The Relevance between Managerial Overconfidence and Audit Quality Following the Introduction of the New External Audit Law

[Purpose] The 2018 implementation of the New External Audit Law is expected to enhance the reliability of financial statements and prevent corporate accounting fraud by expanding the authority of external auditors and increasing the rigor of audit procedures, thereby limiting management’s intervention. This study aims to compare and analyze the relationship between managerial overconfidence and audit quality before and after the introduction of the New External Audit Law to determine whether there is a significant difference. [Methodology] In this study, the research sample was divided into two periods：Research Sample_1 (2015－2017), representing the period before the introduction of the New External Audit Law, and Research Sample_2 (2020－2022), representing the period after its introduction. A multiple regression analysis was conducted using each sample to verify the relationship between managerial overconfidence and audit quality. [Findings] Before the implementation of the New External Audit Law (2015－2017), it was found that the higher the level of managerial overconfidence, the lower the audit quality. However, after the introduction of the New External Audit Law (2020－2022), managerial overconfidence no longer had a significant impact on audit quality. According to the findings of this study, the enhanced independence of external auditors and the increased authority to maintain the accuracy of financial statements following the implementation of the New External Audit Law appear to have reduced instances where managers interfere with the audit process or disrupt it due to overconfidence, thus mitigating the negative impact on audit quality. [Implications] This study differentiates itself from prior research by comparing and analyzing the relationship between managerial overconfidence and audit quality before and after the introduction of the New External Audit Law in 2018. It provides insights into the effectiveness of the new regulation from the perspective of this relationship. The findings suggest significant policy implications, as they highlight how the law’s implementation has strengthened external auditors’ independence and reduced the negative impact of managerial overconfidence on audit quality. This contributes to the broader understanding of regulatory changes in corporate governance and their role in improving financial reporting reliability.