This study examines the effect of the mandatory designation rule on audit fees charged and audit hours rendered by auditors for firms released from the mandatory auditor designation rule in the Korean audit market. Under the mandatory auditor designation rule, which took effect in 1991, problematic firms are assigned new auditors by the Financial Supervisory Service. Previous studies suggest that this regulation positively affects the quality of audits by promoting auditor independence. Thus, this study hypothesises that firms that have been subjected to mandatory auditor designation improve the quality of their financial reporting, and that auditors hired after the mandatory designation period account for reduced audit risks when determining audit fees and audit hours. This study shows that audit fees and audit hours of firms released from the mandatory auditor designation rule are lower than those of other initial audit engagements. Taken together, this study's findings reinforce the notion that auditors' perceptions of changes in audit risk yield corresponding changes in the audit fees they charge and audit hours they render.

This study examines the effect of audit risks in the Korean initial public offering (IPO) market on the designated auditors' decisions. The Korean External Audit Act requires firms to switch from incumbent to new auditors designated by the Securities and Futures Commission after the firm announces a future IPO. This study shows the effects of audit risks by examining if the quality of reported earnings and audit fees significantly differs between IPO-eligible and IPO-ineligible firms. Empirical tests first show that discretionary accruals are significantly lower for IPO-ineligible firms than for IPO-eligible firms in both the IPO designation period and the following review period. We interpret this result to mean that designated auditors evaluate the IPOineligible (and eventually failed) firms' listing possibility as low. Second, audit fees are higher for IPO-ineligible firms in the auditor designation period. This reflects the fact that designated auditors are exposed to future audit risks associated with firms' post-IPO financial market troubles if IPO-ineligible firms attempt to go public. Our study contributes to IPO-related research by showing the effects of auditors' risk evaluation on discretionary accruals and audit fees. This study also contributes to accounting policymaking regarding auditor independence.