Content area
Full Text
1. Introduction
Listed companies in Korea are required to prepare and disclose consolidated financial statements in accordance with the International Financial Reporting Standards (IFRS) as of 2011. The most remarkable feature in the IFRS is that it defines consolidated financial statements as the primary financial statements of a controlling company holding one or more subsidiaries; this is a major change compared to the previous accounting standards. Following IFRS adoption, listed companies are required to prepare and disclose consolidated financial statements not only for annual reports but also for quarterly and semi-annual financial reports. For financial statement users, IFRS adoption brought a fundamental shift in the notion of consolidated financial statements as a source of primary information, in addition to non-consolidated (i.e. individual) financial statements. In the past, financial analysts announced earnings forecasts based on non-consolidated financial statements. However, now that financial analysts must use consolidated financial statements to forecast earnings because of the implementation of the IFRS, consolidated financial statements have become critical for future investment decision-making.
The major advantage of consolidated financial statements is that they deliver systematic information on the financial condition and performance of an economic entity, which consists of a controlling company and its subsidiaries. These are regarded as one economic entity based on their interdependent and organic relationship, although they are legally separate, independent entities. Prior to implementation of the IFRS, users of financial statements in Korea paid more attention to non-consolidated financial statements than to consolidated financial statements, treating the former as primary financial statements. Research on consolidated financial statements has therefore been focused on either their usefulness or their audit quality. In relation to their usefulness, prior studies have shown that consolidated financial statements present incrementally useful information, in addition to that provided by non-consolidated financial statements. This information is based on trade volume or analysis of excess returns and value relevance (Chun, 1994; Hwang, 1995; Kim et al., 2001; Kim and Na, 2002; Shin, 2008; Park and Ji, 2009; Ji et al., 2010).
In preparing consolidated financial statements, the principal auditors are responsible for direction, supervision and performance of the consolidated financial statements audit in accordance with the revised Korean Auditing Standard 600 “Audits of Group Financial Statements” (including the Work of Subsidiary Auditors) in...