تاثیر اتحادیه های کارگری بر انتخاب حسابرس خارجی و حوزه حسابرسی The impact of labour unions on external auditor selection and audit scope: evidence from the Korean market

I. Introduction Agency costs occur where there is a separation between managers and owners (Jensen and Meckling 1976). One of the ways to reduce the agency costs is to hire a high-quality auditor who provides quality assurance service for financial statements prepared by management. We argue that labour unions may play a role that pressures management into selecting high-quality auditors and providing quality assurance service. In this regard, labour unions play a monitoring role by reducing agency costs, which is a positive role of unions. However, there has been little empirical evidence to support this argument. Prior studies heavily rely on a dark side of labour unions, where unions are regarded as a rent-seeker and thereby decrease the firm’s value (Ruback and Zimmerman 1984; Connolly, Hirsch, and Hirschey 1986; Hirsch 1991). The purpose of this study is to fill in the void in the literature by providing empirical evidence that unions represent a monitoring mechanism. Specifically, we test whether labour unions demand high-quality audits. A main function of unions is to protect employee rights and demand the improvement of employee welfare. Negotiating wages with management is one of its most important tasks. Unions rely on financial information in meetings with management over negotiating wage increases. For that purpose, unions make every effort to acquire highly accurate and transparent financial information representing the reality of the business (Kleiner and Bouillon 1988; Appelbaum and Hunter 2007; Leung, Li, and Rui 2009). In addition, unions demand high-quality financial reporting in order to be able to monitor management effectively and secure their jobs against bankruptcies resulting from deteriorating financial conditions. Contrariwise, management has incentives to hide inside information on resources available to the firm or ‘true’ operating income from unions (Bova 2013). This is because better informed unions will have a better position in wage negotiations. Management tends to consider unions rent-seekers instead of value creators (Ruback and Zimmerman 1984; Connolly, Hirsch, and Hirschey 1986; Hirsch 1991). Thus, if the firm performs well and consequently unions’ demand for wage increases is expected to be high, the managers of unionized firms have incentives to manipulate earnings downward since management can use (manipulated) poor performance as an excuse for turning down wage increases as long as the downward does not impair long-term firm value (Liberty and Zimmerman 1986). Hiding information on available resources could allow managers to achieve a more desirable outcome from wage negotiations or to pursue their own benefits (Hilary 2006; Matsa 2010; Klasa, Maxwell, and Ortiz-Molina 2009; Farber et al. 2012). Managers who face wage negotiations and thus pursue downward earnings management may prefer lower-quality external auditors.