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Spillover effect of regulatory accounting inspections on accounting quality of peer companies

Eunjung Cho (Department of Accounting, Namseoul University, Cheonan, Republic of Korea)
Jeehong Kim (Department of Accounting, Yonsei University, Seoul, Republic of Korea)
Sooin Kim (Department of Accounting, Yonsei University, Seoul, Republic of Korea)

Managerial Auditing Journal

ISSN: 0268-6902

Article publication date: 12 March 2020

Issue publication date: 22 April 2020

546

Abstract

Purpose

The purpose of this paper is to examine whether a negative outcome (i.e. a sanction) of an inspection by Korea’s Financial Supervisory Service for an industry-leading company affects the accounting quality of other companies in the same industry. The premise is that when peer companies observe the negative results of such an inspection on a leader in their industry, they will be more concerned about their own risk during a future inspection and more likely to increase their accounting quality.

Design/methodology/approach

The authors conduct a mutivariate Oridnary Least Squares (OLS) regression using 11,476 South Korean samples from 2002 to 2016. The study uses ordinary least square regressions to test the hypotheses using discretionary accruals as a proxy for accounting quality.

Findings

The authors find that peer companies reduced their discretionary accruals in the next period and that this reduction is amplified according to the severity of the disciplinary action on the industry leader and the materiality of errors in that leader’s financial statements.

Originality/value

This finding contributes to the literature by providing the first evidence of a spillover effect of regulatory inspection on accounting quality that financial reporting sanctions not only affect the overall accounting quality of the sanctioned company but also that of its peers in the same industry. The authors expect this study to lead to future research on the effect of other regulations on industry-wide accounting quality.

Keywords

Acknowledgements

This research was partially supported by the Graduate School of YONSEI University Research Scholarship Grants in 2019.

Citation

Cho, E., Kim, J. and Kim, S. (2020), "Spillover effect of regulatory accounting inspections on accounting quality of peer companies", Managerial Auditing Journal, Vol. 35 No. 5, pp. 685-704. https://doi.org/10.1108/MAJ-07-2018-1924

Publisher

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Emerald Publishing Limited

Copyright © 2020, Emerald Publishing Limited

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