An analysis of audit effort/hour demand based on shareholder ownership power

Abstract

Purpose

Audit hour reporting is rare internationally. Thus, to what extent shareholders have the power to influence audit effort/hour demand is a question left unanswered. This study aims to use unique South Korean data to determine whether the increasing power of the largest foreign/domestic shareholders and blockholders can influence audit hour demand.

Design/methodology/approach

In this study ordinary least squares (OLS) regression analysis is conducted using a sample of Korean listed firms over the 2004–2018 sample period.

Findings

The results show: as the percentage equity holding of the largest foreign shareholder and blockholder (>5%) increases, audit hour demand increases. As the shareholding of the largest domestic shareholder increases, audit hour demanded decreases. The association between audit fees/hours is not qualitatively indifferent, after controlling for the audit fee premium effect. Furthermore, the largest foreign shareholder is shown to demand increasingly higher levels of audit hours from Big4 auditors, relative to NonBig4. All results are consistent with audit demand theory.

Originality/value

Whilst previous studies offer audit fee/risk interpretations, this study extends the literature by developing a framework to explain why audit hour demands differ for specific groups. Because audit hour information is rare internationally, the study has important policy implications.

Citation

Mali, D. and Lim, H. (2023), "An analysis of audit effort/hour demand based on shareholder ownership power", Asian Review of Accounting, Vol. 31 No. 4, pp. 583-611. https://doi.org/10.1108/ARA-10-2022-0248