Effect Of Corporate Governance On The Association Between Book-Tax Differences And Audit Quality: Evidence From Korea

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.

Book‐Tax Differences, Corporate Governance Effectiveness and Audit Quality: An Interactive Effects

“…In this context, these results suggest that firms with better governance make more efforts for financial reporting in order to maintain their reliability in the market (Choi & Yang, ; Park et al, ). However, the finding of current study does not support the previous research of Oh et al (), who found in the Korean context that corporate governance effectiveness has a positive and significant effect on the relationship between BTDs and audit fees.…”

Analysis of Book-Tax Difference’s Effect on Audit Fees: Corporate Governance as a Moderating Variable

“…Research on the effect of BTD on time and cost of an audit has been done by [3]. The purpose of the study is to verify whether the auditor actually uses this information at the stage of the audit procedure.…”

“…In his research, [3] also used corporate governance as a moderating variable. The reason why he used governance as a moderating variable is because of the positive and negative relationships (mixed results) between the effects of corporate governance on time-related and audit fees [3].…”

“…In his research, [3] also used corporate governance as a moderating variable. The reason why he used governance as a moderating variable is because of the positive and negative relationships (mixed results) between the effects of corporate governance on time-related and audit fees [3]. According to research that has been done previously in [12] and [13], if a client has good corporate governance, the audit risk will be reduced because the internal control system and financial reporting have been established and done well.…”

“…This leads to a high demand time and audit fees because the client wants a highquality audit. Therefore, [3] also want to prove whether clients who have good corporate governance can influence the relationship between BTD and audit time/cost. After conducting the research, it has been proved that there is a significant positive relationship between corporate governance and BTD relationship with audit cost.…”