As K-IFRS was introduced, consolidated financial statements are regarded as main financial statements and the importance of them is growing. Under the new International Audit Standard 600 which will be implemented in 2013, the auditor of the consolid...
As K-IFRS was introduced, consolidated financial statements are regarded as main financial statements and the importance of them is growing. Under the new International Audit Standard 600 which will be implemented in 2013, the auditor of the consolidated, i.e., the principal auditor, will be held entirely liable for the consolidated financial statements. It is expected that the auditor’s assessment of the level of risk for the audit engagement will go up. The principal auditor demands audit conformity, which means financial statements for parent and its subsidiaries being audited by the same auditor, in order to avoid additional engagement risk resulted from the change in the audit environment.
However, it is necessary to study further to decide as to whether audit conformity leads to enhancement in audit quality. There are some studies that claim audit conformity enhances audit quality because it would help develop better experiences and understanding of the client, resulting in enhanced auditor expertise. There are other studies claiming that audit conformity affects the audit quality adversely due to the higher economic bond to the client. The contradictory studies have their limitations for they only provide indirect evidence of the effect of audit conformity through analyzing audit quality of parent’s financial statements. A few of the studies shows that there are relationships, albeit restricted, between audit conformity and audit quality, however, those studies also show difficulties in generalizing the findings as those studies limited the scope of the subsidiaries. Both studies fail to consider the distinctive effects of the individual client’s characteristics by making the assumption that the effects of auditor conformity will be consistent regardless of the characteristics of the companies.
This paper conducts its study from the subsidiary’s perspective in order to verify the effects of auditor conformity more directly and expands the scope of subsidiaries by including companies subject to the Corporate External Audit Law. Separate analyses are performed on both public subsidiaries and private subsidiaries. This paper also studies whether the proportion of subsidiary’s total asset and sales in the consolidated financial statements has differential influence on the relationship between auditor conformity and audit quality.
The findings are as follows:
First, auditor conformity enhances audit quality and the outcomes are consistent when public subsidiaries and private subsidiaries are analyzed respectively. This supports the auditor expertise hypothesis in that auditors can obtain sufficient knowledge of the clients, e.g., internal transactions, through auditor conformity. In addition, the fact that the significance level of the public subsidiaries are lower than the private ones gives the listing status is the element to affect the relationship between auditor conformity and the audit quality.
Second, the effect of audit conformity to audit quality enhancement is reduced when the subsidiary’s proportion in the consolidated financial statements is relatively high. This outcome is valid for public subsidiaries, whereas it was not significant for private subsidiaries. In other words, auditor conformity impairs auditor’s independence due to the auditor’s economic bond to a client, if the subsidiary’s proportion in the consolidated is high.
In additional analysis, this study verifies if audit conformity improves audit quality by examining subsidiaries which switches their status from auditor inconformity to auditor conformity during the research period and the ways of switching-parent and subsidiary engage a new auditor simultaneously, parent changes its auditor to subsidiary’s auditor and vice versa-have impact on the relationship between auditor conformity and the audit quality. The results are consistent with the main analysis results that audit conformity enhances audit quality and the relationship between audit conformity and audit quality varies depending on the proportion of the asset of the subsidiary in the consolidated.
This paper studies the relationship between auditor conformity and audit quality from the subsidiary’s perspective. This paper expands previous studies on auditor conformity by showing evidence that the aforementioned relationship can vary depending on the characteristics of subsidiaries. Furthermore, this paper provides practical and institutional implications in time of higher demand for auditor conformity.