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.
Highlights
If the performance obligation is fulfilled over a period of time, the revenue is recognized according to the project completion rate calculated based on the basis of the actual cost input ratio to the total planned cost
This is called the percentage of completion method (PCM)
The above case of accounting fraud is significant in that concerns about the PCM that had been raised in the past were confirmed [3]
Summary
If the performance obligation is fulfilled over a period of time, the revenue is recognized according to the project completion rate calculated based on the basis of the actual cost input ratio to the total planned cost. This is called the percentage of completion method (PCM). As a result of a special investigation by the Korea Financial Supervisory Service, it was found that Korea’s D construction company had made over 380 million won in profits over the last 40 years. The above case of accounting fraud is significant in that concerns about the PCM that had been raised in the past were confirmed [3]
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