Does General Counsels mitigate Opportunistic Behaviors when Auditor Replacement?

When new auditors join a firm, their limited understanding of the firm’s operations exacerbates information asymmetry, thereby incentivizing managers to engage in opportunistic behavior. To address this problem, the general counsel (GC) system has been implemented with the purpose of improving firms’ compliance with regulations, promoting social responsibility, and ensuring ethical management practices. In this study, our objective is to empirically examine the effectiveness of GCs in mitigating managerial incentives for opportunistic behavior during the initial year of auditor replacement. To achieve this, we analyze a sample of 797 firm-year observations from Korean listed firms between the years 2018 and 2020. We employ discretionary accruals and the difference between preliminary and reported earnings as proxies for managers’ opportunistic behavior. Our findings demonstrate a significant reduction in opportunistic behavior by managers following the introduction of GCs during the first year of auditor replacement. The contributions of this paper are as follows. First, this study empirically examines the effect of introducing GCs which has not been conducted in prior literature. Second, this study expands the research on opportunistic incentives. Third, this study provides policy implications as it investigates the role of GCs in monitoring and alleviating opportunistic behavior.