Author(s): Hyun Min Oh, Sam Bock Park, Heung Joo Jeon
This study examines the association between corporate international diversification and audit quality and the extent to which the association is affected by corporate governance. Specifically, this paper investigates whether auditors put in additional hours in accordance with the level of corporate international diversification and charge for audit fees as a result of additional effort. In addition, this paper investigates the effects of corporate governance on the association between corporate international diversification and audit quality measure. This study uses the audit hours and audit fees as our audit quality measure and also use the corporate governance score of KCGS (Korean Corporate Governance Service) as corporate governance quality measure. The empirical results of this study are as follows. The relation between corporate international diversification and audit hours are statistically significant and positive on foreign sales ratio and foreign assets ratio, respectively. Also, the relation between corporate international diversification and audit fees are statistically significant and positive on foreign sales ratio and are statistically not significant and positive on foreign assets ratio, respectively. Thus, this paper concludes that the effects of corporate international diversification on audit hours and audit fees increases for firms with higher international diversification. More corporate international diversification increase audit hours and audit fees. The effects of corporate international diversification and corporate governance on audit quality were found to increase with good corporate governance. Thus, this paper concludes that the effects of corporate international diversification and corporate governance on audit hours and audit fees increase for firms with superior corporate governance. When corporate governance is good, more corporate international diversification increases audit hours and audit fees. The results show that corporate governance can be interpreted in terms of investment that enables sustainable growth by improving corporate image and brand value in relation to international diversification, audit hours and audit fees. This study contributes to accounting research as it directly tests the effects of corporate governance on the association between corporate international diversification and audit quality in Korea, providing empirical support that good corporate governance increases the audit hours and audit fees. In addition, this study is meaningful as it presents the empirical evidence that corporate governance presents not only cost in perspective of the capital market such as the increment in costs of capital, the reduction of corporate values, but also additional costs according to the increment in audit risk.