"External Audit Scope Should Be Expanded to Include Small-Scale Public Interest Corporations"

Advice from Accounting Experts

Tricks Like Splitting Receipts Among Multiple Organizations
Public Interest Corporations Left in Audit Blind Spots
Measures Needed to Ensure Accounting Transparency

Diversify Official Forms by Corporation Type
Audit Cost Burden Should Also Be Reduced

[Image source=Yonhap News]

[Asia Economy Reporter Park Jihwan] The controversy over accounting fraud in the donation funds of Justice Memory Solidarity (Jeonguiyeon), which is embroiled in controversy over opaque use of sponsorship funds, has not subsided. Of the 4.9 billion KRW in donation income over the past four years, only 900 million KRW was used for victim support projects, and there have been suspicions of poor accounting processes, including a controversy over spending 33 million KRW in a bar in one day. Accounting experts emphasize the need to establish measures to ensure accounting transparency, as public interest corporations are currently in a blind spot regarding accounting audits.

According to the Ministry of Strategy and Finance and the Financial Services Commission on the 14th, from this year, public interest corporations (excluding religious and school corporations) with annual total income of 5 billion KRW or more or annual donation income of 2 billion KRW or more must undergo accounting audits by external accounting firms. However, Jeonguiyeon is not subject to this as it had total assets of 2.11 billion KRW and annual donation income of 825.51 million KRW last year.

The common view among experts is that this issue stems from the fact that Jeonguiyeon has no legal obligation to undergo an audit by an external accounting firm, so there is no way to check for abnormalities in advance. There is a need to expand the scope of external audits for public interest corporations beyond the current level.

An accounting expert pointed out, "Some public interest corporations have multiple organizations to split donations to avoid meeting the external audit threshold of 2 billion KRW in donation income," adding, "The standards for external audits of public interest corporations should be strengthened so that the monitoring function by objective third parties can be expanded."

For example, it could be a method to require all public interest corporations with either assets or donation income exceeding 1 billion KRW annually to undergo external audits. In the case of public interest corporations, a donation amount of 1 billion KRW has an effect similar to sales of 10 billion KRW in a general company. Companies must provide products or services corresponding to sales to earn 5-10% profit, but donations have no concept of cost.

There are practical difficulties in expanding accounting audits for public interest corporations. From the perspective of public interest corporations funded by sponsorships, the smaller the scale, the more they avoid the burden of audit costs, which are part of management expenses. An accounting industry official explained, "If the external audit deadline for public interest corporations, currently in April, is postponed to May-July, which is the off-season for the accounting industry depending on the scale, the audit cost burden of 4 to 5 million KRW (based on assets or income of 1 billion KRW) can be significantly reduced."

There is also an opinion to introduce a public audit system operated overseas to completely eliminate the external audit cost burden for public interest corporations. The public external audit system is a method where a third party conducts accounting audits for non-profit organizations with strong public nature, and the audit costs are shared socially. Professor Jeong Dojin of Chung-Ang University explained, "The public audit system views external audits of public interest corporations as a public good of society and is most actively conducted in countries like the UK, with some progress in various countries." He emphasized, "External audits are meaningless without guaranteed independence," and "The cost issue for appointing a third-party auditor needs to be resolved."

Lee Chonghee, an accountant at the Good Corporate Governance Institute, said, "This incident largely occurred because, despite the diverse existence of non-profit corporations, the disclosure forms are uniformly standardized without considering the characteristics of each type," adding, "For example, requiring the number of 'beneficiaries' is suitable only for scholarship organizations, so it is necessary to diversify forms according to the types of public interest corporations."

This content was produced with the assistance of AI translation services.