The Usefulness of Accounting Information Derived by Applying the Percentage of Completion Method to Enhance Sustainable Business Practices: Evidence from South Korea

Hyun Mi Ji
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Hyun Mi Ji: College of Business Administration, Keimyung University, Daegu 42601, Korea

Sustainability, 2018, vol. 11, issue 1, 1-12

Abstract: In South Korea, accounting fraud based on the recognition of revenue occurs frequently. The operating profit will be inaccurate if incorrect project completion rates are applied. In order to apply the percentage of completion method (PCM), the project completion rate should be calculated correctly. There has been much controversy regarding the accuracy of the progress rate and the usefulness of the revenue information calculated from the PCM. Therefore, this study investigated whether the quality level of operating profit information using the PCM is actually low in terms of information usefulness. The study period was from 2011 to 2017, the sample was 10,050 firm-year observations among the listed companies in the Korea Stock Exchange, and financial data from the KIS-Value database was used. Empirical analyses showed that investors evaluated the information value of the operating profit by applying the PCM. In other words, there was a low correlation between the stock price and the operating profit when the PCM was used. These results suggest that the practical application of reliable PCM standards and strict supervision by supervisory institutions are necessary. The limitation of this study is that the verification period, i.e., 2011–2017, is short. This is because Korea was obligated to apply the Korean International Financial Reporting Standards (K-IFRS) from 2011. Therefore, in order to ensure comparability of the sample period, only the period after the application of K-IFRS was examined.

Keywords: revenue recognition; accounting fraud; operating income; sustainable profit; the usefulness of accounting information (search for similar items in EconPapers)
JEL-codes: O13 Q Q0 Q2 Q3 Q5 Q56 (search for similar items in EconPapers)
Date: 2018
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