회계법인의 손해배상준비금 적립 비율과 보수적 성향 간의 관계

After the full-fledged implementation of the Securities Class Actions in 2007, the number of litigations against accounting firms has increased every year. In 2010, there were 4 lawsuits against accounting firms. However, there were 22 lawsuits in 2011 and 31 lawsuits in 2012. Therefore, accounting firms reserve funds and purchase accountants professional liability insurance for preparing the litigation costs and audit their clients more conservatively for reducing litigation risks. There are two types of mandatory regulations for preparing litigation costs for accounting firms. First, every year the accounting firm should reserve at minimum of 2% of total profits, within the firm. Second, the accounting firm should accumulate a joint fund, at minimum of 4% of audit serviced profits, within the Association of Korean Institute of Certified Public Accountant (KICPA) or purchase accountants professional liability insurance. According to FSS reports in 2012, the total amount of reserve funds within accounting firms is 178.6 billion won and has increased by 7.3% in comparison to 2011. The total amount of joint funds within the Association of KICPA is 38.6 billion won and it is also increased by 4.6% since the previous year. Even though the total contingency fee for litigation preparation has increased since 2011, it does not mean that, all accounting firms observe those regulations. According to our collected data from 2005 to 2010, only 45% of accounting firms accumulate at minimum of 2% of total profits for the reserve fund within the firm, and 15% of accounting firms accumulate at minimum of 4% of audit serviced profits as joint funds within Association of KICPA. FSS requires to prepare the litigation costs to accounting firms for reducing the damage of accounting firms' clients and to increase the responsibility of accounting firms. However, most accounting firms do not reserve or accumulate joint funds as much as the mandatory ratio. Also, through FSS reports, we know that most accounting firms prefer to prepare litigation costs by accumulating the reserve within the firm. This means that an accounting firm being sued would pay for the litigation cost by using the reserve fund. Therefore, creating a dependency on the reserve accumulation, accounting firms differ in their ability to pay litigation costs. This paper investigates whether the degree of preparing litigation costs, especially the reserve fund within accounting firms, affects the auditors’ level of conservatism. We sample manufacturing companies (in total 4,748) listed in the KOSPI and KOSDAQ stock market from 2005 to 2010. We use the conservatism measure developed by Penman and Zhang (2002). To reduce an endogenous problem between the reserve fund and the accounting firm’s characteristic, we do 2SLS and the differencing estimation. This empirical results show that accounting firms with a high ratio of reserve fund enhances the level of auditing conservatism of their clients, more than accounting firms with a low ratio of reserve fund. Through this result, we know that accounting firms with deep pockets audit their clients more conservatively than the accounting firms without deep pockets. However, if the reserve is 10% over the last 3 years’ average total profits, an additional 2% contribution to the reserve fund does not affect or enhance the auditor’s conservatism. Additionally, we separate the group of accounting firms dependent on the type of organization, instead of the size of accounting firms. We find that the relationship between reserve fund and conservatism of accounting firms is strongly positive in one-firm type of accounting firms. However, accounting firms, which do not belong to one-firm type, we can't find any strong relation with reserve fund and accounting firm's conservatism. From this result, we know that the type of organization of accounting firms is also an important factor affecting the relationship between reserve fund and conservatism of accounting firms. This study contributes to the literature in several ways. First, we use the accounting firm’s financial statement to an accounting firms’ conservatism. Second, we provide evidence of the importance of having a reserved fund in accounting firms. Third, prior literature examine that the Big4 are more conservative than Non-Big 4. However, we set a new standard to measure conservatism by using the reserved fund within the firms instead of using the size of accounting firm.