Do Relatively More Efficient Firms Demand Additional Audit Effort (Hours)?

Abstract

We examine whether firms with higher relative efficiency (operational performance) require additional audit effort (hours) to signal audit quality to demonstrate that their financial reporting systems are robust. Therefore, we use a Korean sample of publicly listed firms because of the Korean audit hour policy which mandates that audit hour information be made available for market participants. We find that client firms with higher relative efficiency have higher audit hours, suggesting that management has an incentive to demand additional audit hours for signalling purposes, and that shareholders, amongst other stakeholders, have an incentive to demand external monitoring to reduce potential agency problems. The results show that relative efficiency is a unique measure of firm performance that can provide insights into a client firm's business and audit risk. We also find evidence suggesting that audit firms do not subject clients to a fee (fee per hour) premium based on relative efficiency, supporting our finding that client firms require audit effort for signalling purposes. Thus, our results have important implications for policymakers about audit effort demand.

Does relative (absolute) efficiency affect capital costs?

“…Second, to our knowledge, we are the very first to show that AFE and RFE are not perceived as equivalent risk measures by market participants. Numerous studies suggest that RFE is a more robust measure of firm performance compared to AFE (Demerjian et al, 2012a, b;Leverty & Grace, 2012;Barr & Siems, 1997;Mali & Lim, 2019;Lim & Mali, 2021). Baik et al (2013) demonstrate that both RFE and AFE are potentially both informative based on evidence both variables can be included in a single regression analysis without the existence of collinearity problems.…”

“…There is evidence that rating agencies provide higher credit ratings to firms with higher relative efficiency, implying RFE is a specific form of information that can be used as an indicator of whether a firm is likely to survive a business cycle (Lim & Mali, 2019). Mali and Lim (2021) demonstrate that audit clients (firms) are incentivised to signal operational performance (RFE) is genuine by securing increasing audit effort. The results indicate that client firms believe that there are economic benefits to signalling robust performance to market participants based on RFE.…”

How do students perceive face-to-face/blended learning as a result of the Covid-19 pandemic?

“…Furthermore, whilst we find accounting students at Sheffield Hallam University prefer F2F learning when the Covid-19 pandemic is not an issue, but prefer BL when Covid is an issue, the results may be different if students have insufficient resources to engage ( Tamrat, 2020 ). Moreover, there is evidence that national (Korean) characteristics influence regulatory frameworks ( Choi et al, 2017 ; Lim and Mali, 2018 , 2020 ; Mali and Lim, 2018 , 2019 , Mali & Lim, 2021a , Mali & Lim, 2021b ). We therefore encourage future meta-data approaches to enhance the predictive validity of our analysis.…”

A comparative analysis of human capital information opaqueness in South Korea and the UK

“…The economy is now ranked 11th based on gross domestic product (GDP). More recently, South Korea has adopted various financial reporting quality strategies to improve its international image (Choi et al , 2017; Lim and Mali, 2020a, b; Mali and Lim, 2018, 2019, 2020, 2021). Therefore, to legitimize the business activities of Korean firms, South Korean firms have an incentive to report higher levels of human capital information compared to other countries.…”