Please use this identifier to cite or link to this item: http://hdl.handle.net/10397/32489
Title: Does auditor designation by the regulatory authority improve audit quality? Evidence from Korea
Authors: Kim, JB
Yi, CH
Keywords: Audit Quality
Auditor designation
Earnings management
Issue Date: 2009
Publisher: Elsevier Science Inc
Source: Journal of accounting and public policy, 2009, v. 28, no. 3, p. 207-230 How to cite?
Journal: Journal of Accounting and Public Policy 
Abstract: In Korea, the regulatory authority designates external auditors for firms that are deemed to have strong incentives and/or great potential for opportunistic earnings management, and mandates these firms to replace their incumbent auditors with new designated auditors and to retain them for a certain period, typically one to three years. We call this regulatory regime 'auditor designation'. This paper investigates whether the auditor designation rule in Korea is effective in deterring managers from making income-increasing earnings management. Consistent with our hypothesis, we find that the level of discretionary accruals is significantly lower for firms with designated auditors than firms with a free selection of auditors. We also find that firms with mandatory auditor changes (i.e., auditor designation) report significantly lower discretionary accruals compared to firms with voluntary auditor changes. The above findings are robust to a battery of robustness checks. Overall, our results are consistent with the notion that the auditor designation enhances audit quality and thus the credibility of financial reporting.
URI: http://hdl.handle.net/10397/32489
DOI: 10.1016/j.jaccpubpol.2009.04.006
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