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The Role of Labor Unions in Corporate Transparency: Focusing on the Role of Governance in Auditor Change Process

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  • Eun Jung Cho

    (Department of Taxation, Namseoul University, Chunan 31020, Korea)

  • Ju Ryum Chung

    (School of Business Administration, University of Seoul, Seoul 02504, Korea)

  • Ho-Young Lee

    (School of Business, Yonsei University, Seoul 03722, Korea)

Abstract

This study investigates how the presence and power of labor unions are associated with auditor replacement, more specifically, external auditor tenure and the direction of auditor change. External auditor tenure and direction have been of great interest to stakeholders, as they are very likely associated with the financial reporting quality and corporate transparency, crucial factors for sustainable business. We are focusing on the role of the labor union, one of the key stakeholders involved in corporate governance and transparent operations, in external auditor selection processes. During the annual wage bargaining process, labor unions that rely on financial information face information asymmetry because financial statements are provided by the management. Therefore, labor unions have a high demand for independent and capable external auditors. This demand is likely to shorten auditor tenure and/or prompt changes to higher-quality auditors. Using a sample of 4568 firm-years listed in the Korean stock markets for the period of 2005 to 2008, we find evidence that the presence and power of labor unions significantly decrease external auditor tenure. We also find that the direction of auditor changes with the presence and power of labor unions is likely from non-industry specialist auditors to industry specialist auditors. This study contributes to the extant literature by extending the previous research on auditor selection and the governance role of labor unions.

Suggested Citation

  • Eun Jung Cho & Ju Ryum Chung & Ho-Young Lee, 2019. "The Role of Labor Unions in Corporate Transparency: Focusing on the Role of Governance in Auditor Change Process," Sustainability, MDPI, vol. 11(9), pages 1-21, May.
    • Handle: RePEc:gam:jsusta:v:11:y:2019:i:9:p:2643-:d:229330
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    References listed on IDEAS

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    1. Vitols Sigurt, 2023. "Board Level Employee Representation and Tax Avoidance in Europe," Accounting, Economics, and Law: A Convivium, De Gruyter, vol. 13(4), pages 457-478, November.
    2. Vitols, Sigurt, 2021. "Board Level Employee Representation and Tax Avoidance in Europe," EconStor Open Access Articles and Book Chapters, ZBW - Leibniz Information Centre for Economics, issue Ahead-of-, pages 1-1.

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