Financial Authorities Significantly Reduce Corporate Burden Related to Accounting Reform

Introduction of Amendments to the Enforcement Decree on the Designated Authority System and Relaxation of Composition Requirements for the Auditor Appointment Committee

[Asia Economy Reporter Minji Lee] Financial authorities have decided to improve the enforcement decree to reduce the burden on companies following the introduction of the new External Audit Act (Act on External Audit of Stock Companies) to ensure a smooth transition of accounting reforms. The main points include easing the requirements for the discretionary designation system and establishing clear regulations related to the standard audit hours system. Additionally, the financial authorities plan to prepare improvement measures for the auditor designation method by the end of this year to promote competition focused on audit quality.

On the 22nd, the financial authorities announced at the ‘Meeting to Support and Review the Market Settlement of Accounting Reform Tasks’ held at the Listed Companies Association Hall in Mapo-gu, Seoul, that they will pursue measures to reduce the burden on companies within the scope that does not undermine the basic intent of the accounting reform system.

The proposed amendments include △ easing the requirements for the discretionary designation system △ strengthening regulations for the Standard Audit Hours Review Committee △ relaxing the composition requirements of the Auditor Appointment Committee △ granting a grace period related to internal accounting systems.

First, the financial authorities plan to ease the threshold for discretionary designation by deleting the financial criteria designation reasons in the enforcement decree of the discretionary designation system. Discretionary designation is a regulatory measure to appoint auditors for companies requiring management, such as those with operating losses for three consecutive years. Due to repeated criticisms that companies designated under the new External Audit Act’s financial criteria and those designated under the existing enforcement decree’s financial criteria overlap significantly, the financial authorities plan to remove the financial criteria designation reasons and exclude companies with an investment grade (BBB) from the scope of discretionary designation.

Regarding the standard audit hours, clear regulations on quorum for resolutions will also be established. Until now, the Review Committee has conducted reviews through written resolutions or held meetings irregularly without clear regulations, causing difficulties in reflecting companies’ opinions evenly. Accordingly, the financial authorities will strengthen the regulations by setting the quorum at attendance of two-thirds or more and requiring a majority vote of the committee members. Other procedures will be subject to the Review Committee’s deliberation, and the Korean Institute of Certified Public Accountants will establish them to ensure procedural legitimacy.

The regulations for the Auditor Appointment Committee, which must consist of seven members, will also be relaxed. The authorities plan to reduce the minimum quorum of the committee from seven to five members by September and expand the committee members to include employees in the case of creditor financial institutions. Accordingly, the committee, which currently consists of three internal members and four external members, will have relaxed composition requirements to two internal members and three external members.

There have been criticisms that creditor financial institutions, as financial institutions, found it difficult to form the committee because the composition requirements limited members to executives. This was due to executives being uncooperative or the difficulty in contacting minority shareholders or foreign investors.

Regarding audits of the internal accounting management system, to alleviate companies’ complaints that auditors apply overly strict standards due to concerns about accounting inspections, the authorities plan to prepare an inspection roadmap focused on initial guidance by December this year to reduce the burden on companies. Companies subject to consolidated standards since 2022 have expressed difficulties in establishing the system due to entry restrictions caused by the COVID-19 pandemic.

Furthermore, the financial authorities plan to prepare improvement measures for the auditor designation method by the end of this year to enable competition among accounting firms centered on audit quality. A Financial Services Commission official explained, “For accounting reform to succeed, companies must feel that audit quality has improved commensurate with the increased fees,” adding, “There must be improvements that move away from auditor designation methods based solely on quantitative factors such as the number of certified public accountants and focus on enhancing audit quality.”

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