The Spark of Controversy Over Justice Network's Accounting... Will the Public Interest Corporation Adopt the 'Public Audit System'?

Nonprofit Organizations with Strong Public Interest
Audits Without Independence Are Meaningless
Audit Costs Should Be Covered by the Government

[Image source=Yonhap News]

[Asia Economy Reporter Ji-hwan Park] Voices calling for the introduction of mandatory external audits for small-scale public interest corporations are growing amid the accounting fraud controversy surrounding the Justice and Memory Foundation (Jeong-ui-yeon). Experts emphasize that the introduction of a 'public audit system,' where the government directly appoints auditors and partially subsidizes some costs, could be a viable alternative. The public audit system refers to a method in which a third party designated by the government conducts external audits for nonprofit organizations with strong public interests, and the audit costs are shared socially.

According to the accounting industry on the 18th, public interest corporations required to undergo external audits by accounting firms are those with annual total revenue exceeding 5 billion KRW or annual donations exceeding 2 billion KRW (excluding religious and school corporations). The Justice and Memory Foundation had total assets of 2.11 billion KRW and annual donation income of 825.51 million KRW last year, so it is not subject to mandatory external audits.

An accounting industry official explained, "The Justice and Memory Foundation's statement that their disclosed data was reviewed by accountants does not mean an audit procedure guaranteeing external independence," adding, "There are often requests from small public interest corporations to confirm that financial statements have been reviewed, but this likely does not go far beyond that level."

Experts expressed concerns that even if the scope of public interest corporations required to undergo accounting audits is expanded, costs will ultimately be an issue. For public interest corporations funded by donations, the smaller the scale, the more difficult it will be to spend on audit fees, which are part of management costs.

An accountant from a small to medium-sized accounting firm pointed out, "Donors want their donations to be fully used for beneficiaries, not for personnel or management expenses," and added, "Due to the burden of audit fees as management costs, small public interest corporations will end up seeking only the cheapest audit services." One example is the expansion of audit targets for apartment complexes, where contrary to expectations, demand concentrated on firms offering low-cost audits around 1 million KRW, which led to a large-scale accounting failure.

There are opinions that introducing a public audit system operated overseas to subsidize external audit costs for corporations with public interest characteristics would be a practical solution. In the UK, over 90% of local governments operate under a system where the PSAA (Public Sector Audit Appointments), designated by the state, appoints auditors. New Zealand also introduced a designated system in 2003, appointing auditors every three years for audits of about 4,000 public institutions.

Professor Do-jin Jeong of Chung-Ang University's Business Administration Department emphasized, "The public audit system is most active in the UK and is being implemented to some extent in various countries," adding, "Audits without guaranteed independence are meaningless, so the cost issue, which is a barrier to introduction, needs to be resolved."

An accounting industry official pointed out, "Since the nature of public interest corporations varies, the supervising government ministries also differ," explaining, "Apartment management offices fall under the Ministry of Land, Infrastructure and Transport, private schools under the Ministry of Education, etc., so stakeholders differ, making integrated legislation difficult."

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