Investment in Internal Auditing and Governance Characteristics: Evidence from S. Korea

• In Event: Corporate Governance

Abstract

In 2002, the Financial Supervisory Service of Korea released the set of regulations in the spirit of the U.S. SOX to enhance transparency over Korean accounting system. In the following year, Korean Congress amended internal control related regulations in the External Audit of Stock Companies Act, which mandate firms to implement and maintain internal control rules and regulations. This study examines governance characteristics associated with investment in internal auditing. Examining 3,775 firm-years in Korea between 2009 and 2012, we find that ownership of the largest shareholder, the number of board directors, proportion of outside directors to total directors, and external audit fees are positively associated with investment in internal auditing. These results indicate companies with higher demand for monitoring are more likely to invest in internal auditing to resolve the agency conflicts. Our study adds to the extant literature on firm characteristics associated with investment in internal auditing, and also contributes to the literature by expanding the scope of research on executive compensation to the focus of internal auditors.

Authors

• Ho-Young Lee, Yonsei University

• Jin Wook Kim, Konkuk University

• Hyun Young Park, Yonsei University