earticle

영어

We study the effects of a peculiar type of expenses, catering expenses, also known as entertainment costs using firm level data for firms listed on and delisted from KOSPI during the period 1991 to 2007. These firm level data are obtained from databases of KIS-Value, Korea Information Services and Maegyung Corporate Annals. Specifically, we focus on the level of expenditure with respect to default risks of firms over time and ex-post their defaults after controlling many firm specific financial and non-financial factors, including ROA, firm size, the length of listing period, turnover and the shareholding of the primary owner. For this, we developed default risk prediction models using Korean firm level data and actual defaults to estimate the default risks of firms over the period, in our study of catering expenses, which are sometimes used as a barometer of unethical usage of expenses, to make best of illegal loopholes in manipulating taxable income and other discretionary usage in various business activities. From the study, we find that (1) the catering expenses, measured as a ratio to sales, do not have any statistically significant relationship with the reputation of auditors, proxied by big 4 auditing firms, which are the biggest in size and primarily associated with global auditing and consulting firms like Ernest Young, KPMG, PwC and Deloitte. The results are same for the interactive terms with their audit opinions that (2) they increase with bad audit opinions, implying firms try hard to improve the results of audit using catering expenses, that (3) the predicted default risks increase the expenditure of the expense while the defaults actually incurred decrease such spending. And the results are same for their corresponding interactive terms with their audit opinions, and that (4) the expenses increase with new auditors, implying that firms cater their auditors for better audit opinions. The catering expenses might have been used to influence accounting audit in Korea, especially by firms with new auditors, high default risks and inappropriate audit opinions in the previous year without any different effects for big 4 auditors. This is compared with non-big 4 auditors to improve possibly bad audit reports especially for high default risk firms but not for actually defaulted firms which decrease such expenses.