Journal Vol. 26 No. 2 (2025), pp. 35-69

Abstract

The introduction of the New External Audit Regulations aims to improve accounting transparency and reliability. In order to verify the policy effect of the system change after implementation in 2018, an empirical analysis was conducted using the accounting conservatism as a proxy, which measures the quality of financial reporting used in previous studies. This study utilized 13,121 company－year samples from 2014 to 2021, which were listed on the KOSPI market and KOSDAQ market. The analysis results are as follows. First, the conservative accounting was strengthened after the introduction of the New External Audit Regulations. This is largely due to the auditor’s independence being further strengthened by the introduction of the periodic designation system and the standard audit hour system, and the auditor’s efforts being greater. Second, after the introduction of the New External Audit Regulations, conservative accounting was strengthened in all Big 4 and non－Big 4 auditor groups compared to before. The fact that there is no difference between the sizes of auditors in this strengthening phenomenon is understandable as a result of efforts made by non－Big 4 auditors to improve the quality of corporate financial reporting after the introduction of the New External Audit Regulations. Lastly, the more audit fees and audit hour, which are audit resources, were invested, the more conservative accounting was strengthened. This study has significance in measuring the policy effect of introducing the New External Audit Regulations. The research area was expanded by measuring the effect of institutional change not as a change in audit quality, but as a change in conservative accounting treatment that suppresses the manager’s upward adjustment of profits. In addition, in order to continuously maintain accounting transparency and reliability, it was empirically confirmed that continuous institutional support for auditors to maintain independence and secure sufficient audit time is very important. However, the accounting conservatism measured by the research model are not perfect and are all based on estimation of statistical models, which can cause measurement errors. Conservative accounting treatment includes excessively conservative accounting treatment that does not properly reflect transaction facts, so there is a limit that may include samples that contradict faithfulness of expression, one of the qualitative characteristics of accounting information.

Keywords

  • New External Audit Regulations
  • Accounting Conservatism
  • Accounting Transparency
  • Accounting Reliability
  • Audit Effort

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