Rank-Specific Audit Hour Dynamics: Managerial Stock Ownership and Fraud-Induced Moderation

Abstract

This study examines the impact of managerial stock ownership on audit effort, focusing specifically on rank-specific audit hours. We analyze data on rank-specific audit hours from Korean accounting firms, as mandated since 2014. Additionally, we explore whether the relationship between managerial stock ownership and rank-specific audit hours is moderated, particularly in response to increased corporate control risk resulting from fraud incidents. The key empirical findings are as follows. Firstly, increased managerial stock ownership is significantly associated with reduced audit hours for partners and senior auditors (including total audit hours). Second, the disclosure of a firm’s fraud case moderates the relationship between managerial ownership and senior auditor audit hours. These findings underscore how heightened managerial stock ownership mitigates agency problems, thereby lowering inherent risk evaluation and subsequent audit effort. However, fraud disclosures elevate the assessment of internal control risk, leading to greater audit efforts by senior auditors. This study holds significance due to its practical implications for firms grappling with agency issues. It confirms that management’s stock ownership influences auditor risk assessment and planning, utilizing unique rank-specific audit hour data. Moreover, the study distinguishes itsel f by highlighting auditors’ speci fic reactions to firm fraud, enriching our understanding of the i mpact of managerial stock ownership on auditors within the framework of the NEW ISA (International Standards on Auditing), which employs a risk-based methodology. © 2024, Korean Accounting Association. All rights reserved.