The Effectiveness of Audit Review: Evidence from Corporate Governance Changes and Audit Quality Changes

This study investigates the effectiveness of audit review by examining whether the audit review by Financial Supervisory Service of Korea (FSS) actually affects the changes in corporate governance, audit quality and accounting quality after audit review investigation. Audit review is purposeful to enhance the reliability of accounting information, protect interested parties and contribute to the sound development of companies. If there exist improvements in accounting environment for sound financial reporting, such as corporate governance and audit quality, audit review may be effective. The sample firms include firms which experienced audit review investigation between 2002 and 2008. We find that there exists improvement in audit committee characteristics in investigated firms without enforcement actions after audit review. The results suggest that audit review by FSS has positive influence on firms without enforcement actions to improve the financial reporting environment. Firms with enforcement actions tend to change non-Big4 auditors to Big4 auditors. These results imply that more frequent and continuous supervisory by FSS may be required to enhance monitoring effect of audit review in the market.