Hyunmi Ji’s research while affiliated with Keimyung University and other places

Purpose: The purpose of this study is to review the new regulations on the periodic auditor designation system and to investigate the role of the Audit Committee in implementing the periodic auditor designation system. Design/methodology/approach: To achieve the objectives of this study, this study examines the revisions of the External Audit Law that stipulates the periodic auditor designation system. This study examines the expected positive and negative effects of the periodic auditor designation. This study suggests the role of the Audit Committee for the successful implementation of the periodic auditor designation system. Findings: The findings of this study are as follows. First, the periodic auditor designation system improves the independence of external auditors, improves the quality of accounting audits, and improves the reliability of financial information. Second, the Audit Committees authority has been strengthened regarding the appointment of external auditors, including audit fees, audit hours, and compliance with audit contracts. The Audit Committee should communicate sufficiently with the external auditor and should fully monitor the audit process of external auditors. Third, improving the independence of external auditors, improving the quality of accounting audits, and improving the reliability of financial information has the effect of converting the supervisors supervisory competency from post-detection supervision to preventive supervision. Research limitations/implications: The results of this study provide practical implications for the role of corporate governance by emphasizing the role of the Audit Committee. Originality/value: Korea is the first country in the world to apply the periodic auditor designation system. This study is worthwhile as the first paper to introduce the expected effects of the application of the periodic auditor designation system.

This study empirically examined financial analyses and a market assessment on goodwill. Goodwill is not an individually identifiable asset but is recognized as an intangible asset because it is viewed as having future economic benefits from a business combination. The verification period for this study was from 2011 to 2019. The sample companies were 13,522 firms-years satisfying the selection criteria among listed companies in the Korean stock market. As a result of empirical analysis, it was found that goodwill is related to stock prices. Goodwill was shown to serve as useful accounting information by reflecting the economic realities of intangible assets called creating excess profitability and sustainable profit. For analysis, regression analysis was conducted by separating the companies listed on the KOSPI stock market and those listed on the KOSDAQ stock market. The results of the analysis were as follows. In the case of listed companies in the KOSPI stock market, goodwill was found to have a positive (+) stock price relationship as useful accounting information. These results suggested that goodwill is an asset that represents the ability to generate excess profit as a sustainable profit. The contributions of this study are as follows. First, this study verified that goodwill is related to stock prices even after the adoption of International Financial Reporting Standards (IFRSs). Second, it will be possible to induce rational decision-making regarding goodwill to accounting standards setters, supervisors, and users of financial information. Third, it recognized that the value of the financial market can be recognized only by providing reliable accounting information to the managers who prepare financial statements. This can lead managers to provide capital markets with more useful information.

This study examined the usefulness of the cash-based interest coverage ratio (CICR). It also verified the usefulness of accrual-based interest coverage ratio (AICR), which is used as a criterion for exiting insolvent companies. This paper analyzed whether the value relevance of earnings to stock price differs according to various interest coverage ratios. The CICR is measured by dividing the cash generated from operations by the interest payments. AICR is measured by operating income divided by interest expenses. The research model for the hypothesis test of this study is based on the Ohlson model, which has been used for the test of stock value relevance in many previous studies. As a result of the empirical analysis, the CICR is used as useful information by the investors in the capital market. CICR is used as useful information in the capital market as an indicator of sustainability of profits. This study suggests that supervisors and financial institutions can make rational decision-making if they consider AICR and CICR as criteria for exiting insolvent companies. The contribution of this study was to suggest that the CICR can be a useful indicator for determining whether a company is insolvent due to its relatively low forecast error and high predictability.

This study empirically verifies how the value relevance of intangible asset accounting information is affected by the degree of information reliability of intangible assets. The study period was from 2011 to 2016 when Korea International Financial Reporting Standards (K-IFRS) were applied, and the sample companies were 8,174 firm-year observations. Empirical analysis shows that investors have relatively positive evaluations of intangible assets in the capital market when intangible assets are highly reliable. This implies that the reliability of intangible assets is significant information to help evaluate the relationship between accounting information and stock prices. The contribution of this study is as follows. First, it is confirmed that the usefulness of accounting information can be enhanced if the reliability of intangible assets is guaranteed. Second, reasonable decision-making can be induced in the use of intangible asset accounting information in accounting decision making, supervision, and investment decision-making. Third, it can be recognized by managers that the value of intangible assets that are highly reliable can be recognized in the capital market.

This study empirically verified the effect of cash based interest coverage ratio on the value relevance of accounting information. The accrual based interest coverage ratio, which divides operating profit by interest expense, includes accruals. On the other hand, the cash based interest coverage ratio, which is the cash inflow from the actual business divided by the actual outflow of interest, can be a better useful financial ratio indicator because the managers discretionary accruals are removed. Investors in the capital market will be assessed as cash-strapped companies that fail to cover their interest payments with the cash generated by the business if the cash based interest coverage ratio is less than 1. In this case, we expect negative stock price reactions to the companys net profit and net asset book value. In this study, 2,991 companies that satisfy sample selection criterion of KOSPI and KOSDAQ listed companies from 2011 to 2014, to which International Financial Reporting Standards are obliged, were tested. The empirical results show that the value relevance of net asset value and earnings per share is lower when the cash based interest coverage ratio is less than 1. In other words, it is verified empirically that the cash based interest coverage ratio are useful financial ratios to judge the relationship between accounting information and stock price.

This study investigates the impact that IFRS adoption in Korea has had on the value relevance of accounting information. The hypothesis is that under the new set of accounting standards (IFRS-based accounting standards named K-IFRS in Korea), the quality of book value and earnings reported by these companies is relatively higher. To this end, the quality of accounting information proxy is studied using the value relevance of book value and earnings. 10,720 firm-year observations are obtained for a five-year period before and a five-year period after the adoption of K-IFRS, and the results indicate that the adoption of K-IFRS is related to a higher reported book value and earnings quality. The results show that the value relevance of the firms’ book value and earnings is significantly higher after the adoption of K-IFRS. This study reinforces the notion that introducing IFRS improves the usefulness of accounting information and further indicates that IFRS adoption can ensure consistency in Korea of international accounting standards to improve the credibility of accounting information. As such, this research has directly addressed the impact of IFRS adoption on the quality of financial reporting in an emerging market.

We expect that tax expenses will provide a last opportunity to meet an earnings target, and involve the complexity and discretion necessary for information asymmetry to persist. Hence, tax expenses are powerful settings to examine earnings management among a wide range of firms. Considering this background, we hypothesize that changes in tax expenses are related to whether firms miss their reported earnings of the previous year. We also examine the possibility and effectiveness of earnings management through tax expenses depending on the amount to be managed. Consistent with our hypothesis, we find that firms decrease the fourth quarter effective tax rate (ETR) to meet the previous year’s reported earnings. However, tax expenses could be a successful tool to manage earnings, but only when unmanaged earnings are very close to a target. These results provide general evidence that tax expenses are used to manage earnings, and suggest that stricter external audit procedures for tax expenses are required to prevent self-interested discretion by managers on their firm’s tax returns.