The Effect Of Human Resource Investment In Internal Accounting Control On Cost Stickiness

Abstract

This study examined the characteristics of internal accounting control system based on size of human resources assigned to the system to verify whether downward stickiness of total cost and selling and administrative expenses differentially appears according to the level.An entrepreneur who wishes to maximize one's utility has an incentive to externally grow the enterprise beyond the optimal size or to possess idle resources, creating cost sticking phenomenon by possessing surplus resources even when sales volume decreases. Previous studies verified the effect of control system intended to resolve the agency problem on asymmetry of cost. This study expanded the scope of previous studies to consider internal accounting control system as a monitor of the agency problem. Enterprises that effectively operate internal accounting control system are expected to show limited opportunistic incentive of the entrepreneurs because of reduced agency cost.The main purpose for enterprises to establish and operate internal accounting control system is to provide accurate and reliable financial information to investors by preventing or uncovering accounting scandals of the management and possibility of errors. Internal accounting control system of Korea was first introduced in September 2001 through 'Corporate Restructuring Promotion Act', and Financial Supervisory Service announced the regulation on public announcement in September 2002 as a series of relevant measures. The regulation requires enterprises to publicly announce the number of workers in each department in charge of internal accounting control system on the internal accounting control system report. Under the presumption that internal accounting control can be more effectively done by increasing the number of workers in charge of internal accounting control system, the intent of such public announcement is to provide external interested parties with information that can be used to determine whether internal accounting control system of an enterprise is being effectively managed. Accordingly in this study, enterprises with large size of human resources assigned to internal accounting control system were predicted to show relaxed downward stickiness of cost.As a result of verifying 2,532 enterprise-year samples listed on Korea Stock Exchange between 2003 and 2008, enterprises with larger size of human resources assigned to internal accounting control system were found to show relaxed downward stickiness of cost. This means that an enterprise with large number of workers assigned to internal accounting control system can effectively monitor the enterprise, which can efficiently control opportunistic decisions of the entrepreneur such as downward stickiness of cost. As an additional analysis, human resources were classified into departments to which persons in charge of internal accounting are affiliated to examine the effect on downward stickiness of cost. As a result of verification, high ratio of internal accounting personnel assigned to accounting department resulted in relaxed downward stickiness of cost. Accounting departments in charge of preparing for financial statements were more effectively performing monitoring work compared to other departments.

Cost stickness and earnings predictability: Evidence from

“…The second bulk of literature (e.g. Balakrishnan, et al, 2003;Calleja, et al, 2006;Blue, et al, 2012;Darabi&Darvishi, 2013;Ryu, et al, 2014;Chae& Chung, 2015; analyzed the causes of cost stickness, which are asset intensity, employee intensity, legislations, capacity usage, managerial optimistic and pessimistic, and corporate governance. In this side of this literature illustrated how these causes can effect on the level of cost stickness and assured the increased importance of cost stickness in the accounting research field, as well as highlighting the importance of analyzing the effects of cost stickness on the outcomes of the financial statements which cared about it the third bulk of literature.…”

“…On the other side, the causes of cost stickness differed among the studies when they were explaining the cost stickness phenomenon because of the difference of resource adjustment motives. Consequently, I can determine the most important causes of cost stickness through prior literature in: asset intensity, employee intensity, resource structure, cost structure, operating efficiency in using capacity, strategy, inventory assets, debt intensity, employment laws, and the level of using capacity (See, Subramaniam & Weidenmier, 2003;He, et al, 2010;Bosch & Blandón, 2011;Shust & Weiss, 2014;Apostolos, et al, 2015;Bugeja, et al, 2015;Chae & Chung, 2015;Holzhacker, et al, 2015;Qin, et al, 2015;Zanella, et al, 2015;Magheed, 2016;Pamplona, et al, 2016;Jang, et al, 2017).…”

“…In addition one of its causes is the asset intensity which can be measured by the percentage of total assets to sales revenue (See: Anderson, et al, 2003;Subramaniam & Weidenmier, 2003;He, et al, 2010;Jang, et al, 2017). The second cause of cost stickness is the economic growth which can be measured by the difference between the revenue of the year t and year t-1 divided by revenue of year t (See: Shust & Weiss, 2014;Apostolos, et al, 2015;Bugeja, et al, 2015;Chae & Chung, 2015).…”

“…On the other side, the second hypothesis predict the effect of causes on the level of cost stickness for the cost of goods sold and the selling and general and administrative cost by developing the Anderson, et al (2003) model by the causes which are asset intensity and economic growth following numerous studies (See, Subramaniam & Weidenmier, 2003;He, et al, 2010;Bosch & Blandón, 2011;Shust & Weiss, 2014;Apostolos, et al, 2015;Bugeja, et al, 2015;Chae & Chung, 2015;Holzhacker, et al, 2015;Qin, et al, 2015;Zanella, et al, 2015;Magheed, 2016;Pamplona, et al, 2016;Jang, et al, 2017).…”

Competitiveness and cost behaviour: evidence from the retail industry

“…It happens because unused resources are retained due to factors that may be internal and/or external. The internal factors are: asset and labour intensity (Anderson et al , 2003); the size of the company (Sepasi and Hassani, 2015; Via and Perego, 2014), organisational capital (Chae and Chung, 2015; Venieris et al , 2015; Chae and Ryu, 2016; Mohammadi and Taherkhani, 2017), agency issues (Kama and Weiss, 2013; Xi et al , 2013; Brüggen and Oliver, 2014; Bugeja et al , 2015; Chae and Ryu, 2016; Namitha and Shijin, 2016; Xue and Hong, 2016), national culture (Kitching et al , 2016). The external factors are: economic growth rates (Anderson et al , 2003); the regulation of labour (Banker et al , 2013; Via and Perego, 2014; Zanella et al , 2015); political pressure (Prabowo et al , 2018); and competitive pressure (Cheung et al , 2018; Li and Zheng, 2017; Uy, 2014).…”