"Increase in Companies Receiving Adverse Opinions Due to Strengthened Internal Accounting Control System Supervision"

Publication of the Report on Comparison and Implications of Internal Accounting Control Systems between Korea and the US

[Asia Economy Reporter Minji Lee] As a result of the first audit of the internal control over financial reporting (ICFR) system for listed companies with total domestic assets exceeding 2 trillion won last year, the proportion of companies receiving an adverse audit opinion was 2.4%. The report anticipated that the proportion of companies receiving adverse opinions would increase further in the future.

According to the report "Comparison and Implications of Internal Control over Financial Reporting Systems in Korea and the U.S." published by Samjong KPMG on the 23rd, 15.9% of companies in the U.S. received adverse opinions in the first year of ICFR audits, and although this proportion steadily decreased thereafter, it increased again after the PCAOB strengthened its supervision in 2013.

Domestically, among the reasons for adverse opinions on the ICFR system, "scope limitation," which indicates that the minimum requirements for the internal control system, such as inadequate internal control design, were not met, accounted for the highest proportion (32.6%). In contrast, in the U.S., there were almost no adverse cases due to such reasons. In the U.S., the proportions were high for "lack of accounting personnel and expertise" (21.2%), "insufficient information technology (IT) controls" (19.6%), and "inadequate segregation of duties" (12.6%).

Samjong KPMG attributed the 10 percentage point increase in the proportion of "scope limitation" reasons among domestic companies last year compared to the previous year to the strengthening of external auditors' work following the introduction of ICFR audits. During the same period, the proportion of companies receiving adverse opinions due to "insufficient IT controls" in the U.S. increased by 14.5 percentage points compared to the previous year. The report explained that this was because, although dependence on IT systems in corporate management has increased, controls over access rights to programs and data and monitoring of changes were insufficient.

When adverse opinions on the ICFR system were classified by similar characteristics, the most common reason in both Korea (42.8%, 59 out of 138 cases) and the U.S. (54.6%, 304 out of 557 cases) was related to the ability to prepare financial statements. The report stated that this should be prioritized for improvement as it directly affects the reliability of financial reporting.

Kim Yoo-kyung, leader of the K SOX specialized team at Samjong KPMG, emphasized, "The ultimate goal of the ICFR system is to strengthen the company's direct financial statement preparation capability. For financial information to be reliable, a transparent control environment such as general IT controls, segregation of duties, and supervisory functions of the audit committee must be established. It is also very important to secure the qualification (independence and expertise) of the evaluation organization so that periodic evaluation results of the ICFR system are reliable and management can timely identify and improve deficiencies."

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