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Effect of corporate governance on the association between book-tax differences and audit quality: Evidence from Korea

Title
Effect of corporate governance on the association between book-tax differences and audit quality: Evidence from Korea
Author
박삼복
Keywords
Audit fees; Audit hours; Audit risks; Book-tax differences; Corporate governance
Issue Date
2016-07
Publisher
CIBER Institute
Citation
Journal of Applied Business Research, v. 32, No. 4, Page. 1097-1114
Abstract
We investigate whether auditors input additional audit hours according to the sizes of book-tax differences (hereinafter BTD) and request additional audit fees for additional audit hours. In addition, the interaction effects of corporate governance on the relationships between BTD and audit hours/audit fees are examined using the total corporate governance (TCG) scores, data from the Korea Corporate Governance Service (KCGS). We predict that since auditors have the incentive and ability to consider BTD, audit hours and audit fees will increase when BTD are larger. Empirical results of our study are as follows. First, BTD and audit hours (LnAH) show a negative (-) association that is not statistically significant. Second, audit fees (LnAF) were shown to increase along with BTD. This can be interpreted as a result of requests for additional audit fees for increased audit risks due to individual firms' BTD. Third, the interaction effect of corporate governance on the relationship between BTD and audit hours (LnAH) showed a positive (+) association, but the association was not statistically significant. Fourth, the interaction effect of corporate governance on the relationship between BTD and audit fees (LnAF) showed a statistically significant positive (+) association. This be understood as meaning that firms with better governance make more efforts for financial reporting in order to maintain their reliability in the market. This study contributes to the literature in several important aspects. First, it empirically demonstrates whether auditors properly reflect BTD on audit risks. Next, our study is analyzes the effects of corporate governance on the relationship between BTD and audit hours/audit fees using the total corporate governance (TCG) scores presented by the Korea Corporate Governance Service (KCGS). Finally, our findings empirically showed social proof function of accounting audits as a strategy to reduce information risks.
URI
https://www.cluteinstitute.com/ojs/index.php/JABR/article/view/9725http://hdl.handle.net/20.500.11754/65834
ISSN
0892-7626
DOI
10.19030/jabr.v32i4.9725
Appears in Collections:
COLLEGE OF BUSINESS AND ECONOMICS[E](경상대학) > ACCOUNTING AND TAX(회계세무학과) > Articles
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