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korean management review - Vol. 51 , No. 2

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korean management review - Vol. 51, No. 2, pp. 389-435
Abbreviation: kmr
ISSN: 1226-1874 (Print)
Print publication date 30 Apr 2022
Received 28 Jul 2021 Revised 24 Aug 2021 Accepted 21 Nov 2021
DOI: https://doi.org/10.17287/kmr.2022.51.2.389
The Effect of the Rank-Specific Audit Hours/Total Audit Hours on Credit Ratings and the Cost of Debt
Jong-Il Park ; Kyu-An Jeon ; Yun-Jeong Lee
(First Author) Professor, School of Business, Chungbuk National University (parkjil@chungbuk.ac.kr)
(Corresponding Author) Professor, Department of Accounting, Soongsil University (kajeon@ssu.ac.kr)
(Co-Author) Ph. D. Candidate, Department of Accounting, Chungbuk National University (ckoz17@naver.com)
직급별 감사시간과 총감사시간이 기업신용등급 및 타인자본비용에 미치는 영향

Copyright 2011 THE KOREAN ACADEMIC SOCIETY OF BUSINESS ADMINISTRATION This is an open access article distributed under the terms of the Creative Commons Attribution License 4.0, which permits unrestricted, distribution, and reproduction in any medium, provided the original work is properly cited.

Abstract

Using audit hours by rank-specific in Korean listed firms from 2014 to 2019, we examine whether there is the effect of audits effort on the credit ratings (RATING) and the cost of debt (COD), and investigate how audit effort mediates relationship between ROA and RATING (or COD). Specifically, we analyze whether external information users (i.e., credit rating agencies and creditors) perceive increase in auditor’s effort (i.e., rank-specific audit hours, total audit hours) as a proxy for audit quality or audit risk. Overall, our results provide some evidence that the market reacts negatively to more audit hours, and the results imply that market participants perceive that more audit effort is associated to firms with the higher audit risk. We also find that the effect of more audit hours weaken the positive relation between ROA and RATING or negative relation between ROA and COD. We also find that the frequency of auditor’s communication with corporate governance is negatively (positively) associated to RATING (or COD). Thus, this study contributes to the literature on audit quality/risk by showing novel evidence that the announcement of more audit hours are perceived a proxy for audit risk rather than audit quality from rating agencies and creditors.


Keywords: Total Audit Hour, Rank-specific Audit Hours, Credit Ratings, Cost of Debt, Audit Quality, Audit Risk

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∙ The author Jong-Il Park is currently a professor in accounting at school of business, Chungbuk National University. He received his undergraduate, MS, and Ph. D. degree in business administration from Hongik University. He is interested in issues of financial reporting quality, book-tax difference, earnings management, overvalued equity, tax avoidance, tax risk, corporate governance, ESG, audit quality, audit hours by rank, and earnings forecast of analyst.

∙ The author Kyu-An Jeon is a professor in accounting at school of business, Soongsil University. He received his undergraduate, MS, and Ph. D. degree in business administration from Seoul National University. He is a CPA and worked at Samil and Samjong accounting corporation. He is interested in issues of tax avoidance, tax risk, tax investigation, family business succession tax, ESG, audit quality, audit fee, audit hour, periodic auditor designation, standard audit hours, and audit committee.

∙ The author Yun-Jeong Lee is currently a doctoral student at Chungbuk National University Graduate School of Business. She received his undergraduate and MBA degree in business administration at Chungbuk National University. Her recent research interests lie in financial reporting quality, investment efficiency, overvalued equity, managerial overconfidence, corporate governance, ESG, tax avoidance, audit quality, audit hours by rank, and earnings management.