오류수정 보고실태에 관한 연구

Prior period errors are omissions from, and misstatements in, the entity’s financial statements for one or more prior periods arising from a failure to use, or misuse of, reliable information. Such errors include the effects of mathematical mistakes, mistakes in applying accounting policies, oversights or misinterpretations of facts, and fraud. Korean accounting standards for prior period error adjustments have been changed frequently. Prior to 1996 all prior period errors were adjusted to retained earnings. As prior research shows that management frequently utilizes prior period errors to manipulate earnings, the standard setter revised accounting standards for prior period errors in the way that prior period errors are reflected in the income statement for 1997-1998 fiscal year. However, the accounting standards for prior period errors revised in 1999 required that prior period errors be adjusted to retained earnings, except for income-tax-related error corrections that were recognized in the income statement. In 2001, the newly organized standard setter, the Korean Accounting Standard Board (KASB), issued the standards for accounting changes and error corrections (The KASB Statement No. 1) which requires a two-fold accounting treatment for prior period errors. The Statement requires that prior period errors be reported as income or loss from continuing operations in the income statement. However, if prior period errors is material, it should be adjusted to retained earnings. In this case, if financial statements for prior periods are presented for the comparison purpose, the prior period financial statements should be restated. Most of previous studies on prior period errors have focused on whether there are significant differences in stock market reactions to the prior period error corrections across accounting methods firms use or whether managers use prior period errors as an earnings management tool. However, there has been little basic research on the reporting patterns of prior period errors in practice. First, regulators need to know how reporting patterns of prior period errors have been changed as a result of revision of accounting standard. In addition, it is important for regulators and auditors to understand the frequency, magnitudes and nature of accounting errors over different industries and stock exchanges. This study descriptively analyzes the prior period error adjustments reporting patterns by Korean firms. More specifically, we examine not only the pervasiveness of accounting errors but also their nature through yearly analysis, industry analysis and comparative analysis over two different stock exchanges. Our sample consists of 3,079 non-financial firms listed on the KSE or KOSDAQ during 1997-2003. The regulatory environment and accounting practice for firms in financial industries are much more restrictive than those for firms in non-financial industries. Thus, we exclude financial institutions. Our major findings are as follows. First, the frequency and amount of prior period adjustment losses are much higher and larger than those of prior period adjustment gains, which implies that managers may use prior period adjustments in managing their earnings. However, the frequency has declined since 2000, which is consistent with improved reliability of financial statements after the economic crisis. We find that revenue-related errors occur most frequently and their amounts are the largest among the accounting error items. In addition, it turns out that the errors related to investments are growing every year mainly due to more complex accounting rules. An industry analysis shows that the frequency of accounting errors in construction industry is twice as high as those of other industries, implying discretionary estimation of percentage of completion by managers in the process of revenue recognition. On the other hand, service industry shows the lowest frequency and smallest amounts of accounting errors mainly due to its simple business nature. The results suggest a significant variation across industries in relation to occurrence of accounting errors. Unlike our expectation, accounting errors occur more frequently in KSE-listed firms than KOSDAQ-listed firms. In addition, we break down the accounting errors into two groups, core items and noncore items, depending on their nature and test whether managers consider the nature of accounting errors in judging the fundamental errors to choose the reporting method under K-SFAS No.1. It is found that managers' judgements are mainly affected by the magnitude of accounting error rather than the nature of the accounting error. We expect that our findings may provide useful implications for auditors and regulators.