Developing an Assessment Model for Risky Unclaimed Invoices of Korean Construction Firms Using Information Disclosure

Abstract

Financial difficulties relating to projects, such as huge losses and unclaimed invoices, have been identified as a problem for the construction industry. Especially, unclaimed invoices that have been incurred but have not yet been recognized by the customer are a particular financial issue in the Korean construction industry. And the sum of unclaimed invoices has been on an increasing trend in Korean top construction companies and large amounts of unclaimed invoices have a high probability of translating into a loss. Despite the riskiness of unclaimed invoices, information about them is protected by firms as being inside information. As such, investors and other stakeholders have difficulties interpreting this information. There are also no systems or assessment standards related to unclaimed invoices or the risks. Moreover, there are many studies on predicting bankruptcy or assessing business performance but few focus on unclaimed invoices. Due to these reasons, the unrevealed large amounts of unclaimed invoices, which cant be immediately recovered, can cause companies to suffer from financial strains and are directly connected with investor losses. In general, all unclaimed invoices are considered dangerous

however, there are certainly some unclaimed invoices that can be recovered without any losses. As such, it is necessary to distinguish bad unclaimed invoices from the total number of unclaimed invoices. So this study suggests guidelines for comparing firms based on the unclaimed invoices. As the result of literature review, there are some limitations. Under current accounting basis, the major weakness is that there isnt a standardized technique for assessing the percentage of completion of a project. As such, there will be a gap between the real percentage of completion and that reflected in the accounting. This characteristic of an unclaimed invoice can be occurred losses. To solve this problem, this study analyzed the difference in unclaimed invoices between negative profit groups and positive profit groups. Secondly, variables that affect unclaimed invoices were identified from the whole data set. Next, the whole data were divided companies into 2 groups

sound performance group and performance deterioration group. The performance deterioration group was also analyzed to identify the variables that affect unclaimed invoices. The causes of unclaimed invoices that have a high possibility of being a loss were analyzed by comparing these two results from the whole data and the performance deterioration data. Lastly, using these results, formulas used to calculate the dangerous of unclaimed invoices were created and classification standards were set. Twenty percent of the whole data were used in the validation process, and verification was conducted using expert interviews. As the result, unclaimed invoice that two years before occurring losses has significant value by conducting t-test. Next performance deterioration group was divided into 3 groups

large sales group, mid-sized sales group and small-sized sales group. By conducting regression analysis, significant variables that affect unclaimed invoice were identified. For the large sales group uncovered three significant variables: domestic sales, infrastructure sales and receivables turnover. In mid-sized group, there was a significance difference in the total sum of plant sales and construction sales. Lastly, in the small-sized group both the proportion of infrastructure sales and receivables turnover were selected as significant variables. Using these factors and coefficient values, formulas that assess risk level of unclaimed invoice were defined. All the result was classified into high level of dangerous, considerable level and moderate level. Since information surrounding unclaimed invoices are available to the public, this study reveals the risk associated with excessive amounts of unclaimed invoices and aids transparency in company accounts. It will contribute to reducing the adverse selection of stakeholders as a result of information asymmetry and help them to accurately assess a companys performance. Ultimately, it will help increase the financial health of Koreas construction industry, as well as the efficiency of the market. Although this study has contributed to this field of research by conducting an empirical study of unclaimed invoices using real data, it didnt consider comprehensive situations of certain companys situations such as experts insight. This research conducted an investigation into the unclaimed invoices of enterprise units. There was a limitation in the detailed analysis because the total amount of unclaimed invoices was used as the dependent variable. However, an in-depth analysis of the markets and the projects which cause unclaimed invoices could be undertaken if research can be conducted based on information related to specific markets and newly disclosed projects.