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Quality of peer
Spillover effect of regulatory companies
accounting inspections on
accounting quality of
peer companies 685
Eunjung Cho Received 13 July 2018
Revised 19 February 2019
Department of Accounting, Namseoul University, Cheonan, Republic of Korea, and 7 August 2019
5 November 2019
Jeehong Kim and Sooin Kim Accepted 3 February 2020
Department of Accounting, Yonsei University, Seoul, Republic of Korea

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 Spillover effect, Accounting quality, Regulatory accounting inspections
Paper type Research paper

1. Introduction
Accounting information plays a crucial role in maintaining capital markets through the
efficient allocation of resources. Thus, high-quality information is required to enable its
users to make effective decisions, which is why the quality of accounting information is
continuously addressed in the literature. Each country has implemented a variety of
regulatory regimes to prevent errors and violations of accounting standards in financial
statements. In South Korea, the Financial Services Commission, a government
Managerial Auditing Journal
Vol. 35 No. 5, 2020
pp. 685-704
This research was partially supported by the Graduate School of YONSEI University Research © Emerald Publishing Limited
0268-6902
Scholarship Grants in 2019. DOI 10.1108/MAJ-07-2018-1924
MAJ organization, oversees financial statements and audit reports to ensure conformity with
35,5 accounting and audit standards. The execution is delegated to two institutions, the
Financial Supervisory Service (FSS) for listed companies and the Korean Institute of
Certified Public Accountants (KICPA) for unlisted companies. Although financial
statements are first prepared by the management of a company, they are also included in
audit reports as an output of audits by independent auditors, and thus FSS inspection
686 usually covers a review of audit procedures to ensure that the auditors have performed the
audit in accordance with auditing standards. If financial statements are found to have
violated accounting standards, FSS requires the company in question to correct any errors
and takes disciplinary actions against the company and, possibly, the auditors if the
auditors are deemed responsible for the misstated financial reporting.
In this paper, we examine whether a negative outcome for an industry-leading company
(i.e. financial misstatement) in an FSS inspection affects the accounting quality of other, non-
inspected companies in the same industry. Within each industry, an economic event at one
company can spill over to the activities of other companies, meaning that the result of an
FSS inspection of one company can serve as useful information for its peers. Based on the
theory of organizational learning, the existence of a spillover effect can be supported
(Barnard, 1938; Lawrence and Lorsch, 1967; Thompson, 1967; Fiol and Lyles, 1985).
Therefore, if the result of peer companies’ financial misstatements and related sanctions can
act as new information, other non-inspected companies will react to avoid such undesirable
results from future FSS inspections; we can call this a “spillover effect.”
In South Korea, when financial misstatement of a company is detected by FSS, the
violations of accounting standards and subsequent enforcement actions by FSS are publicly
disclosed. Because companies within the same industry carry out business activities in a
similar economic environment and thus generally use similar accounting practices (Abdo,
2016), managers who observe peer companies’ financial misstatements and related
sanctions would become alarmed and check their own accounting information for similar
errors and violations. Therefore, we assume that companies who observe FSS’s detection of
financial misstatements and sanctions on their peers may have incentives to improve their
accounting quality to avoid receiving FSS sanctions themselves.
In this paper, we do not distinguish financial accounting quality from audit quality.
Because accounting information disclosed to outside investors is a comprehensive result of
the accounting quality determined by managers and of the audit quality determined by
auditors. FSS inspection is thus directed at both the company and its auditor. Therefore, our
paper, which aims to prove the spillover effect on the accounting information quality of FSS
accounting inspection, does not need to distinguish accounting quality from audit quality.
The spillover effect may affect peers’ managers, auditors or both. We focus only on final
accounting quality that is disclosed to investors.
Prior studies of the effect of regulatory reviews on companies have indicated that such
actions are effective in enhancing the quality of financial accounting at the reviewed
companies (Alam and Petruska, 2012; Bannister and Wiest, 2001; Carcello et al., 2011; Kim,
2011; Kim and Seo, 2017). Our study extends this finding to examine whether misstatement
detection and sanctioning of industry leaders in an accounting inspection by a regulatory
service has a spillover effect on the quality of accounting at peer companies. Because the
purpose of regulation enforcement is to prevent companies’ undesirable behavior as
effectively as possible (Shavell, 2004), analyses of the spillover effect of regulation
enforcement can prove the widespread benefit of regulation enforcement and therefore
expand the recognized impact of enforcement. For this reason, spillover effects are
increasingly being studied. Some studies investigate the market-based spillover effect (Lang
and Stultz, 1992; Gleason et al., 2008; Dee et al., 2011; Ma, 2017). Other studies address the Quality of peer
spatial spillover effect between countries (Dutillieux et al., 2016; Zhu et al., 2019). In this companies
study, we examine the spillover effect within an industry. Within an industry, one firm’s
economic event can have a spillover effect on other firms (Beatty et al., 2013; Kedia et al.,
2015). Similar to our study, Brown et al. (2018) investigate the spillover effect of a Securities
and Exchange Commission (SEC) review of qualitative disclosure and find that companies
that do not receive any comment letter modify their subsequent year’s disclosures after
observing SEC comments on peer companies. 687
Using Korean data spanning from 2003 to 2016, we first examine whether misstatement
detection and accompanied sanctions after an FSS inspection influence the accounting
quality of peer companies. The results show that accounting quality does indeed improve in
the following year, which means that regulatory inspection has a positive spillover effect
within an industry. We also analyzed whether the severity of sanctions or the materiality of
violations increases this spillover effect. Our findings reveal that if industry leaders receive
harsher sanctions, the accounting quality of peer companies improves more.
This study provides several contributions to the existing literature on both spillover effects and
regulatory accounting inspection. First, prior analyses of the effect of regulatory inspection have
focused primarily on the accounting quality of sanctioned companies, whereas this study
examines the effect on the accounting quality of other, non-sanctioned companies. To the best of
our knowledge, this study is the first to analyze spillover effects of regulatory inspection on
accounting quality. Our findings provide evidence that regulatory inspections impact accounting
quality not only in sanctioned companies but also in non-sanctioned companies within the same
industry. Thus, institutional enforcement has a much greater benefit for financial reporting
quality, which can provide guidance for the allocation of FSS’s scarce resources. Second, our
results provide evidence for the effectiveness of regulatory inspection, which is often criticized as a
mere ex post examination, by proving that FSS inspection has an ex ante effect to enhance the
accounting quality of uninspected companies. Third, unlike Accounting and Auditing
Enforcement Releases (AAER) or Public Company Accounting Oversight Board (PCAOB)
inspection data in the USA, which include only sanctioned companies, we use specific data from
South Korea that allow us to identify companies that have undergone regulatory inspection but
were not sanctioned[1]. These proprietary data from FSS help us distinguish the spillover effect
more clearly. In addition, because FSS accounting inspection in Korea is unique and different from
accounting oversight systems in other countries, our results have potential implications for other
countries’ regulators. These detailed data also allow our study to reach more comprehensive
findings on the severity of enforcement actions or the materiality of accounting standards
violations.
The rest of this paper is organized as follows: Section 2 presents our review of the
literature and the development of our hypotheses, Section 3 describes the research design
and samples and provides descriptive statistics, Section 4 reports the empirical results and
Section 5 offers our conclusions.

2. Literature review and hypothesis development

2.1 Accounting inspection system in Korea
South Korea’s FSS has oversight over audit reports, including financial statements issued by
publicly listed companies (unlisted companies are delegated to KICPA), to ensure compliance
with accounting and auditing standards. That is, regulatory inspection conducted by FSS serves
to ensure the reliability of accounting information disclosed to financial markets via strong
oversight of the fairness of financial statements and audit reports. This process serves as a
function of the accounting supervisory system to detect fraudulent financial reporting and to
MAJ ensure the quality of audits conducted by external auditors. Compared with the US market, FSS
35,5 accounting inspection can be viewed as a combined function of SEC’s accounting and audit
enforcement and PCAOB’s accounting firm inspection[2].
There are three types of FSS inspection for listed companies in South Korea. The first
type of FSS inspection (type I) selects and inspects companies on a sampling basis. To allow
efficient inspection using the limited resources of FSS, FSS mainly exploits sampling-based
688 inspection, which combines a risk-based approach with random sampling. The second type
(type II) is carried out on companies suspected of accounting fraud or on those that file for
bankruptcy or court receivership[3]. The third type of inspection (type III) is conducted to
examine the listed qualifications and financial soundness of companies that are planning to
go public. In this study, we focus on a particular type of FSS inspection: type I inspection.
Because general companies are subject to type I inspection, whereas other types of FSS
inspection target specific companies, focusing on type I inspection has the advantages of
allowing a larger sample and producing generalized results.
If during the FSS inspection, generally accepted accounting principles (GAAP) violations are
identified, the responsible companies and auditors will be subject to disciplinary action according to
the materiality of the accounting violations[4]. Actions taken against auditors include cautions,
warnings, restrictions on audit works and a notice to prosecution, whereas actions taken against
companies and executives also include demands for correction, cautions, warnings, fines,
designation of auditors, restriction on the issuance of securities, advice on dismissal of executives
and a notice to prosecution. In the event that financial misstatement of a company (and possibly its
auditor) is detected as a result of the FSS inspection, the results (i.e. violation of accounting
standards and related sanctions) are released on FSS’s official website for up to three years. The
inspection report includes the company and auditor name, violation details and enforcement
outcomes. Compared with the US system, FSS inspection report is similar to AAER by the SEC and
the PCAOB inspection report.

2.2 Effects of regulatory inspections

Each country implements its own accounting oversight system to enhance financial
reporting quality. Although the specifics of each system may differ by country, regulatory
bodies believe that these systems help increase the transparency of financial information,
which is supported by previous studies. Alam and Petruska (2012) assert that US companies
identified in the SEC’s enforcement releases demonstrate higher levels of conditional
conservatism to mitigate their information asymmetry and agency problems. Bannister and
Wiest (2001) find that client companies are likely to have fewer discretionary accruals
during the period in which their auditors are being investigated by the SEC in relation to an
enforcement action. Gramling et al. (2011) and Carcello et al. (2011) find that the PCAOB
inspection process improves audit quality, as measured by the issuance of going-concern
opinions and the level of abnormal auditee accruals.
Using Korean data, Kim (2011) examines the effect of FSS inspection, discovering that in
the year after an audit review, discretionary accruals of sanctioned companies not only
decreased but also were smaller than discretionary accruals of peer companies. Similarly,
Kim and Seo (2017) find that companies have significantly negative discretionary accruals
in the post-inspection period compared with the pre-inspection period.
Most previous studies investigating the consequence of regulatory inspections focused
only on direct effects. However, recent studies extend the subject to the indirect effect of
regulatory inspection. Dee et al. (2011) argue that the stock price of Deloitte clients reacted
negatively to PCAOB sanctions against Deloitte in 2007 because the sanctions implied that
Deloitte demonstrated poor audit quality; thus, investors perceived the audit quality of
Deloitte clients to also be low. This result indicates that the PCAOB sanction contains new Quality of peer
information about the quality of Deloitte’s work. Aobdia (2018) examines the reaction of companies
auditors and their clients after receiving a Part I Finding, which identifies audit deficiencies
in the engagements examined in a PCAOB inspection, finding that auditors invest more
efforts regarding their inspected engagements and non-inspected engagements. The author
argues that these results prove the direct and spillover effects of PCAOB inspection.
We also investigate the indirect (e.g. spillover) effects of regulatory inspection (e.g. FSS
inspection). However, our study concentrates on the final accounting quality of peer 689
companies. Although the fundamental purpose of regulatory inspections is to enhance
accounting quality by increasing accounting transparency, no prior studies analyze the
indirect effect of regulatory inspections on accounting quality. In this paper, we examine
whether FSS inspection has an indirect effect on enhancing the accounting quality of peer
companies within the same industry.

2.3 Spillover effects of accounting information

Economic actors perform their activities in their own interest, but these activities affect
other economic actors because they are systemically intertwined. Therefore, in conducting
business, an economic event at one company may affect others (Beatty et al., 2013), which is
referred to as a “spillover effect.” In the accounting literature, similar terms include
“information transfer” or “contagion effect.” The contagion effect refers to “the situation that
an adverse event of one firm can also deliver negative information about other firms”
(Gleason et al., 2008). Information transfer is generally used in a very narrow sense meaning
“a phenomenon that occurs when an information event for one firm affects the share prices
of other firms” (Ma, 2017). However, broadly speaking, they refer to certain types of spillover
effects.
Early studies on information transfers (Foster, 1981; Eckbo, 1983; Bowen et al., 1983;
Olsen and Dietrich, 1985; Han and Wild, 1990) indicate that accounting information from
economically related companies affects a company’s stock returns. Relatedly, Gleason et al.
(2008) find that when accounting restatements negatively affect the shareholder wealth of
restating companies, they also induce share price declines for non-restating companies in the
same industry. These prior studies focus mainly on the effect of companies on the corporate
value or stock price of other companies. Thus, these studies address the spillover effect from
the perspective of investors, who are major users of information. Recently, studies on
spillover effects have expanded to analyzing the effect on managerial decisions. Kedia et al.
(2015) examine contagion in earnings management, documenting that companies are more
likely to manage their earnings after the restatement of peer companies is publicly
announced. Such contagion does not exist when the restating company is disciplined by the
SEC or class action lawsuits, providing evidence of the deterrent effect of enforcement
activity. In addition, Beatty et al. (2013) find that peer companies increase their investments
during periods in which there are high-profile reports of fraudulent behavior at an industry
leader.
Similar to our study, Brown et al. (2018) recently investigate whether there is a spillover
effect of SEC comment letters on non-commented companies’ disclosure behavior. They find
that managers of no-letter firms are likely to modify their qualitative disclosure after
observing SEC comment letters for peer companies, which provides evidence on the
spillover effect of SEC comment letters. In Korea, FSS inspection results are disclosed to the
public. Thus, data from Korea could provide a good opportunity to examine more
fundamental research questions regarding whether regulatory inspections have spillover
effects related to improving accounting quality.
MAJ 2.4 Development of hypotheses
35,5 The aforementioned studies find that regulatory inspections are effective in enhancing
accounting quality for those companies subject to such inspections. In this study, we seek to
examine whether the regulatory inspection of one company affects the accounting quality of
its peers.
When a company undergoes a regulatory inspection (FSS inspection, etc.) and is
690 sanctioned for fraudulent reporting, it can result in huge costs or losses for the company.
Sanctions will damage companies’ reputation and increase the cost of financing (Karpoff
et al., 2008). In addition, there is also a risk of subsequent litigation (Bonner et al., 1998) and
stock price drops (Feroz et al., 1991). In the event of these outcomes, managers of the
company’s peers within the same industry will observe these costs and take preventive
action by modifying their own financial reporting. This reaction to other economic sectors’
economic events could be referred to as the spillover effect. The prior literature provides
evidence of such an effect. Bratten et al. (2016) find that companies pay attention to a leader’s
reported earnings and manage their earnings in accordance with the leader’s reported
earnings. Brown et al. (2018) show that the SEC comment letter for one company can
influence another company’s disclosure behavior.
The spillover effect within an industry can be supported by the theory of organizational
learning. In Fiol and Lyles (1985), organizational learning is defined as “the process of
improving actions through better knowledge and understanding.” Organizations align with
their environments to remain competitive and innovative (Barnard, 1938; Lawrence and
Lorsch, 1967; Thompson, 1967). Thus, companies adopt and adjust strategies when they
face new information or environmental changes to survive over the long run (Fiol and Lyles,
1985). Because companies within the same industry generally experience similar economic
events and have similar accounting systems (Abdo, 2016), a company’s sanction from FSS
inspection will serve as new information for its peers in the industry. If a company observes
the sanctioning of a peer company and the substantial costs associated with it, then it will
check its own financial reporting and seek to identify and correct any misstatements.
Therefore, companies (or their managers) will try to improve their own financial reporting
quality to avoid the significant costs of potential disciplinary action from an FSS inspection.
Using discretionary accruals as a measure of accounting quality, our first hypothesis is
as follows:

H1. If FSS detects financial misstatement in an industry, peer companies will decrease
discretionary accruals.
The spillover effect of FSS accounting inspection may vary according to the level of
sanctioning or the materiality of the accounting standard violation. The materiality of
the accounting violation is related to the extent to which misstated financial statements
could misguide investors’ decisions. For example, an account misclassification or
misrepresentation in the footnotes could be classified as a low-level violation, whereas a
manipulation of earnings could be classified as a material violation. When financial
misstatements are discovered through FSS accounting inspection, the materiality of the
accounting standard violation can be differential information to peers, and managers of
peer companies will react differently in accordance with the materiality of the
accounting violation. Therefore, the spillover effect will be stronger for material
violations.
If FSS discovers financial misstatements through an accounting inspection, then it
decides the severity of sanctions based on the materiality and the intent of the accounting
standard violation. The sanctions vary from cautions or warnings to prosecution. Minor
sanctions such as cautions or warnings imply that financial misstatements of industry Quality of peer
leaders are minor violations and bring lower costs to the misstating companies, so the companies
information that misstating industry leaders have received a caution or a warning from an
FSS inspection might not be an issue to peers. We believe that managers of peer companies
will respond more strongly to stronger sanctions.
To examine whether the spillover effect is larger in financial misstatements
accompanying stronger sanctions, we propose our second hypothesis as below: 691
H2. The greater the severity of an FSS sanction, the more likely discretionary accruals
will decrease at peer companies.

3. Research design and selection of samples

3.1 Research design
To test our hypothesis that peer companies improve accounting quality after FSS identifies
a company as having deficiencies in financial statements through the inspection process, we
run the following OLS regression.

chABSDAi;t ¼ a0 þ b 1 ARi;t1 þ b 2 SIZEi;t þ b 3 LEVi;t þ b 4 ROAi;t þ b 5 CFOi;t

þ b 6 FSi;t þ b 7 BIG4i;t þ RInd þ RYear þ « i;t (1)

The dependent variable, chABSDAi,t, is the change in the absolute value of discretionary
accruals estimated using the approach in Kothari et al. (2005). For each industry classified
according to the two-digit Korean Standard Industry Classification (KSIC), we run the OLS
regression to estimate discretionary accruals. In estimating discretionary accruals, we
eliminate observations where there are fewer than 20 observations in a two-digit industry
code for a given year. To proxy for accounting quality, negative discretionary accruals are
multiplied by 1, such that a larger value of ABSDA means lower accounting quality. The
interest variable, AR, equals 1 for company-years in the same two-digit KSIC code for which
FSS announces at least one deficiency in financial statements. We define AR in two ways:
ARall and ARlead. First, ARall is an indicator variable equal to 1 for company years in the
same two-digit KSIC code as the sanctioned company-years and 0 otherwise. To narrow the
range of peer companies, ARlead is set to 1 only if the sanctioned company is in the first
quartile in terms of market capitalization at the end of a fiscal year. The purpose of this
variation is to address the logic that companies may not respond to every sanction in their
industry but that the sanctioning of misstatements by industry leaders will be more
influential.
Equation (2) is the regression model to test whether the severity of enforced
disciplinary action (ENFC) or the materiality of financial misstatements (VIOL) has an
incremental effect on the relation between FSS-identified deficiencies in a company’s
financial statement and the improvement of accounting quality for its peer companies.
ENFC is an ordered categorical variable that ranges from 0 to 4. ENFC (VIOL) is 0 for
company years where no industry leader is designated by FSS as having made financial
misstatements and varies from 1 to 4 according to the severity of enforced disciplinary
actions (the materiality of financial misstatements). Appendix outlines how we rate the
severity of enforced disciplinary action (the materiality of financial misstatements) to
construct ENFC (VIOL).
MAJ chABSDAi;t ¼ a0 þ b 1 ARi;t1 þ b 2 ENFC ðVIOLÞi;t1 þ b 3 SIZEi;t þ b 4 LEVi;t
35,5 þ b 5 ROAi;t þ b 6 CFOi;t þ b 7 FSi;t þ b 8 BIG4i;t þ RInd þ RYear
þ « i;t (2)

To construct control variables, we follow prior studies that examine the determinants of
accounting quality. SIZE is the natural logarithm of total assets and controls the political
692 costs of accounting malpractices. LEV is included to control the pressure from satisfying
debt covenants and is calculated as total liability to total equity in book values. Unprofitable
companies have a greater incentive to manipulate their earnings; thus, we add ROA (return
on assets) to control for profitability. If a company has an effective corporate governance
system, accounting quality improves because of the monitoring role that the system plays.
We control the effectiveness of corporate governance by adding foreign investors’ share of
common stock (FS) and an indicator variable equal to one if the external auditor of the
company is one of the “big 4” auditors (BIG4).

3.2 Sample selection

To investigate the spillover effect of FSS inspection on peer companies’ accounting quality,
we use financial data from Dataguide Pro and proprietary FSS inspection data provided by
FSS. These proprietary data help us exclude companies for which inspection of financial
statements by FSS did not identify a deficiency. Although these companies are in the same
industry as the misstating companies, their accounting quality may be directly influenced
by the FSS’s inspection of their own financial statements. Therefore, if these companies are
included in samples, then the changes in the accounting quality of peer companies may
reflect both spillover and direct effects of FSS inspection. To exclude the possibility of this
confounding effect, we use proprietary data and eliminate all companies inspected by FSS,
even if the inspected companies had no detected misstatements during FSS inspection[5].
Our initial sample comprises companies listed on KOSPI or KOSDAQ between the years
2002 and 2016. We exclude company years that lack two-digit KSIC codes or have missing
values for variables used in the regression model. Because financial statements from the
financial industry are structured differently, we exclude financial companies with two-digit
KSIC codes of 64, 65 or 66. Furthermore, to avoid ambiguity, we exclude companies whose
fiscal year does not end in December. Finally, we exclude inspected company years to avoid
the confounding effect of the FSS’s inspection on the accounting quality of inspected
companies. Because our independent variable, chABSDAi,t, takes a differential value, the
sample data used in our analysis begin in 2003. In summary, our final sample comprises
11,202 company years arising from 1,240 companies in 23 industries (10th KSIC).

4. Empirical results
4.1 Descriptive statistics
Table I summarizes the trends in regulatory audit reviews by South Korea’s FSS. From 2003 to
2016, FSS inspected the audited financial statements of an annual average of 8.0 per cent of
companies listed on the KOSPI or KOSDAQ and 17.2 per cent of the inspected companies had at
least one financial misstatement. In Panel A, we report the number of listed companies, the
number of inspected companies and the number of companies for which misstatements were
identified by FSS. The industries are compressed to 13 industry classifications based on two-digit
KSIC industry codes and listed in descending order of the misstatement detection ratio. The
misstating detection ratio is calculated as the number of misstating companies divided by the
number of inspected ones. The results show that while FSS covers each industry evenly with its
 Quality of peer
Panel A. Coverage of FSS inspections by industry
# of company- # of inspec- # of misstating companies
Industry classifications years (A) tions (B) companies (C) B/A (%) C/B (%)
Manufacture of non-metallic products 423 41 14 9.7 34.1
Agriculture, forestry, fishing, mining and
quarrying 221 23 6 10.4 26.1
Construction 864 93 22 10.8 23.7
Wholesale and retail trade 1,673 157 34 9.4 21.7 693
Manufacture of wood, cork, pulp, paper
and printing reproduction of recorded
media 484 40 7 8.3 17.5
Manufacture of machinery and
equipment 6,914 521 89 7.5 17.1
Service 4,746 379 64 8.0 16.9
Manufacture of chemical products 2,964 248 39 8.4 15.7
Manufacture of base metals and
fabricated metal products 1,477 137 21 9.3 15.3
Manufacture of textile, apparel and
leather, luggage and footwear 622 60 8 9.6 13.3
Manufacture of furniture and others 167 10 1 6.0 10.0
Electricity, gas, steam and air
conditioning supply, water supply;
sewage, waste management, material
recovery 209 21 2 10.0 9.5
Manufacture of food products, beverages
and tobacco 745 74 4 9.9 5.4
Total 21,509 1,804 311 8.4 17.2
Panel B. Coverage of FSS inspections by year
# of public # of # of misstating
Year firms (A) inspection (B) companies (C) B/A (%) C/B (%)
2002 1,315 72 27 5.5 37.5
2003 1,365 78 9 5.7 11.5
2004 1,385 123 35 8.9 28.5
2005 1,435 185 37 12.9 20.0
2006 1,492 186 29 12.5 15.6
2007 1,552 251 34 16.2 13.5
2008 1,585 255 19 16.1 7.5
2009 1,575 170 15 10.8 8.8
2010 1,571 177 20 11.3 11.3
2011 1,604 89 26 5.5 29.2
2012 1,601 75 23 4.7 30.7
2013 1,618 49 14 3.0 28.6
2014 1,666 37 13 2.2 35.1
2015 1,745 57 10 3.3 17.5 Table I.
Average 1,536 129 22 8.4 17.2
FSS’s accounting
Note: *Industries are suppressed to 13 reclassifications based on two-digit KSIC codes inspections

inspections, the rate of misstatement varies across industries. In Panel B, the annual trends of
audit reviews show that FSS has inspected fewer companies in recent years, but misstatement
detection rates have increased in the past five years.
Panel A in Table II presents descriptive statistics for the main variables used in our
analysis. The mean value of ARall is 0.542, which means that 54.2 per cent of non-inspected
companies are in the same industry as sanctioned companies. However, we consider only the
 35,5

694
MAJ

Table II.
Descriptive statistics
Panel A. Full sample
Variables Mean Std. Min Median Max
DA 0.059 0.156 0.725 0.039 0.373
ABSDA 0.111 0.125 0.000 0.070 0.725
chABSDA 0.002 0.146 0.717 0.001 0.725
ARallt1 0.542 0.498 0.000 1.000 1.000
ARleadt1 0.173 0.378 0.000 0.000 1.000
ARfreqt1 0.088 0.233 0.000 0.000 1.000
ARsizet1 0.011 0.039 0.000 0.000 0.278
SIZE 18.664 1.405 16.029 18.431 23.311
LEV 0.423 0.208 0.036 0.419 1.243
ROA 0.008 0.172 1.003 0.027 0.305
CFO 0.034 0.116 0.483 0.039 0.362
FS 0.063 0.110 0.000 0.011 0.551
BIG4 0.524 0.499 0.000 1.000 1.000

Panel B. Different characteristics of peers of companies of which financial misstatements have been identified by FSS
ARleadt1 = 1 (n = 1,982) ARleadt1 = 0 (n = 9,494) Diff.
Variables Mean Std. Median Min Max Mean Std. Median Min Max Mean Median
ABSDA 0.121 0.130 0.000 0.079 0.725 0.109 0.123 0.000 0.069 0.725 0.013*** 0.010
SIZE 18.484 1.425 16.029 18.227 23.311 18.777 1.396 16.029 18.552 23.311 0.292*** 0.324***
LEV 0.442 0.220 0.036 0.437 1.243 0.423 0.216 0.036 0.417 1.243 0.019*** 0.020***
ROA 0.039 0.216 1.003 0.022 0.305 0.012 0.182 1.003 0.026 0.305 0.027*** 0.004
CFO 0.014 0.136 0.483 0.029 0.362 0.035 0.116 0.483 0.041 0.362 0.021*** 0.012***
TAN 0.261 0.191 0.001 0.244 0.789 0.279 0.185 0.001 0.265 0.789 0.019*** 0.020***
LOSS 0.302 0.459 0.000 0.000 1.000 0.287 0.452 0.000 0.000 1.000 0.016 0.000
FS 0.061 0.113 0.000 0.010 0.551 0.064 0.109 0.000 0.013 0.551 0.004 0.003
BIG4 0.495 0.500 0.000 0.000 1.000 0.517 0.500 0.000 1.000 1.000 0.022* 1.000

Notes: Variable definitions: DA is discretionary accruals based on Kothari et al. (2005); ABSDA is the absolute value of DA; chABSDA is ABSDAt minus ABSDAt1; ARall t1 is 1 for
company-years where misstatements by at least one firm in the same industry-year are detected; AR leadt1 is 1 for company-years where misstatements by at least one of the four
largest firms (by market capitalization) in the same industry-year are detected by FSS and 0 otherwise. Industry classification is based on two-digit KSIC codes. ARfreqt1 is the number
of detected firms scaled by the total number of reviewed firms in an industry; ARsizet1 is the sum of the detected firms’ market capitalization scaled by the total market capitalization
in the industry; SIZE is the natural logarithm of sales; LEV is the debt-to-asset ratio; ROA is net income divided by lagged total assets; CFO is operating cash flow divided by lagged
total assets; FS is the ownership of foreign shareholders; BIG4 is 1 if the external auditor is one of the Big 4 accounting firms and 0 otherwise. *, **and *** represent significance at 10, 5
and 1%, respectively
misstatements of industry leaders in terms of market capitalization, meaning that 17.3 per Quality of peer
cent of companies are in the same industry as sanctioned industry leaders. Panel B in companies
Table II shows the difference in characteristics between industry peers of leading firms
whose misstatements are identified by FSS and companies in industries in which no
misstatement is identified by FSS. Peers of sanctioned industry leaders have larger absolute
discretionary accruals if other characteristics are not controlled. They are smaller in size,
less profitable and create lower operating cash flows than companies in industries in which
no misstatements are identified by FSS. 695
The correlation matrix in Table III shows the Pearson correlation coefficients between
variables. By running multivariate regression, we address the positive correlation between
the indicator of peer companies (ARallt1 and ARleadt1) and the magnitude of discretionary
accruals (ABSDAt) in the year following an announcement by FSS of misstatements by
industry leaders.

4.2 Regression results

4.2.1 Changes in accounting quality for peers of sanctioned companies. Table IV presents
the test results of H1. In column (1), the coefficient on ARal1t1 is insignificant. On the
contrary, the coefficient on ARleadt1 is 0.014 and significant at the 1 per cent level in
column (2). These results imply that peer companies improve their accounting quality in the
period after an industry leader receives sanctions as a result of FSS inspection. However, we
cannot find significant evidence that companies are affected by sanctions on smaller
companies even though they are in the same industry. Taken together, the different results
of tests using ARallt1 and ARleadt1 indicate that peer companies do not always improve
their accounting quality but do become more self-disciplined when industry leaders are
proven by a regulatory authority to have made financial misstatements.
4.2.2 Severity of sanctions and the materiality of misstatements. Next, we document test
results for H2 in Table V. H2 predicts that the accounting quality of peer companies will
improve more if the sanctions on misstating companies are stronger.
The negative and significant coefficient on ENFC in column (1) of Panel A indicates that
peer companies consider the severity of enforced actions for industry leaders whose
financial statements are proven by FSS to have material deficiencies when determining
accounting quality. Additionally, we retest H2 with a replacement of ENFC with VIOL
because the enforced action is determined based on the materiality of misstatement. In
column (2) of Panel A, the coefficient on VIOL is 0.007 and significant at the 5 per cent
level. This result implies that peer companies consider the materiality of misstatements in
their decisions regarding their own accounting quality.

4.3 Robustness test

4.3.1 Frequency and size of sanctions. The next test examines the possibility that companies
may not take immediate action in response to accounting failures by an industry peer.
Basically, FSS inspects audited financial statements annually through random and risk-
based sampling, and companies and auditors are aware of the practice that some companies
in an industry can be sanctioned for misstatements. We augment our interest variable,
ARlead, from indicator status to a continuous variable that reflects the relative frequency
and size of sanctions in each industry. Specifically, ARfreq is measured as the number of
industry leaders sanctioned by FSS divided by the total number of companies whose
financial statements are investigated by FSS at the two-digit industry level. Similarly,
ARsize is calculated as the sum of sanctioned industry-leader market capitalization divided
by the total sum of market capitalization at the two-digit KSIC code level. This
 35,5

696
MAJ

Table III.
Pearson correlations
Variables (1) (2) (3) (4) (5) (6) (7) (8) (9)

ARleadt1 (1) 1.000 0.038 (0.000) 0.007 (0.478) 0.079 (0.000) 0.034 (0.000) 0.055 (0.000) 0.066 (0.000) 0.012 (0.183) 0.017 (0.071)
ABSDA (2) 1.000 0.641 (0.000) 0.228 (0.000) 0.199 (0.000) 0.548 (0.000) 0.174 (0.000) 0.081 (0.000) 0.070 (0.000)
SIZE (3) 1.000 0.031 (0.001) 0.089 (0.000) 0.237 (0.000) 0.019 (0.04) 0.005 (0.621) 0.010 (0.271)
LEV (4) 1.000 0.073 (0.000) 0.331 (0.000) 0.237 (0.000) 0.473 (0.000) 0.396 (0.000)
ROA (5) 1.000 0.324 (0.000) 0.206 (0.000) 0.125 (0.000) 0.042 (0.000)
CFO (6) 1.000 0.576 (0.000) 0.176 (0.000) 0.146 (0.000)
FS (7) 1.000 0.182 (0.000) 0.130 (0.000)
BIG4 (8) 1.000 0.251 (0.000)
MKT (9) 1.000

Notes: *Refer to Table II, Panel A for variable definitions; T-statistics are reported in parentheses
 chABSDAi;t ¼ a0 þ b 1 ARi;t1 þ b 2 SIZEi;t þ b 3 LEVi;t þ b 4 ROAi;t þ b 5 CFOi;t
Quality of peer
companies
þ b 6 FSi;t þ b 7 BIG4i;t þ b 8 MKTi;t þ RInd þ RYear þ « i;t

(1) AR = ARall (2) AR = ARlead

Variables Pred. Estimates T-stat. Estimates T-stat.
697
Intercept ? 0.060 3.00*** 0.061 3.06***
AR – 0.005 1.44 0.014 3.24***
SIZE þ/ 0.003 3.04*** 0.003 2.96***
LEV þ/ 0.010 1.34 0.010 1.35
ROA þ/ 0.295 17.76*** 0.295 17.74***
CFO þ/ 0.294 12.41*** 0.293 12.37***
FS þ/ 0.002 0.17 0.001 0.11
BIG4 þ/ 0.000 0.20 0.000 0.18
MKT þ/ 0.001 0.48 0.001 0.48 Table IV.
Industry/year F.E. ? Included Included Changes in
Number of observations 11,202 11,202 accounting quality at
Adjusted R2 0.106 0.107
peers of companies
F-statistics 15.89*** 16.34***
identified by FSS as
Notes: 1) Refer to Table II, Panel A for variable definitions; 2) *; ** and ***represent significance at 10, 5 having made
and 1%, respectively. 3) T-statistics using standard errors clustered by companies are reported misstatements

chABSDAi;t ¼ a0 þ b 1 ARleadi;t1 þ b 2 ENFC ðVIOLÞi;t þ b 3 SIZEi;t þ b 4 LEVi;t

þ b 5 ROAi;t þ b 6 CFOi;t þ b 7 FSi;t þ b 8 BIG4i;t þ b 9 MKTi;t þ RInd þ RYear þ « i;t

(1) (2)
Variables Pred. Estimates T-stat. Estimates T-stat.

Intercept ? 0.060 3.01*** 0.061 3.04***

ARlead þ/ 0.016 1.39 0.011 0.97
ENFC – 0.010 2.80***
VIOL – 0.007 2.20**
SIZE þ/ 0.003 2.91*** 0.003 2.94***
LEV þ/ 0.010 1.38 0.010 1.35
ROA þ/ 0.295 17.72*** 0.295 17.77***
CFO þ/ 0.292 12.37*** 0.293 12.39*** Table V.
FS þ/ 0.000 0.05 0.001 0.10 Difference in
BIG4 þ/ 0.000 0.10 0.000 0.15 spillover effects
MKT þ/ 0.001 0.49 0.001 0.47 according to the
Industry/year F.E. ? Included Included severity of sanctions
Number of observations 11,202 11,202 and the materiality of
Adjusted R2 0.108 0.107
the violation:
F-statistics 16.59*** 16.26
Changes in
Notes: 1) Refer to Table II, Panel A for variable definitions; 2) *; ** and ***represent significance at 10, 5 accounting quality of
and 1%, respectively; 3) T-statistics using standard errors clustered by companies are reported peer companies
MAJ augmentation enables ARfreq and ARsize to reflect the influence of sanctioning by FSS. The
35,5 coefficients on ARfreq and ARsize in columns (1) and (2) of Table VI are 0.032 (t-values:
4.42) and 0.128 (t-values: 3.34), respectively. This result supports the findings for the
test of H1 by providing evidence regarding the negative association between the importance
of sanctioning to peer companies and the extent of improvement in their accounting quality.
4.3.2 Direction of earnings management in industry leaders’ misstatement period. We
698 identify the effect of regulatory audit reviews on accounting quality by determining the
direction of earnings management in non-sanctioned companies in the year before the
industry leader’s financial misstatements were identified. POSDA is 1 if the discretionary
accruals of a focal company in year t1 are larger than 0 and 0 when DAi,t1 is smaller than
0 and has a missing value when DAi,t1 equals 0. For clear interpretation, we alter our
independent variable to chDAi,t: changes in discretionary accruals. In Table VII, the positive
coefficient (0.031) on ARlead indicates that downward earnings management in year t1
decreases if industry leaders receive sanctions for financial misstatements by increasing
discretionary accruals. On the contrary, for companies that managed earnings upward in
year t1, if POSDAi,t1 equals 1, the gross effect of industry-leader sanctions on changes in
peer company’s discretionary accruals is 0.180 ( b 1þ b 2þ b 3 effect of audit review on peer
companies’ earnings management is more pronounced in companies that were engaged in
upward earnings management.
4.3.3 Analysis using a level variable. We take the year-to-year differential value to
investigate the changes in the accounting quality of peer companies subsequent to
regulatory audit review by FSS. However, whether the level of accounting quality is higher
in peers of sanctioned companies than in others remains as a question. If a regulatory review
detects financial misstatements, peer companies not only improve their accounting quality
but also report higher-quality accounting information than companies in non-sanctioned

chABSDAi;t ¼ a0 þ b 1 ARi;t1 þ b 2 SIZEi;t þ b 3 LEVi;t þ b 4 ROAi;t þ b 5 CFOi;t

þ b 6 FSi;t þ b 7 BIG4i;t þ b 8 MKTi;t þ RInd þ RYear þ « i;t

(1) AR = ARfreq (2) AR = ARsize

Variables Pred. Estimates T-stat. Estimates T-stat.

Intercept ? 0.061 3.06*** 0.059 2.96***

AR – 0.032 4.42*** 0.128 3.34***
SIZE þ/ 0.003 2.95*** 0.003 2.93***
LEV þ/ 0.010 1.36 0.010 1.36
ROA þ/ 0.295 17.77*** 0.295 17.73***
CFO þ/ 0.293 12.42*** 0.294 12.40***
FS þ/ 0.000 0.04 0.001 0.13
BIG4 þ/ 0.000 0.24 0.000 0.13
Table VI. MKT þ/ 0.001 0.48 0.001 0.45
The effect of Industry/year F.E. ? Included Included
frequency or size of Number of observations 11,202 11,202
Adjusted R2 0.108 0.107
misstatements on
F-statistics 16.74 16.42
changes in
accounting quality of Notes: 1) Refer to Table II, Panel A for variable definitions; 2) *; ** and *** represent significance at 10, 5
peer companies and 1 per cent, respectively. 3) T-statistics using standard errors clustered by companies are reported
 chDAi;t ¼ a0 þ b 1 ARleadi;t1 þ b 2 POSDAi;t1 þ b 3 ARlead*POSDAi;t1 þ b 4 SIZEi;t þ b 5 LEVi;t
Quality of peer
companies
þ b 6 ROAi;t þ b 7 CFOi;t þ b 8 FSi;t þ b 9 BIG4i;t þ b 10 MKTi;t þ RInd þ RYear þ « i; t

Variables Pred. Estimates T-stat.

Intercept ? 0.253 9.09*** 699

ARlead þ 0.031 5.11***
POSDA – 0.189 49.54***
ARlead*POSDA – 0.022 2.64***
SIZE þ/ 0.011 7.63***
LEV þ/ 0.002 0.16
ROA þ/ 0.656 34.23***
CFO þ/ 0.944 39.67***
FS þ/ 0.059 4.56***
BIG4 þ/ 0.003 1.23
MKT þ/- 0.004 1.54
Industry/Year F.E. ? Included
b 1þ b 2þ b 3 0.180 25.77*** Table VII.
Number of observations 11,136 Differences in
Adjusted R2 0.443
spillover effects
F-statistics 114.27***
according to pre-
Notes: 1) Refer to Table II, Panel A for variable definitions; 2) *, ** and ***represent significance at 10, 5 inspection earnings
and 1%, respectively. 3) T-statistics using standard errors clustered by companies are reported management

industries. To corroborate this reasoning, we examine the association between sanctions on

industry leaders after regulatory audit review and the accounting quality of peer companies
afterward. In columns (1)-(3) in Table VIII, the coefficients on AR (ARlead, ARfreq and
ARsize) are negative and significant at the 1 per cent level, indicating that the level of
accounting quality is higher for peers of sanctioned companies. This additional test
complements our main test results by showing that companies improve their accounting
quality in response to sanctions on a leader in their industry and, at the same time, provide
more transparent accounting information in the period following the announcement of
sanctions.
Next, Table IX presents the test results for H2 using a level variable for the absolute
value of discretionary accruals as an independent variable. The level of discretionary
accruals becomes much lower for peers of sanctioned companies according to the intensity
of enforcement actions, and the materiality of a violation does not incrementally affect the
level of discretionary accruals. However, we believe that the overall test results from
Tables IV to IX support our hypothesis that FSS audit reviews of industry leaders affect the
accounting quality of industry peers and that this effect becomes more pronounced when
sanctions are severe and material misstatements are revealed.

5. Conclusion
This paper investigates the spillover effect of regulatory reviews. Specifically, we analyze
whether the sanctioning of industry leaders after regulatory review influences the
accounting quality of peer companies.
Using regulatory inspection data from Korea’s FSS, we provide evidence that when an
industry leader is sanctioned, peer companies improve their financial accounting quality.
MAJ ABSDAi;t ¼ a0 þ b 1 ARi;t1 þ b 2 SIZEi;t þ b 3 LEVi; t þ b 4 ROAi;t þ b 5 CFOi;t
35,5
þ b 6 FSi;t þ b 7 BIG4i;t þ b 8 MKTi;t þ RInd þ RYear þ « i;t

(1) AR = ARlead (2) AR = ARfreq (3) AR = ARsize

700 Variables Pred. Estimates T-stat. Estimates T-stat. Estimates T-stat.

Intercept ? 0.144 6.73*** 0.144 6.75*** 0.146 6.82***

AR – 0.011 3.79*** 0.009 2.03** 0.117 4.74***
SIZE þ/ 0.002 1.83* 0.002 1.79* 0.002 1.87*
LEV þ/ 0.035 5.68*** 0.035 5.66*** 0.035 5.7***
ROA þ/ 0.398 29.22*** 0.398 29.23*** 0.398 29.2***
CFO þ/ 0.236 12.87*** 0.237 12.9*** 0.237 12.9***
FS þ/ 0.017 1.62 0.016 1.59 0.017 1.6
BIG4 þ/ 0.001 0.50 0.001 0.48 0.001 0.55
MKT þ/ 0.007 3.14*** 0.007 3.14*** 0.007 3.11***
Table VIII. Industry/year F.E. ? Included Included Included
Accounting quality Number of observations 11,476 11,476 11,476
2
of peers of companies Adjusted R 0.398 0.397 0.398
F-statistics 64.64*** 64.69*** 64.64***
identified by FSS as
having made Notes: 1) Refer to Table II; Panel A for variable definitions; 2) *, ** and *** represent significance at 10, 5
misstatements and 1%, respectively. 3) T-statistics using standard errors clustered by companies are reported

ABSDAi;t ¼ a0 þ b 1 ARleadi;t1 þ b 2 ENFC ðVIOLÞi;t þ b 3 SIZEi;t þ b 4 LEVi;t þ b 5 ROAi;t

þ b 6 CFOi;t þ b 7 FSi;t þ b 8 BIG4i;t þ b 9 MKTi;t þ RInd þ RYear þ « i;t

(1) (2)
Variables Pred. Estimates T-stat. Estimates T-stat.

Intercept ? 0.145 6.75*** 0.144 6.73***

ARlead þ/ 0.003 0.31 0.001 0.16
ENFC – 0.004 1.67*
VIOL – 0.003 1.17
SIZE þ/ 0.002 1.85* 0.002 1.83*
LEV þ/ 0.035 5.70*** 0.035 5.68***
ROA þ/ 0.398 29.20*** 0.398 29.23***
CFO þ/ 0.236 12.88*** 0.237 12.88***
Table IX. FS þ/ 0.017 1.64 0.017 1.62
Difference in BIG4 þ/ 0.001 0.54 0.001 0.51
spillover effects MKT þ/ 0.007 3.14*** 0.007 3.13***
according to the Industry/year F.E. ? Included Included
severity of sanctions Number of observations 11,476 11,476
Adjusted R2 0.398 0.398
and the materiality of F-statistics 63.07*** 63.16
the violation:
accounting quality of Notes: 1) Refer to Table II, Panel A for variable definitions. 2) *, ** and *** represent significance at 10, 5
peer companies and 1%, respectively; 3) T-statistics using standard errors clustered by companies are reported
This effect is even greater when the sanctions are severe or the accounting violation is Quality of peer
associated with earnings. This finding contributes to the literature by providing the first companies
evidence of the spillover effect of regulatory reviews on accounting quality and has
important implications for regulators, investors and scholars. First, this study shows that
financial reporting regulations can affect the overall quality of an industry by increasing the
accounting quality not only of the sanctioned company but also its peers. Second, this study
can provide a fruitful basis for future research regarding the effect of other regulations on 701
peer companies’ accounting quality.
This study also has limitations. First, we acknowledge that measurement errors may
exist within the discretionary accruals. However, discretionary accruals are the most
common proxy used for determining accounting quality and are most suitable for
measuring manager discretion and observing manager responses to the findings of
regulatory reviews at other companies. Second, we focus only on the spillover effect of
regulatory reviews in terms of earnings quality. Future studies can investigate the
impact of regulatory reviews on other areas of peer companies (such as audit hours or
audit fees). It is also worth exploring whether corporate governance enhances this
spillover effect .

Notes
1. The data used in this research are also unique in Korea because they are not publicly disclosed.
We are grateful to FSS for providing the details necessary for our study.
2. Compared to comment letters between SEC staff and SEC filers, the FSS accounting inspection
mainly focuses on compliance with accounting and audit standards.
3. Information on accounting fraud usually comes from a whistleblower. If such information is
received, FSS checks the facts and conducts an inspection.
4. Classifications of the materiality of accounting standards violations are listed in Appendix.
5. FSS announces the result of accounting inspection on FSS’s official website only if inspected
companies are designated by FSS as having made misstatements. However, inspected companies
with no misstatements remain confidential. If we use publicly disclosed data, these companies
must be categorized as peer companies, which will cause the spillover effect to be mixed with the
direct effect of FSS inspection.

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Appendix. Classification of enforcement action and accounting standards violations

Panel A summarizes the sanctions FSS imposes on misstating companies and how we construct the
variables ENFC and VIOL. We give the highest score to prosecution or recommendation of executive
resignation because these sanctions are imposed if both intentionality and materiality of accounting
standard violation are high. On the contrary, cautious remarks or warnings are imposed only if the
misstatements are mere mistakes or errors, so we give a score of 2. Fines, auditor designation and
restriction on issuing securities are imp osed if the intentionality and the materiality of violation are
at a medium level. We consider the impact of these three sanctions to give scores. Because the
restriction on issuing securities would not be penalty for companies that do not plan to issue new
securities, we give a score of 2. Fines accompany financial loss of misstating companies, and auditor
designation increases auditors’ scrutiny; thus, these actions bring immediate costs to misstating
companies. We score 3 for fines and auditor designation. Panel B summarizes the types of
misstatements. We follow FSS’s guideline for sanctions in scoring each violation from 1 to 4.

Corresponding author
Eunjung Cho can be contacted at: ejcho34@gmail.com

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MAJ Panel A. Classification of enforcement action
35,5 Enforcement action ENFC
Prosecution 4
Recommendation of executive resignation 4
Fines 3
Designation of external auditors 3
Restriction on issuing securities 2
704 Cautions or warnings 2
No sanction 1
Panel B. Classification of accounting standards violations
Type of violation VIOL
A. Misstatement affecting profits (loss) and equity value
Misstatement of account receivables or revenues 4
Misstatement of account inventory or cost of goods sold 4
Overstatement of non-current assets 4
Omissions of borrowings 4
Understatement of allowance for doubtful receivables 4
Understatement related to loss on valuation of marketable securities or investment securities 4
Others 4
B. Misstatement of assets and liabilities
Misstatements of both assets and liabilities 3
Misstatements of both sales and cost of goods sold 3
C. Omission of footnotes
Table AI. Related party transactions 2
Classification of Guarantees and collateral 2
enforcement action Others
and accounting D. Misclassification of accounts 1
standards violations E. Violations of regulations not related to accounting standards 1