Audit Committees and Managerial Influence on Audit Quality:

‘Voluntary’ versus ‘Mandatory’ Approach to Corporate

Governance

Bum-Jin Park , Soonchunhyang University, Korea

This study provides empirical evidence on how managerial influence to reduce audit quality is moderated by
a combination of the audit committee (AC) form and compliance with AC best practice guidelines. There is a
negative association between managerial ownership and audit fees; however, the association becomes positive
when a voluntary AC follows best practices. Furthermore, the results are robust to the exclusion of industries
with large frequency in the sample, the consideration of Korean business groups and recessionary times. The
results of this study imply that a voluntary approach to corporate governance, which encourages companies
to follow best practice guidelines in the form and composition of the AC, is more effective in controlling
management than a mandatory approach. This study contributes to policy making aimed at improving AC
effectiveness.

T
his study aims to provide regulators and practi-
tioners with evidence of the optimal combination
of the audit committee (AC) form (‘voluntary’
versus ‘mandatory’) and compliance with AC best prac-
tices to ensure that the AC is more effective in monitoring
managers.
Although prior research has firmly established the
relationship between managerial ownership and audit
fees and between AC characteristics and audit fees,
no previous study empirically examines whether the
influence of managerial ownership on audit fee pricing
can be moderated by the AC form and compliance with
AC best practices. Research on audit fees has considered
managerial ownership as only one of the causes of agency
problems that can increase audit risk, but it neglects that
managerial influence stemming from ownership could
lead to a decreased demand for high-quality audits,
resulting in low audit fees (Gotti et al. 2012; Willekens
et al. 2004). The demand for high-quality audits may
be attenuated when managers with extensive ownership
concentrate only on their private interests by utilising
internal corporate information (Desender et al. 2013;
Gotti et al. 2012; Jensen and Meckling 1976; Niemi
2005; Park 2012).1 External auditors reduce the agency
problems of management and external stakeholders by
monitoring the financial reporting process (Boone et al.
2012; Graham et al. 2005; Jensen and Meckling 1976;
Kinney 2005). Research on the relationship between
ACs and audit fees consistently finds that ACs, which are
responsible for the oversight of auditors and financial
reporting processes, play a decisive role in triggering
demand for high-quality audits, resulting in high
audit fees (Abbott et al. 2003, 2004; Jung 2005; Loukil
2014). ACs interact with the auditor to supervise
managers, whereas managers might have an incentive
to avoid this supervision, especially if they seek personal
benefits (Abbott et al. 2003; Beck and Mauldin 2014;
Desender et al. 2013). Thus, this study begins with a
tension between management and ACs over demand
for high-quality audits.
Even though there is no legal requirement for the for-
mation of an AC, companies that voluntarily establish
ACs would have greater incentives to improve manage-
ment transparency and earnings credibility. Many stud-
ies find a positive relationship between agency problems
and voluntary AC, suggesting that voluntary AC is trig-
gered by a high demand for the monitoring of manage-
ment (Bradbury 1990; Collier 1996; Firth and Rui 2007;
Pincus et al. 1989; Piot 2004). Since 2000, major capi-
tal markets (e.g., India (2000), the US (Sarbanes–Oxley,
2002), Spain (2002), Australia (2004), the UK (2008),
France (2008), Germany (2009), etc.) have sought to find
alternative ways to improve AC effectiveness through AC
composition and practices, requiring all listed compa-
nies to form ACs (Fichtner 2010). Many regulators rec-
ommend that ACs follow the three best practice guide-
lines (i.e., independence, expertise, meeting frequency)
Correspondence: Bum-Jin Park, Department of Business Ad-
ministration, Soonchunhyang University, 22 Soonchunhyan-
gro, Shinchang-myeon, Asan-si, Chungcheongnam-do, 336–745
Korea. email: sunguja@sch.ac.kr
Accepted for publication 25 June 2018.

266 Australian Accounting Review No. 88 Vol. 29 Issue 1 2019 doi: 10.1111/auar.12263
B.-J. Park
to be more effective management oversight bodies (Blue
Ribbon Committee (BRC) 1999; National Association
of Corporate Directors (NACD) 2000; Securities and
Exchange Commission (SEC) 2003). The literature ar-
gues that these best practices make ACs more effective
in constraining managerial opportunistic discretion and
promoting audit quality (Abbott and Parker 2000; Ab-
bott et al. 2003, 2004; Beasley et al. 2000; Bedard et al.
2004; Choi et al. 2004; DeZoort 1998; DeZoort and Salte-
rio 2001; Jung 2005; Klein 2002; Loukil 2014; McMullen
and Raghunandan 1996; Xie et al. 2003). ACs following
all best practices may focus on protecting shareholders as
well as their reputations, which are more important than
the fear of losing the committee job, and thus, they will
moderate managerial influence over audit quality (Ab-
bott et al. 2003, 2004; Fama 1980; Gilson 1990; Loukil
2014; Sharma et al. 2011). However, no research has ex-
plored which approaches (‘soft’ or ‘hard’) to the form
and composition of the AC are more effective in mon-
itoring management. To address this issue, this study
examines how (1) managerial ownership and (2) AC
form affect audit fee pricing, and (3) how the interac-
tions between managerial ownership and AC form on
audit fees are moderated by compliance with all AC best
practices.
Unlike countries where there is a mandatory require-
ment for all listed companies to establish an AC (e.g., the
Member States of the European Union, the US, the UK,
Austria and China), in Korea, only listed companies with
assets above a certain scale are required to follow the
formation and composition of the regulated AC. Thus,
companies with mandatory ACs coexist with those
with voluntary ACs. For this reason, Korea provides an
optimal setting for identifying the best combination of
AC form and compliance with AC best practices to be the
most effective AC. In order to address issues (1) and (2)
above, the full sample of 5420 observations listed on the
Korea Composite Stock Price Index (KOSPI) was used
for the period 2008–16, and a reduced sample of 1715
observations with ACs was used to address issue (3). This
study finds a negative association between managerial
ownership and audit fees, which becomes positive when
the voluntary AC follows all the best practices. The
results are robust to the exclusion of industries with high
frequency from the sample, the consideration of Korean
business groups (chaebols), and the recession identified
by the National Bureau of Economic Research (NBER)
(2010). Consequently, management with significant
ownership exerts downward fee pressure to reduce audit
quality, but voluntary ACs can mitigate such managerial
efforts when following all best practices. To the best of my
knowledge, this study is the first to identify the combi-
nation of AC form and compliance with AC best practice
guidelines to enhance AC effectiveness. The findings will
help policy makers and practitioners see that the volun-
tary compliance mechanism in terms of the AC, rather

C 2018 CPA Australia
Audit Committees and Managerial Influence on Audit Quality
than the mandatory AC requirements, can lead to a more
effective AC.
Background and Hypotheses Development
Korean institutional background
While the first and second backgrounds create an en-
vironment conducive to managers exerting significant
influence over audit fees, the third and fourth provide
an opportunity to test how AC forms and compliance
with AC best practices moderate managerial influence
over audit fees.
First, Korea has a mechanism through which man-
agers can directly affect audit fee pricing. In developed
countries, such as the US and the UK, ACs are ulti-
mately responsible for auditor selection and compensa-
tion. However, in Korea, ACs do not determine auditor
and audit fees independently of management because
the Korean Act on External Audit of Stock Companies
(KAEASC) allows management to determine an auditor
as well as audit fees and then obtain ex post facto approval
from the AC.
Second, Korea has a family-owned corporate environ-
ment; the separation of ownership and control within
business organisations barely exists. This management
style has resulted in the emergence of a business group
known as chaebol,2 wherein one parent company
oversees many companies through a pyramidal or
multi-layered shareholding agreement (Bae et al.
2002; Baek et al. 2006). Thus, managerial influence
in this group would be greater as managerial owner-
ship increases (Claessens et al. 2000; Fan and Wong
2002).
Third, there is a system of protecting the appointment
of the AC members from managerial influence. While
the Korean Commercial Code (KCC) does not limit the
execution of controlling shareholders’ voting rights for
the director selection, their shares of up to only 3% of
total shares are permitted as voting rights for the ap-
pointment of AC members to limit their influence in
this process.
Fourth, companies that do not have ACs coexist with
companies that have voluntary or mandatory ACs. The
KCC (2000) requires only listed companies with assets
over two trillion won (about US$1.8 billion, based on the
2017 average exchange rate) to establish ACs and follow
the composition standards that an AC be comprised of
at least three members, including independent directors
making up more than two-thirds of the committee, and
a financial expert. Although Korea has no guidelines
for the minimum meeting frequency of AC per year,
the Korea Corporate Governance Service (KCGS)
recommends the AC meets more than once every
quarter.
Australian Accounting Review 267
Audit Committees and Managerial Influence on Audit Quality
Managerial ownership and a demand for high-quality
audits
There are competing hypotheses on the relationship
between managerial ownership and corporate value in
agency theory (Fama 1980). One is the convergence of
interest hypothesis, stating that significant ownership
aligns managers’ interests with shareholders’ interests,
thereby maximising corporate value (Jensen and Meck-
ling 1976; Ng 2005; Warfield et al. 1995). Another is
the managerial entrenchment hypothesis, stating that by
assigning more discretion to management, significant
ownership induces managers to pursue their own pri-
vate interests, which depreciates corporate value (Cheng
et al. 2012; Claessens et al. 2002; Denis et al. 1997; Morck
et al. 1988; Shleifer and Vishny 1989). Thus, the im-
pact of managerial influence stemming from ownership
on corporate value depends on management’s desired
goals.
Audit quality can improve when auditors seek a greater
level of audit assurance or coverage to ensure earnings
credibility. Such efforts result in higher audit fees
(Abbott et al. 2003, 2004; Beck and Mauldin 2014;
Bedard and Johnstone 2004; Huang et al. 2014; Loukil
2014; Simunic 1980). Consistent with the convergence
of interest hypothesis, management with greater own-
ership would demand higher audit quality to provide
stakeholders with more reliable accounting information,
thus exerting upward pressure on audit fees, whereas fol-
lowing the managerial entrenchment hypothesis, greater
ownership may induce management to use a firm’s
private information in order to pursue their own self-
interest. Such managers are likely to prefer lenient au-
ditors and thus create downward pressure on audit fees.
The principal–principal conflicts of a controlling
shareholder and minority shareholders are more preva-
lent in companies where the ownership structure is more
concentrated, and in countries where there is no or weak
shareholder protection (Cheng et al. 2012; La Porta et al.
1999; Ng 2005). The controlling shareholder and man-
agement in such an environment are likely to expro-
priate the minority shareholders and inflate earnings to
gain private benefits (Bae et al. 2002; Bertrand et al.
2002; Claessens et al. 2000, 2002; Hung 2001; Joh 2003).
A majority of studies concerning the issue of manager
ownership and audit fees supports the managerial en-
trenchment hypothesis (Beck and Mauldin 2014; De-
sender et al. 2013; Gotti et al. 2012; Niemi 2005; Park
2012). Using data from firms in Finland, Niemi (2005)
finds greater audit fee reductions in manager-controlled
companies than in other companies. Using data from
the US, Gotti et al. (2012) also find a negative associa-
tion between managerial ownership and audit fees. Sim-
ilarly, using audit data from Korea, Park (2012) reveals
a negative association between controlling shareholders’
shareholdings and audit fees and further, this negative
268 Australian Accounting Review
B.-J. Park
association remains robust across company size. De-
sender et al. (2013) analyse data on continental Euro-
pean companies and find that the positive association
between board independence and audit fees is weaker
for firms with concentrated ownership, indicating that
ownership concentration leads to fee reductions. Beck
and Mauldin (2014) apply the tenure of the chief fi-
nancial officer (CFO) as managerial influence and find
that relatively more powerful CFOs decrease audit fees.
Since Asia’s financial crisis in 1997, South Korea has also
experienced many cases of accounting fraud (e.g., the
Daewoo Group, Tongyang Group, SK Group and STX
Group). Given the Korean corporate governance envi-
ronment where ownership is not separated from control,
managers with significant ownership would attempt to
gain private benefits by using the firm’s private infor-
mation and thus exert fee reduction to engage auditors
who are less severe and less sceptical by limiting time and
costs. Accordingly, the following hypothesis is proposed.
H1: There is a negative association between managerial
ownership and audit fees.
Managerial ownership, AC form and demand
for high-quality audits
Previous studies argue that the AC supports auditors
in an accounting disagreement between auditors and
client management (Knapp 1987), and that its existence
is related to higher auditor independence (Beattie et al.
1999), higher earnings quality (Dechow et al. 1996; Klein
2002), higher audit quality (Goodwin-Stewart and Kent
2006), fewer shareholder lawsuits, fewer financial restate-
ments (Abbott et al. 2004) and fewer auditor changes
(McMullen and Raghunandan 1996).
It has been argued that a voluntary AC is associated
with reduced earnings management (Bradbury 1990),
and that the agency costs, which increase by higher lever-
age (Collier 1996; Pincus et al. 1989) or larger firm size
(Firth and Rui 2007; Piot 2004), serve as a catalyst for
companies to voluntarily establish ACs to monitor man-
agement. Thus, the voluntary AC would prefer to ap-
point a larger and better quality audit firm to reduce
agency costs (Collier 1996; Eichenseher and Shields 1985;
Menon and Williams 1994; Pincus et al. 1989; Willekens
et al. 2004). Given this assumption, the manager’s efforts
to reduce audit quality would be weakened in firms with
an AC, and further, this association could depend on the
AC forms (‘voluntary’ or ‘mandatory’). Therefore, the
following hypothesis is proposed.
H2: The negative association between managerial own-
ership and audit fees will be weaker for firms with
voluntary audit committees than for those with
mandatory audit committees.

C 2018 CPA Australia
B.-J. Park
Managerial ownership, compliance with AC best
practices and audit fees
If the formation of the AC cannot improve the effective-
ness of monitoring management (Beasley 1996; Menon
and Williams 1994; Pucheta-Martı́nez and de Fuentes
2007), the AC should be required to follow AC best prac-
tices. Anglo-Saxon countries, particularly the US, have
played a leading role in establishing guidelines for AC
best practices. The ACs would have to follow three best
practices in order to carry their weight as an effective
oversight body.
First, AC members should be independent of control-
ling shareholders and management to oversee auditor
independence. The Public Oversight Board (1993) re-
ports that ACs are more effective when comprised of
only outside directors (Bedard et al. 2004). Beasley et al.
(2000) reveal that management’s propensity to practice
fraudulent accounting is significantly reduced when the
ACs are comprised of only outside directors. Abbott and
Parker (2000) argue that ACs with only outside direc-
tors are more likely to select industry specialist audi-
tors. Klein (2002) finds a negative association between
AC independence and earnings management. Thus, in-
dependent AC members have direct incentives to seek
better audit coverage and audit effort in an attempt to
protect their own reputations and reduce litigation risk
(Abbott et al. 2003, 2004). This results in higher audit
fees (Abbott et al. 2003, 2004; Jung 2005; Loukil 2014).
Second, AC members should possess the experience or
expert knowledge necessary for the oversight of financial
reporting and auditing (Abbott et al. 2003, 2004; Jung
2005). The BRC (1999) recommends that ACs include at
least one member with accounting or financial expertise
to enhance the AC’s professional skills. McMullen and
Raghunandan (1996) find that the percentage of certified
public accountants (CPAs) among AC members is higher
in firms with fewer problems in the financial reporting
process. Xie et al. (2003) and Choi et al. (2004) find
that earnings management decreases significantly when
the AC consists of members who are more knowledge-
able about accounting and finance issues. The greater
the expertise of the members in accounting or finance,
the higher the awareness of the committee about any
problems or risks in the financial reporting process, thus
leading to in-depth discussions with the external audi-
tors on these issues. Accordingly, ACs with greater exper-
tise may pay higher audit fees due to their demand for
high-quality audits (DeZoort 1998; DeZoort and Salterio
2001). Using data from the US, Abbott et al. (2003) find
that audit fees are higher in firms with an AC comprised
of at least one member with accounting and financial
expertise.
Third, AC meetings should be frequent to enhance
AC diligence. The BRC (1999) and the NACD (2000)
recommend that ACs meet at least four times per year,

C 2018 CPA Australia
Audit Committees and Managerial Influence on Audit Quality
suggesting that meeting frequency acts as a proxy for AC
activities (Abbott et al. 2003). Beasley et al. (2000) show
that ACs meet less frequently in companies committing
financial statement fraud. Abbott and Parker (2000) find
that ACs that are comprised of only outside director and
meet at least two times annually tend to engage indus-
try specialist auditors. Xie et al. (2003) demonstrate that
more active ACs lead to a significant reduction in earn-
ings management. Moreover, Abbott et al. (2003, 2004)
find fewer earnings restatements but higher audit fees
in firms where ACs meet at least four times annually.
Jung (2005), using audit data from Korea, finds a pos-
itive association between AC activities and audit fees.
Furthermore, Sharma et al. (2011) use data from firms
in New Zealand to show that the positive association be-
tween the client’s economic importance to the auditor
and earnings management is moderated by the AC fol-
lowing all best practices. Using data from French firms,
Loukil (2014) shows that AC existence and independence
and meeting frequency increase audit fees. Given the ar-
guments in prior studies, ACs following all best practices
in Korea are expected to mitigate managerial influence
to reduce audit quality. In particular, the opportunistic
fee-reducing efforts of management will be weakened
more in companies with voluntary ACs. Therefore, the
following hypothesis is proposed:
H3: The negative interaction between managerial own-
ership and the voluntary audit committee will be
greater when the voluntary audit committee follows
all best practices.
Sample Selection and Models
Sample selection
The economic recession will allow us to better identify
the influence of management and ACs over the demand
for high-quality audits (Beck and Mauldin 2014). The
contracting economy leads to decreased profitability and
opportunistic earnings management, and thus may in-
cite managers to exert downward fee pressure on audit
fees to elude external controls. On the other hand, it in-
creases the occurrence of financial reporting errors and
bankruptcy, and thus may prompt ACs to exert upward
fee pressure in order to complement their monitoring
role. The recession that started with the subprime mort-
gage crisis in the US was reported to range from Decem-
ber 2007 to June 2009, but the economy had still not fully
recovered by the end of 2009 (NBER 2010). This study
covers the period 2008–16, including the recessions.
As summarised in Panel A of Table 1, this study be-
gins with a sample of 8023 firm-year observations listed
on the KOSPI. It eliminates (1) 1404 firm-year ob-
servations for financial institutions, (2) 297 firm-year
Australian Accounting Review 269
Audit Committees and Managerial Influence on Audit Quality B.-J. Park

Table 1 Sample description

Panel A: Selection process
Firm-year observations listed on the KOSPI market 2008–16 8023
Excluding observations for financial institutions (1404)
Excluding observations with closing months other than December (297)
Excluding observations with missing corporate governance and audit data (432)
Excluding observations with missing KIS-VALUE data (470)
Full sample 5420
Excluding observations without audit committees (3705)
Reduced sample 1715

Panel B: Sample distribution by year

Year 2008 2009 2010 2011 2012 2013 2014 2015 2016 Total
N 559 576 597 612 620 636 647 584 589 5420
(132) (159) (166) (185) (196) (209) (217) (230) (221) (1715)
% 10.3 10.6 11.0 11.3 11.4 11.7 11.9 10.8 10.9 100
(7.7) (9.3) (9.7) (10.8) (11.4) (12.2) (12.7) (13.4) (12.9) (100)

Panel C: Sample distribution by industry

Industrya 1 2 3 4 5 6 7 8 9 10 11 12 13
N 333 162 1209 186 277 447 252 529 369 430 215 827 184
(101) (50) (311) (50) (90) (122) (76) (149) (139) (173) (53) (341) (60)
% 6.1 3.0 22.3 3.4 5.1 8.2 4.6 9.8 6.8 7.9 4.0 15.3 3.4
(5.9) (2.9) (18.1) (2.9) (5.2) (7.1) (4.4) (8.7) (8.1) (10.1) (3.1) (19.9) (3.5)
a Industry
membership is determined by the Korea Standard Industry Classification (KSIC).
1. Food and grocery, 2. Pulp and paper, 3. Chemicals, 4. Non-metal and mineral, 5. General construction, 6. Primary metal, 7. Other
machine, 8. Electronic and electrical equipment, 9. Transportation equipment, 10. Wholesale and commodities brokerage, 11. Furniture
and others, 12. Enterprise services, 13. Water transportation.

observations with closing months other than Decem- LNAF t = β0 + β1 M OWN t−1 + β2 AC t−1
ber, to control different operating circumstances, (3)
+ β3 M OWN t−1 × AC t−1 + β4 LNTAt−1
432 firm-year observations with missing corporate gov-
ernance (e.g., ACs and boards) and audit fee data, which + β5 ARINV t−1 + β6 SQSUBSt−1 + β7 LEV t−1
can be manually collected from the annual reports filed
+ β8 LOSSt−1 + β9 ROAt−1 + β10 OCF t−1
with the Korean Electronic Disclosure System (DART)
(http://dart.fss.or.kr/), and (4) 470 firm-year observa- + β11 BIG4t + β12 BDINDt−1 + β13 BDSIZE t−1
tions with missing financial data from the Korean KIS-
+ β14 BDMEET t−1 + β15 FIRST t
VALUE (http://www.kisvalue.com) database. The full
sample (N = 5420) was used to verify the effectiveness + β16 GROUP t−1 + β17−28 IND + β29−34 YD
of the AC form and the reduced sample (N = 1715)
+ε (1)
was used to verify the interaction effect of the AC form
and compliance with AC best practices. Subsequently,
all continuous variables were winsorised at the 1st and where
99th percentile of each value to control outliers. Panels B LNAF = the natural log of audit fees;
and C show the distribution of the sample. The distribu- M OWN = the percentage of equity owned by man-
tion for the reduced sample is indicated in parentheses. agement;
The sample reasonably represents the population across AC = a dummy variable equal to one for firms
industry and year. with an AC and zero otherwise;
LNTA = the natural log of total assets;
ARINV = accounts receivable plus inventory di-
Models vided by total assets;
SQSUBS = the square root of the number of consol-
Managerial ownership, AC form and audit fees idated subsidiaries;
LEV = total liabilities divided by total assets;
The following regression model is estimated to test LOSS = a dummy variable equal to one for firms
Hypothesis 1: that report a loss and zero otherwise;

270 Australian Accounting Review 

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B.-J. Park
ROA = income before extraordinary items di-
vided by total assets;
OCF = operating cash flows divided by total as-
sets;
BIG4 = a dummy variable equal to one for firms
that engage Big 4 auditors and zero oth-
erwise;
BDIND = the percentage of outside directors on the
board;
BDSIZE = the natural log of the number of board
members;
BDMEET = the natural log of the number of annual
board meetings;
FIRST = a dummy variable equal to one for the
first year of audit engagement and zero
otherwise;
GROUP = a dummy variable equal to one for firms
that belong to chaebols and zero other-
wise;
IND = a dummy variable equal to one for firms
that belong to a specific industry and zero
otherwise;
YD = a dummy variable equal to one for firms
that belong to a specific year and zero
otherwise.
The dependent variable used to capture the demand
for high-quality audits is the logarithm of audit fees
(LNAF).3 The M OWN variable captures the degree of
the managerial influence on audit quality and is calcu-
lated as the percentage of equity owned by management.
The AC variable is a dummy variable equal to one for a
firm with AC and zero otherwise. Hypothesis 1 suggests
that the coefficient on M OWN in equation (1) would
be negative and significant (β1 < 0). Consistent with
prior research, because organisation complexity creates
upward fee pressure, it is expected that LNTA, ARINV,
SQSUBS and GROUP will be positively associated with
audit fees (β4 , β5 , β6 , β16 > 0). Since financial distress
enhances audit risk and thus creates upward fee pressure,
LEV and LOSS are expected to be positively associated
with audit fees (β7 , β8 > 0). Moreover, because high-
quality auditors demand higher fee premiums for audit
quality, BIG4 is expected to be positively associated with
audit fees (β11 > 0). On the other hand, because both
good accounting performance and strong cash flows
decrease audit risk, ROA and OCF are predicted to be
negatively associated with audit fees (β9 , β10 < 0). Since
a board’s best practices lead to the demand for high
audit quality, to complement its monitoring role, it is
expected that BDIND, BDSIZE and BDMEET will be
positively associated with audit fees (β12 , β13 , β14 > 0).4
Because auditors in the first year of audit engagement
tend to offer a fee discount to keep clients, FIRST is
expected to be negatively associated with audit fees
(β15 < 0).

C 2018 CPA Australia
Audit Committees and Managerial Influence on Audit Quality
Managerial ownership, compliance with AC best
practices and audit fees
The following regression models are estimated to test
Hypotheses 2 and 3. Specifically, equation (2) is designed
to test the effect of voluntary ACs following best practices
on fee-reducing efforts by management and equation (3)
is developed similarly for mandatory ACs.
LNAF t = β0 + β1 M OWN t−1 + β2 VOL AC t−1
+ β3 ACBP t−1 + β4 M OWN t−1
× VOL AC t−1 + β5 M OWN t−1 × ACBP t−1
+ β6 VOL AC t−1 × ACBP t−1
+ β7 M OWN t−1 × VOL AC t−1
× ACBP t−1 + Controls + ε (2)
LNAFt = β0 + β1 M OWN t−1 + β2 MAN AC t−1
+ β3 ACBPt−1 + β4 M OWN t−1
× MAN AC t−1 + β5 M OWN t−1 × ACBP t−1
+ β6 MAN AC t−1 × ACBP t−1
+ β7 M OWN t−1 × MAN AC t−1 × ACBP t−1
+ Controls + ε (3)
where
VOL AC = a dummy variable equal to one for firms
with voluntary AC and zero otherwise;
MAN AC = a dummy variable equal to one for firms
with mandatory AC and zero otherwise;
ACBP = a dummy variable equal to one for firms
with an AC following all best practices
and zero otherwise.
The VOL AC variable, which represents voluntary AC,
is a dummy variable equal to one for firms with an AC
and assets under two trillion won, and zero otherwise.
The MAN AC variable representing mandatory AC is a
dummy variable equal to one for firms with an AC and
assets over two trillion won. The ACBP variable is in-
cluded to represent the AC following all best practices
regulated in Anglo-Saxon countries. It takes the value
one for a firm whose AC (1) is comprised of only outside
directors, (2) has an accounting or a financial expert,5
and (3) meets more than four times a year. The inter-
action terms, M OWN × ACBP, VOL AC × ACBP and
MAN AC × ACBP are included as control variables to
implement the testing of three-way interaction terms.
Hypotheses 2 and 3 suggest that the coefficients on the
interaction terms, M OWN × VOL AC and M OWN ×
Australian Accounting Review 271
272
Table 2 Descriptive statistics
Panel A: Full sample – Firms with AC versus those without AC

All firms Firms with AC Firms without AC

Variablea Mean Median Std. dev. Mean Median Std. dev. Mean Median Std. dev. Difference in mean
LNAF 11.570 11.396 0.843 12.214 12.181 0.964 11.272 11.225 0.573 44.797∗∗∗
Audit fees (KRW million) 196 89 1661 354 195 1272 123 75 1808
M OWN 0.138 0.076 0.158 0.101 0.031 0.139 0.155 0.116 0.164

Australian Accounting Review

−11.692∗∗∗
AC 0.316 0.000
LNTA 26.742 26.473 1.531 28.004 28.060 1.662 26.157 26.130 1.035 49.890∗∗∗
ARINV 0.255 0.249 0.154 0.215 0.199 0.144 0.273 0.271 0.155 −13.046∗∗∗
SQSUBS 2.029 1.732 2.025 3.154 2.828 2.705 1.508 1.414 1.324 30.066∗∗∗
LEV 0.434 0.436 0.206 0.461 0.484 0.212 0.421 0.419 0.202 6.654∗∗∗
LOSS 0.215 0.000 0.411 0.186 0.000 0.389 0.228 0.000 0.420 −3.532∗∗∗
ROA 0.038 0.036 0.079 0.045 0.039 0.075 0.034 0.035 0.081 4.567∗∗∗
Audit Committees and Managerial Influence on Audit Quality

OCF 0.044 0.042 0.084 0.055 0.051 0.079 0.039 0.038 0.085 6.558∗∗∗
BIG4 0.699 1.000 0.459 0.875 1.000 0.331 0.617 1.000 0.486 19.910∗∗∗
BDIND 0.400 0.333 0.167 0.498 0.500 0.144 0.355 0.333 0.156 32.189∗∗∗
BDSIZE 1.664 1.609 0.367 1.918 1.946 0.321 1.546 1.386 0.325 39.361∗∗∗
BDMEET 2.485 2.485 0.674 2.475 2.398 0.604 2.490 2.485 0.704 −0.746
FIRST 0.150 0.000 0.357 0.137 0.000 0.344 0.157 0.000 0.363 −1.870∗
GROUP 0.289 0.000 0.453 0.603 1.000 0.489 0.143 0.000 0.350 39.467∗∗∗
N 5420 1715 3705

Panel B: Reduced sample – Voluntary AC versus mandatory AC

All AC Voluntary AC Mandatory AC

Variable Mean Median Std. dev. Mean Median Std. dev. Mean Median Std. dev. Difference in mean
LNAF 12.214 12.181 0.964 11.551 11.462 0.640 13.004 12.948 0.633 −47.068∗∗∗
Audit fees (KRW million) 354 195 1272 178 95 1635 565 420 531
M OWN 0.101 0.031 0.139 0.143 0.089 0.158 0.051 0.001 0.090 14.390∗∗∗
ACBP 0.529 1.000 0.499 0.449 0.000 0.498 0.624 1.000 0.485

C
−7.338∗∗∗


N 1715 933 782
a Variable definitions appear below equation (1). ∗∗∗ p < 0.01 and ∗ p < 0.10 (all two-tailed tests).

2018 CPA Australia

B.-J. Park
B.-J. Park Audit Committees and Managerial Influence on Audit Quality

VOL AC × ACBP in equation (2) would be positive and

−0.05∗∗∗

−0.05∗∗∗

−0.05∗∗∗
0.07∗∗∗
0.07∗∗∗
−0.04∗∗∗

−0.06∗∗∗
−0.02∗
−0.03∗
FIRST
significant (β4 , β7 > 0).

−0.01

0.00

0.00
−0.02
0.02
1
0.06∗∗∗

0.04∗∗∗

0.24∗∗∗
0.08∗∗∗
−0.09∗∗∗
−0.13∗∗∗
BDMEET

0.04∗∗
−0.02∗
−0.01
−0.01

0.00
−0.02
−0.01

0.04
Empirical Results

1
Descriptive statistics

0.44∗∗∗
−0.08∗∗∗
0.47∗∗∗
0.46∗∗∗
−0.13∗∗∗
0.31∗∗∗
0.07∗∗∗
−0.07∗∗∗
0.07∗∗∗
0.06∗∗∗
0.21∗∗∗
0.18∗∗∗

0.11∗∗∗
BDSIZE

0.00
1
Panel A of Table 2 provides the descriptive statistics
for the full sample and Panel B shows the descriptive

0.33∗∗∗
−0.10∗∗∗
0.40∗∗∗
0.32∗∗∗
−0.13∗∗∗
0.23∗∗∗

0.05∗∗∗
0.10∗∗∗
0.04∗∗
statistics for the reduced sample. In Panel A, the mean

BDIND

−0.01
−0.02

0.01
−0.03
−0.02
and median of the audit fees are 196 and 89 million

1
won, respectively. The percentages of equity owned by
management (M OWN) and firms with ACs are, on

0.40∗∗∗
−0.13∗∗∗
0.26∗∗∗
0.43∗∗∗
−0.12∗∗∗
0.25∗∗∗
0.04∗∗∗
−0.12∗∗∗
0.11∗∗∗
0.12∗∗∗

0.09∗∗∗
0.16∗∗∗
−0.14∗∗∗
−0.09∗∗∗
BIG4
average, 13.8% and 31.6%, respectively. These results

1
indicate that in the Korean corporate environment,
management can exert significant influence at the

−0.11∗∗∗

0.09∗∗∗
0.14∗∗∗

0.04∗∗∗
−0.17∗∗∗
−0.33∗∗∗
0.50∗∗∗

0.08∗∗∗

−0.12∗∗∗
shareholder meeting and companies without ACs

−0.04∗∗

−0.02∗
OCF

0.00
0.03

−0.01
account for more than half of the full sample. The

1
remaining control variables are qualitatively similar to
prior research using audit data from the US (Abbott and

−0.06∗∗∗

0.06∗∗∗
0.14∗∗∗
0.10∗∗∗

−0.22∗∗∗
−0.53∗∗∗

0.53∗∗∗
0.12∗∗∗

−0.14∗∗∗
0.03∗∗

0.03∗∗

−0.04∗
ROA
Parker 2000; Abbott et al. 2003, 2004; Beck and Mauldin

0.03

−0.03
2014), with the exception of the board-related variables

1
(BDIND, BDSIZE, BDMEET), which are somewhat
−0.08∗∗∗
−0.05∗∗∗
−0.12∗∗∗
−0.04∗∗∗
−0.06∗∗∗
0.32∗∗∗

−0.52∗∗∗
−0.31∗∗∗
−0.12∗∗∗

0.11∗∗∗
smaller.6 Furthermore, Panel A presents comparisons
0.03∗∗

0.04∗
LOSS

0.02
0.03
between firms with an AC and those without an AC.

1
Rows 1–2 indicate that while the mean of audit fees is
significantly higher among firms with ACs, the mean
0.22∗∗∗
−0.25∗∗∗
0.09∗∗∗
0.17∗∗∗
0.18∗∗∗

0.38∗∗∗
−0.33∗∗∗
−0.25∗∗∗

0.07∗∗∗
0.14∗∗∗
0.26∗∗∗
0.10∗∗∗
of managerial ownership is significantly greater among
LEV

−0.01

−0.04
those without them (both p < 0.01). These results
1

suggest that the AC needs to be established to control

0.63∗∗∗

0.38∗∗∗
0.62∗∗∗
−0.30∗∗∗

0.24∗∗∗
0.17∗∗∗
0.22∗∗∗
managerial influence on audit quality. Panel B presents
SQSUBS

−0.03∗∗

−0.05∗∗
0.00
0.00
−0.01
0.02

0.00
comparisons between firms with voluntary and manda-
1

tory ACs. Rows 1–2 indicate that while the mean of audit
fees is significantly higher among firms with mandatory
0.22∗∗∗
−0.04∗∗∗
−0.17∗∗∗
−0.30∗∗∗

−0.33∗∗∗
0.16∗∗∗

0.08∗∗∗

−0.15∗∗∗
−0.12∗∗∗
−0.12∗∗∗
−0.08∗∗∗
−0.06∗∗
ARINV

ACs, the mean of managerial ownership is significantly

0.00

−0.01
greater among those with voluntary ACs (both p <
1

0.01). These results show that the demand for high- < 0.01, ∗∗ p < 0.05 and ∗ p < 0.10 (all two-tailed tests).

quality audits and agency costs is greater in firms with

0.83∗∗∗
−0.23∗∗∗
0.56∗∗∗

−0.36∗∗∗
0.62∗∗∗
0.23∗∗∗

0.37∗∗∗
0.27∗∗∗
0.33∗∗∗
0.04∗
LNTA

0.01
0.01

−0.02
−0.03

voluntary ACs.
1

Table 3 presents the Pearson correlations for the full

sample (upper part) and the reduced sample (shaded
0.52∗∗∗
−0.16∗∗∗

0.24∗∗∗

0.13∗∗∗

0.09∗∗∗
0.11∗∗∗
0.13∗∗∗
−0.06∗∗

lower part). As expected, audit fees (LNAF) are nega-

0.01
0.04
−0.01
0.02

0.00
−0.03
AC

tively correlated with managerial influence (M OWN)

1

and positively correlated with AC existence (AC) and

compliance with AC best practices (ACBP), respectively
−0.25∗∗∗

−0.35∗∗∗

−0.09∗∗∗
−0.28∗∗∗
−0.09∗∗∗

−0.18∗∗∗
−0.12∗∗∗
−0.07∗∗∗
M OWN

−0.07∗∗

0.05∗
−0.04∗

(both p < 0.01). The results for the reduced sample are
−0.03

0.01

0.02
Table 3 Correlation matrix

similar to those for the full sample. Managers with sig-

nificant ownership are shown to have little demand for
−0.36∗∗∗
0.23∗∗∗
0.87∗∗∗
0.29∗∗∗
0.66∗∗∗
0.23∗∗∗

−0.09∗∗∗
0.36∗∗∗
0.27∗∗∗
0.30∗∗∗

high-quality audits to pursue private interests and thus

LNAF

0.03
0.01

−0.02
−0.03

exert downward fee pressure on audit fee pricing. On the

1

other hand, ACs following best practices appear to have

a demand for high-quality audits to protect shareholder
BDMEET
M OWN

SQSUBS
Variable

BDSIZE
BDIND
ARINV

interests and their own reputations, and thus exert up-

ACBP
LNAF

FIRST
LNTA

LOSS

BIG4
ROA

∗∗∗ p
OCF
LEV

ward fee pressure on audit fee pricing.


C 2018 CPA Australia Australian Accounting Review 273
Audit Committees and Managerial Influence on Audit Quality B.-J. Park

Table 4 OLS regression of audit fees on managerial ownership and AC

LNAFt = β0 + β1 M O WNt−1 + β2 ACt−1 + β3 M OWNt−1 × ACt−1 + β4 LNTAt−1 + β5 ARINVt−1 + β6 SQSUBSt−1
+ β7 LEVt−1 + β8 LOSSt−1 + β9 ROAt−1 + β10 OCFt−1 + β11 BIG4t + β12 BDINDt−1 + β13 BDSIZEt−1 (1)
+ β14 BDMEETt−1 + β15 FIRSTt + β16 GROUPt−1 + β17−28 IND + β29−34 YD + ε

Model 1: All firms Model 2: Excluding Model 3: Excluding

mandatory AC voluntary AC

Variablea Pred. sign Estimate (t-value) Estimate (t-value) Estimate (t-value)

M OWN − −0.129 (−2.870)∗∗∗ −0.110 (−2.421)∗∗∗ −0.156 (−3.535)∗∗∗
AC + 0.100 (4.876)∗∗∗ 0.018 (0.745) 0.348 (11.042)∗∗∗
M OWN × AC +/− −0.477 (−5.479)∗∗∗ −0.244 (−2.485)∗∗∗ −0.661 (−3.860)∗∗∗
LNTA + 0.324 (46.358)∗∗∗ 0.278 (33.194)∗∗∗ 0.288 (35.497)∗∗∗
ARINV + 0.216 (4.547)∗∗∗ 0.163 (3.232)∗∗∗ 0.222 (4.365)∗∗∗
SQSUBS + 0.083 (21.489)∗∗∗ 0.071 (13.372)∗∗∗ 0.076 (18.067)∗∗∗
LEV + 0.254 (7.261)∗∗∗ 0.319 (8.480)∗∗∗ 0.252 (6.730)∗∗∗
LOSS + 0.085 (4.860)∗∗∗ 0.074 (3.891)∗∗∗ 0.072 (3.855)∗∗∗
ROA − −0.189 (−1.940)∗ −0.109 (−1.069) −0.325 (−3.092)∗∗∗
OCF − −0.399 (−4.875)∗∗∗ −0.274 (−3.143)∗∗∗ −0.440 (−5.040)∗∗∗
BIG4 + 0.119 (8.352)∗∗∗ 0.150 (10.275)∗∗∗ 0.138 (9.084)∗∗∗
BDIND + 0.190 (4.392)∗∗∗ 0.198 (3.954)∗∗∗ 0.079 (1.664)∗
BDSIZE + 0.149 (7.894)∗∗∗ 0.170 (8.300)∗∗∗ 0.169 (8.521)∗∗∗
BDMEET + 0.018 (1.930)∗ 0.028 (2.855)∗∗∗ 0.029 (2.937)∗∗∗
FIRST − −0.031 (−1.833)∗ −0.024 (−1.351) −0.041 (−2.306)∗∗
GROUP + 0.069 (3.847)∗∗∗ 0.068 (3.531)∗∗∗ 0.045 (2.187)∗∗
IND +/− Yes Yes Yes
YD +/− Yes Yes Yes
Intercept +/− 1.988 (11.104)∗∗∗ 3.140 (14.651)∗∗∗ 2.892 (14.039)∗∗∗
Adjusted R2 74.9% 50.1% 78.3%
F-value 451.337∗∗∗ 130.342∗∗∗ 450.540∗∗∗
N 5420 4638 4487
a Variable definitions appear below equation (1). ∗∗∗ p < 0.01, ∗∗ p < 0.05 and ∗ p < 0.10 (all two-tailed tests).

Managerial ownership, AC form and audit fees
Table 4 presents the results for the full sample, the sam-
ple excluding firms with mandatory ACs and the sample
excluding firms with voluntary ACs, respectively. Specif-
ically, Models 1–3 show the results verifying the effects
of the AC, the voluntary AC and the mandatory AC,
on managerial influence to reduce audit quality by us-
ing companies without an AC as the control group. As
expected, all coefficients for M OWN are negative and
significant (β = −0.129/−0.110/−0.156, all p < 0.01),
whereas the coefficients for AC in Models 1 and 3 are
both positive and significant (β = 0.100/0.348, both
p < 0.01). The results indicate that managers with sig-
nificant ownership exert downward fee pressure, whereas
AC existence is associated with upward fee pressure. Con-
trary to expectations, the coefficients on the interaction
terms, M OWN × AC are all negative and significant
(β = −0.477/−0.244/−0.661, all p < 0.01), suggesting
that managerial influence on audit quality cannot be
mitigated by only the existence of the AC (Beasley 1996;
Menon and Williams 1994; Pucheta-Martı́nez and de
Fuentes 2007). Thus, the results support Hypothesis 1.
Consistent with prior research, the coefficients for
LNTA, ARINV, SQSUBS, LEV, LOSS, BIG4, BDIND,
BDSIZE, BDMEET and GROUP are all positive and
significant, whereas the coefficients for ROA, OCF and
FIRST are all negative and significant.
Managerial ownership, compliance with AC best
practices and audit fees
Table 5 presents the results for the reduced sample with
ACs. Panel A shows how the negative interaction between
managerial ownership and a voluntary AC varies when
the AC follows all best practices after considering com-
panies with mandatory ACs as the control group. Panel
B shows how the negative interaction between manage-
rial ownership and a mandatory AC varies when the
AC follows all best practices after considering compa-
nies with voluntary ACs as the control group. Similar
to the results in Table 4 for the full sample, in Panel A,
all coefficients for M OWN are negative and significant
(β = −0.383/−0.558/−0.082, p < 0.1 or 0.01), and the
coefficient on the interaction term, M OWN × VOL AC
in Model 3 is negative and significant (β = −0.131, p
< 0.05). These results show that managerial influence
to reduce audit quality remains unchanged even in the
companies with voluntary ACs. However, the coefficient
on the three-way interaction term, M OWN × VOL AC
× ACBP is positive and significant (β = 0.884, p <
0.05), suggesting that voluntary AC can effectively limit

274 Australian Accounting Review 

C 2018 CPA Australia
B.-J. Park Audit Committees and Managerial Influence on Audit Quality

Table 5 OLS regression of audit fees on managerial ownership and AC following all best practices
Panel A: Managerial ownership, voluntary AC and compliance with AC best practices

LNAF t = β0 + β1 M OWN t−1 + β2 VOL AC t−1 + β3 ACBP t−1 + β4 M OWN t−1 × VOL AC t−1 + β5 M OWN t−1
(2)
× ACBP t−1 + β6 VOL AC t−1 × ACBP t−1 + β7 M OWN t−1 × VOL AC t−1 × ACBP t−1 + Controls + ε

Model 1 Model 2 Model 3

Variablea Pred. sign Estimate (t-value) Estimate (t-value) Estimate (t-value)

M OWN − −0.383 (−4.528)∗∗∗ −0.558 (−3.171)∗∗∗ −0.082 (−1.659)∗
VOL AC + −0.058 (−1.487) −0.072 (−1.728)∗ 0.001 (0.018)
ACBP +/− 0.037 (1.689)∗ 0.144 (3.883)∗∗∗
M OWN × VOL AC +/− 0.229 (1.177) −0.131 (−2.472)∗∗
M OWN × ACBP +/− −1.036 (−3.006)∗∗∗
VOL AC × ACBP +/− −0.198 (−0.750)
M OWN × VOL AC × ACBP +/− 0.884 (2.291)∗∗
LNTA + 0.372 (25.831)∗∗∗ 0.373 (25.680)∗∗∗ 0.371 (25.308)∗∗∗
ARINV + 0.245 (2.646)∗∗∗ 0.247 (2.660)∗∗∗ 0.236 (2.547)∗∗
SQSUBS + 0.078 (15.418)∗∗∗ 0.079 (15.373)∗∗∗ 0.075 (14.406)∗∗∗
LEV + 0.187 (2.868)∗∗∗ 0.181 (2.786)∗∗∗ 0.192 (2.938)∗∗∗
LOSS + 0.085 (2.594)∗∗ 0.085 (2.606)∗∗∗ 0.078 (2.377)∗∗
ROA − 0.263 (1.414) 0.257 (1.380) 0.247 (1.328)
OCF − −0.821 (−5.264)∗∗∗ −0.824 (−5.283)∗∗∗ −0.823 (−5.291)∗∗∗
BIG4 + 0.109 (3.165)∗∗∗ 0.110 (3.192)∗∗∗ 0.114 (3.321)∗∗∗
BDIND + 0.212 (2.823)∗∗∗ 0.221 (2.950)∗∗∗ 0.220 (2.930)∗∗∗
BDSIZE + 0.057 (1.612) 0.063 (1.784)∗∗ 0.065 (1.860)∗
BDMEET + 0.003 (0.119) 0.003 (0.111) 0.007 (0.366)
FIRST − −0.020 (−0.656) −0.022 (−0.699) −0.020 (−0.665)
GROUP + 0.043 (1.385) 0.048 (1.512) 0.058 (1.841)∗
IND +/− Yes Yes Yes
YD +/− Yes Yes Yes
Intercept +/− 0.961 (2.335)∗∗ 0.954 (2.297)∗∗ 0.898 (2.139)∗∗
Adjusted R2 81.6% 81.6% 81.7%
F-value 212.113∗∗∗ 211.887∗∗∗ 192.661∗∗∗

Panel B: Managerial ownership, mandatory AC and compliance with AC best practices

LNAF t = β0 + β1 M OWN t−1 + β2 MAN AC t−1 + β3 ACBP t−1 + β4 M OWN t−1 × MAN AC t−1 + β5 M OWN t−1
(3)
× ACBP t−1 + β6 MAN AC t−1 × ACBP t−1 + β7 M OWN t−1 × MAN AC t−1 × ACBP t−1 + Controls + ε

Model 1 Model 2 Model 3

Variable Pred. sign Estimate (t-value) Estimate (t-value) Estimate (t-value)

M OWN − −0.423 (−5.059)∗∗∗ −0.366 (−3.941)∗∗∗ −0.278 (−2.110)∗∗
MAN AC + 0.066 (1.707)∗ 0.083 (1.977)∗∗ 0.017 (0.327)
ACBP +/− 0.034 (1.551) 0.014 (0.362)
M OWN × MAN AC +/− −0.244 (−1.260) 0.145 (0.552)
M OWN × ACBP +/− −0.147 (−0.838)
MAN AC × ACBP +/− 0.118 (2.239)∗∗
M OWN × MAN AC × ACBP +/− −0.803 (−2.091)∗∗
Controls +/− Yes Yes Yes
Adjusted R2 81.8% 81.8% 81.9%
F-value 215.465∗∗∗ 215.338∗∗∗ 195.399∗∗∗
a Variable definitions appear below equations (2) and (3). ∗∗∗ p < 0.01, ∗∗ p < 0.05 and ∗ p < 0.10 (all two-tailed tests).

managerial influence on audit quality when following all
best practices.7 Similar to Panel A, in Panel B, all coef-
ficients for M OWN are negative and significant (β =
−0.423/−0.366/−0.278, p < 0.05 or 0.01), and the coef-
ficients on the interaction term, M OWN × MAN AC in
Models 2 and 3 are not significant, suggesting that man-
agerial influence on audit quality is not controlled by
mandatory ACs. Moreover, the coefficient on the three-
way interaction term, M OWN × MAN AC × ACBP,
is negative and significant (β = −0.803, p < 0.05),
suggesting that voluntary AC, rather than mandatory
AC, is more effective in monitoring management when
following all best practices. The results support Hypoth-
esis 3, but not Hypothesis 2.


C 2018 CPA Australia Australian Accounting Review 275
Audit Committees and Managerial Influence on Audit Quality B.-J. Park

Table 6 Sensitivity tests

Industry effects Chaebol group effects Recession effects

Chemical Enterprise services Chaebol Non-chaebol Recession Non-recession

estimate estimate estimate estimate estimate estimate
Variablea (t-value) (t-value) (t-value) (t-value) (t-value) (t-value)
M OWN −0.236 −0.043 −0.130 −0.568 −0.840 −0.283
(−1.900)∗ (−2.159)∗∗ (−2.145)∗∗ (−0.390) (−2.361)∗∗ (−1.959)∗
M OWN × VOL AC −0.208 −0.077 −1.625 0.381 0.618 −0.624
(−0.689) (−0.256) (−4.660)∗∗∗ (0.261) (1.447) (−1.910)∗
M OWN × VOL AC × ACBP 0.783 0.632 1.983 0.822 0.701 0.982
(1.781)∗ (1.703)∗ (4.316)∗∗∗ (0.420) (1.725)∗ (2.023)∗∗
Controls Yes Yes Yes Yes Yes Yes
Adjusted R2 81.3% 82.9% 81.4% 57.2% 85.5% 80.7%
F-value 155.329∗∗∗ 192.050∗∗∗ 116.996∗∗∗ 24.256∗∗∗ 82.603∗∗∗ 147.002∗∗∗
N 1404 1374 680 1035 457 1258

In industry effects, higher frequencies are observed in Chemical (18.1%) and Enterprise services (19.9%). a Variable definitions appear
below equation (2). ∗∗∗ p < 0.01, ∗∗ p < 0.05 and ∗ p < 0.10 (all two-tailed tests).

Table 6 provides the results estimating equation (2) to
test how the effects of voluntary ACs following best prac-
tices on the fee-reducing efforts of management depend
on economic conditions. The results for industry effects
(excluding industries with the largest and second largest
frequency from the reduced sample) show that the ex-
perimental variables (M OWN × VOL AC × ACBP) are
still maintained (β = 0.783/0.632, both p < 0.1). The
results for chaebol group effects show that managerial
influence (M OWN) on audit quality is greater among
chaebol firms, but such managerial influence is effectively
controlled by voluntary ACs following best practices
(β = 1.983, p < 0.01). The results suggest that voluntary
AC should follow all best practices to control the chaebol
group’s managerial influence. Following NBER (2010),
this study defines the 2007–9 period as recessionary. The
results for the recession effects show that managerial
influence on audit quality is significantly limited by vol-
untary ACs following best practices for recessionary and
non-recessionary times (β = 0.701/0.982, p < 0.1 and
0.05), indicating that voluntary AC following best prac-
tices is effective in monitoring management regardless
of recession.
AC effectiveness and the demand for high-quality
audits
To ensure that audit fees are legitimate as a proxy for
AC demands for high-quality audits, Table 7 provides
the results of further analyses. Discretionary accruals are
a tool for managers to attain opportunistic goals (Gul
et al. 2003; Healy and Palepu 1993; Subramanyam 1996).
Managers could face significant dismissal risk and com-
pensation reduction if they report a financial loss and
declining earnings, and thus exert opportunistic earn-
ings management to avoid these issues (Boone et al.
2012; Park 2015, 2017). The following logistic regression
models are used to investigate how voluntary ACs follow-
ing best practices affect income-increasing discretionary
accruals used for loss avoidance (LA) and earnings de-
clining avoidance (EDA).
LAt−1 (EDAt−1 ) = β0 + β1 M OWN t−1 + β2 VOL AC t−1
+ β3 ACBP t−1 + β4 M OWN t−1
× VOL AC t−1 + β5 M OWN t−1
× ACBP t−1 + β6 VOL AC t−1
× ACBP t−1 + β7 M OWN t−1
× VOL AC t−1 × ACBP t−1
+ β8 LNTAt−1 + β9 LIQt−1
+ β10 GRW t−1 + β11 MBt−1
+ β12 ROAt−1 + β13 LEV t−1
+ β14 LOSSt−1 + β15 BDINDt−1
+ β16−27 IND + β28−33 YD + ε (4)
The dependent variable, LA, is a dummy variable
equal to one if the firm’s pre-managed earnings (net
income deflated by total assets in the prior fiscal year
– discretionary accruals) fall short of zero by less than
5% of total assets8 and zero otherwise. The dependent
variable, EDA, is a dummy variable equal to one if the
firm’s pre-managed earnings fall short of earnings in the
previous year by less than 5% of total assets and zero
otherwise. Discretionary accruals are estimated by the
performance-adjusted model (Kothari et al. 2005).9 LIQ
refers to current assets scaled by current liabilities. MB
is the market value scaled by the book value, and GRW
is the growth rate in sales over the prior year.
If voluntary ACs following best practices are effective
in constraining managers’ opportunistic behaviours,

276 Australian Accounting Review 

C 2018 CPA Australia
B.-J. Park Audit Committees and Managerial Influence on Audit Quality

Table 7 AC effectiveness and AC demand for high-quality audits

Panel A: Effect of AC on attaining opportunistic earnings goals

LA EDA

Variablea Pred. sign Estimate (Wald) Estimate (Wald)

M OWN + 0.529 (3.140)∗ 0.943 (3.369)∗
VOL AC − −0.328 (0.992) −0.918 (6.543)∗∗
ACBP − −0.718 (9.159)∗∗∗ −0.716 (7.580)∗
M OWN × VOL AC +/− 0.882 (0.294) 3.022 (2.960)∗
M OWN × ACBP +/− 1.819 (0.708) 2.881 (1.596)
VOL AC × ACBP +/− 0.783 (5.255)∗∗ 1.438 (15.122)∗∗∗
M OWN × VOL AC × ACBP − −2.861 (3.364)∗ −5.458 (4.573)∗∗
LNTA +/− −0.050 (0.366) −0.120 (1.952)
LIQ − 0.054 (2.434) 0.035 (0.845)
GRW − 0.013 (0.004) 0.279 (1.489)
MB + 0.117 (3.115)∗ 0.049 (0.762)
ROA − −3.467 (5.762)∗∗ 1.704 (2.154)
LEV + 1.751 (14.802)∗∗∗ 0.576 (1.412)
LOSS − −1.916 (48.003)∗∗∗ −0.630 (6.070)∗∗
BDIND − 0.443 (0.787) 0.572 (1.175)
IND +/− Yes Yes
YD +/− Yes Yes
Intercept +/− −0.180 (0.005) 1.127 (0.192)
Nagelkerke R2 11.8% 6.8%
χ2 126.331∗∗∗ 66.189∗∗∗
N 1715 1715

Panel B: Sensitivity analyses of subsamples with opportunistic incentives

LA Non-LA EDA Non-EDA

Estimate Estimate Estimate Estimate
Variable Pred. sign (t-value) (t-value) (t-value) (t-value)
M OWN − −0.413 −0.188 0.167 −0.214
(−1.772)∗ (−1.763)∗ (0.223) (−1.900)∗
M OWN × VOL AC +/− 0.457 −0.316 −0.872 −0.015
(0.974) (−1.033) (−0.960) (−0.058)
M OWN × VOL AC × ACBP +/− −0.550 1.094 1.277 0.723
(−0.795) (2.461)∗∗ (0.970) (1.844)∗
Controls +/− Yes Yes Yes Yes
Adjusted R2 88.1% 82.3% 73.5% 84.8%
F-value 47.760∗∗∗ 159.786∗∗∗ 14.066∗∗∗ 198.681∗∗∗
N 298 1417 244 1471
a Variable definitions appear below equation (1). ∗∗∗ p < 0.01, ∗∗ p < 0.05 and ∗ p < 0.10 (all two-tailed tests).

the coefficients on the three-way interaction term in
equation (4) will be negative and significant (β7 < 0).
Panel A shows that the coefficients on the three-way
interaction term, M OWN × VOL AC × ACBP, are
negative and significant for both LA and EDA (β =
−2.861/−5.458, p < 0.1 and 0.05). If voluntary ACs
following best practices demand high-quality audits to
monitor management, the coefficients on the three-way
interaction term in equation (2) will be positive and
significant in firms whose managers’ opportunistic
behaviours are effectively controlled by ACs (β7 > 0).
Panel B shows that the coefficients on the three-way
interaction term, M OWN × VOL AC × ACBP, are
positive and significant for two subsamples of non-LA
and non-EDA (β = 1.094/0.723, p < 0.05 and 0.1),
suggesting that effective ACs have a greater demand for
high-quality audits to control manager opportunistic
behaviour, resulting in higher audit fees.
Conclusions
In Korea, only listed companies with assets over two tril-
lion won are required to comply with regulations for
the formation and composition of the AC, and thus
companies with mandatory ACs coexist with those with
voluntary ACs. Furthermore, in the Korean corporate
environment where ownership is almost not separated
from control, management is allowed to influence the
selection and compensation of auditors. These settings
have amplified doubts about whether the AC can miti-
gate managerial influence on audit quality. The purpose


C 2018 CPA Australia Australian Accounting Review 277
Audit Committees and Managerial Influence on Audit Quality
of this study is to shed light on the optimal combina-
tion of AC form and compliance with AC best practice
guidelines to control managerial influence to reduce au-
dit quality. The results show that there is a negative as-
sociation between managerial ownership and audit fees
but this association does not vary with the AC form.
However, this negative association becomes positive
when voluntary AC follows all best practices. The find-
ings suggest that while managers with significant owner-
ship continue their efforts to reduce audit quality in or-
der to elude external controls, voluntary ACs can control
such efforts when following best practices. Consequently,
voluntary ACs are more effective in controlling man-
agement when following best practices than mandatory
ACs, suggesting the legitimacy of the voluntary approach
to corporate governance. Moreover, voluntary ACs fol-
lowing best practices could mitigate managerial influ-
ence on fee reductions in chaebol firms. The moderating
effects of voluntary ACs on managerial influence remain
the same regardless of recessionary times. In further anal-
yses, effective ACs are shown to have increased demand
for high-quality audits, resulting in higher audit fees.
The findings contribute to the growing debate on the
adoption of corporate governance elements across coun-
tries in two ways. First, this study provides empirical
evidence of how the combination of AC form and com-
pliance with AC best practices moderates managerial
influence on audit quality. No previous study has proven
that the voluntary approach to corporate governance is
more effective than the mandatory approach. Regula-
tors need to seek incentives that encourage companies to
follow AC best practices. Second, this study has impli-
cations for regulators in countries where AC guidelines
are mandatory. Regulators need to develop safety de-
vices that strictly review auditing and limit managerial
influence on audit quality because a mandatory AC is
not effective enough to control managers’ opportunistic
behaviours. This study thus provides interesting insights
that can be applicable to capital markets with manda-
tory AC requirements (e.g., the Member States of the
European Union, the US, the UK, Austria and China) as
well as those with no mandatory AC requirements (e.g.,
Brazil, Japan, Norway, Iran, Italy, and Switzerland).
Acknowledgement
This work was supported by the Soonchunhyang Uni-
versity Research Fund.
Notes
1 Abbott et al. (2003) argue that external auditors’ selection could
be affected, directly or indirectly, by both management and con-
trolling shareholders regardless of the proportion of their shares.
2 The groups have been designated by the Korean Fair Trade Com-
mission (KFTC) since 1987 to protect a disturbance of market
278 Australian Accounting Review
B.-J. Park
order due to the excessive concentration of economic power.
They are prevented from cross-shareholding and mutual debt
guarantee among their affiliates.
3 In Korea, audit fees are determined based on financial and non-
financial data in the prior fiscal year as these should be confirmed
within four months of the beginning of the fiscal year (KAEASC).
4 Vicknair et al. (1993) and Beasley and Salterio (2001) argue that
board characteristics are closely related to audit committee char-
acteristics.
5 Accounting experts are limited to a CPA, certified tax accountant
(CTA) and principle accounting officers of other companies or
tax officers, whereas financial experts are limited to a CFO or
other officers with experience in securities, banks or insurance.
6 On average, the boards are composed of 5.6 members and the
meeting frequency is 15.2 times per year.
7 The results of the analyses for the KCC’s criterion that requires
including outside directors amounting to more than two-thirds
of the total members are also similar to those for ACBP, and
thus the KCC needs to recommend that voluntary ACs follow the
current mandatory requirements to enhance its effectiveness.
8 Managers are likely to rely on income-increasing accruals within
5% of total assets to attain their earnings goals (Boone et al. 2012;
Dechow et al. 1995; Park 2015, 2017).
9 Residuals (ɛ) in the following equation are defined as discre-
tionary accruals and the industries with fewer than five observa-
tions each year are excluded from the sample:
TA t /A t−1 = α0 (1/A t−1 ) + α1 (RE Vt − AR t )/A t−1
+ α2 PP E t /A t−1 + α3 ROA t + ε
where TAt refers to total accruals (net income – operating cash
flows) in year t, At–1 denotes the total assets in year t–1, REVt is
the change in sales in year t, ARt is the change in receivables in
year t, PPEt is gross property, plant and equipment in year t, and
ROAt denotes net income before taxes deflated by total assets in
year t–1.
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