"Companies Violating Accounting Standards Due to Employee Errors and Lack of Understanding"

Financial Supervisory Service Takes Action on Accounting Error Corrections at 78 Firms Over the Past 5 Years

[Asia Economy Reporter Minji Lee] Most companies that violated accounting standards were found to have done so due to personnel errors and a lack of understanding of accounting standards. Accordingly, the Financial Supervisory Service (FSS) plans to continue inspecting correction statuses, promptly conducting reviews and audits, and publicly disclosing the results to prevent accounting errors.

According to the FSS on the 20th, after selecting companies subject to review by inspecting those that voluntarily corrected accounting errors, a total of 78 companies took corrective actions on accounting errors over five years from 2015 to September of this year. The number of actions taken by year was one in 2015, ten in 2016, four in 2017, sixteen in 2018, twenty-seven in 2019, and twenty as of September this year. Among these, 59 companies were listed on the KOSPI and KOSDAQ markets, and 19 were listed on the KONEX market or were other business report submitting entities.

The FSS explained, “We have continuously refined the scope for selecting review targets and expanded the selection pool. Since the enforcement of the new External Audit Act, companies and auditors have become more cautious in closing accounts and auditing, leading to an increase in companies correcting accounting errors.”

Since the introduction of the financial statement review system in 2019, 19 companies were detected; among them, 17 received minor sanctions, and two were subject to measures by the Securities and Futures Commission for intentional or gross negligence violations. Of the violating companies, six (7.7%) were intentional violations, and 23 (29.5%) were gross negligence violations. Negligence violations accounted for 49 companies (62.8%). Most negligence violations were found to stem from personnel errors or insufficient understanding of accounting standards.

The FSS stated, “If the violation amount is less than four times the materiality threshold, it is generally judged as negligence. With the enforcement of the new External Audit Act, the criteria for sanctions have been revised, making the conditions for gross negligence stricter, which has significantly increased the proportion of negligence sanctions.”

Companies corrected errors by reissuing audit reports (48.7%) and restating prior period financial statements for comparison (51.3%). Among companies that corrected errors exceeding 16 times the materiality threshold (an amount considered to influence users’ judgment of accounting information), 66.7% corrected errors by reissuing audit reports. The most common corrections involved equity and profit and loss errors affecting shareholders’ equity (79.4%).

The average time from the start of review and audit to corrective action was 9.7 months. However, since the introduction of the financial statement review system, minor sanctions for negligence violations have been promptly concluded, showing a decreasing trend in processing time. It took 12.1 months in 2018 but decreased to 9.5 months this year.

Going forward, the FSS plans to continue inspecting correction statuses, promptly conducting reviews and audits, and publicly disclosing the results to prevent accounting errors. If it is judged that the cause was personnel error or insufficient understanding of accounting standards, the case will be promptly concluded with minor sanctions.

Furthermore, when prior auditors amend financial statements they audited, the FSS will also check whether sufficient communication occurred among the previous and current auditors and company management. The FSS stated, “We will disclose major financial statement correction cases and sanction results to prevent listed companies from repeating similar accounting errors. Companies should also make efforts to adequately disclose correction details, such as properly reflecting errors by accounting period according to the accounting standards applied to long-standing accounting errors.”

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