Establishing Internal Accounting Management Audit Roadmap... "Guidance-Focused for Next 2-3 Years... Supporting Smooth Transition"

[Asia Economy Reporter Park Jihwan] The Financial Services Commission and the Financial Supervisory Service announced on the 11th that they will establish a supervisory roadmap for the internal accounting control system and operate supervision mainly as guidance during the first 2 to 3 years of implementation to support companies and auditors in smoothly adapting to the changed system.

With the amendment of the External Audit Act, external audits of the internal accounting control system for publicly listed companies have been gradually implemented since 2019. Audits of the internal accounting control system apply from the 2019 audit report if the total assets based on individual/separate financial statements exceed 2 trillion KRW, from the 2020 audit report if over 500 billion KRW, and from 2022 if over 100 billion KRW. From 2023, all listed companies will be subject to this. For consolidated financial statements, the application will start from 2023 for companies with assets over 2 trillion KRW, from 2024 for those over 500 billion KRW, and from 2025 for other companies.

During the guidance period of the Financial Authorities’ supervision of the internal accounting control system, the main operational direction is to support a smooth transition. They plan to focus on resolving market uncertainties by preparing a supervisory roadmap.

During the guidance period, supervision will only be initiated in cases where intentional accounting fraud is found during the financial statement audit process and is judged to be caused by violations of internal accounting control regulations, or if the previous year's internal accounting control system audit opinion was adverse.

The scope of supervision will focus on internal controls related to issues pointed out in the company’s financial statement audit. It targets internal control matters related to accounts and disclosure items identified during the financial statement audit.

For auditors, the appropriateness of audit procedures will be checked. While improvement recommendations will be the main response to identified weaknesses, if significant weaknesses in internal accounting control regulations are found to be the cause of intentional accounting fraud, the response will be escalated by one level. When judging the motive (intentional, gross negligence, negligence) for auditors’ violations of audit procedures, this will be primarily considered, and if the response level is deemed insufficient, it will be used as a reason to escalate the response.

During supervision of auditors, consistency and thoroughness of the internal accounting control system audit methodology will be checked. In individual audit tasks, the appropriateness of internal accounting control system audit procedures according to audit standards will be confirmed. If the standardization level of the internal accounting control system audit methodology is insufficient or violations of audit procedures are found in individual audit tasks, improvement recommendations will be made.

After the guidance period ends, in addition to the reasons for initiating supervision during the guidance period, supervision will also be conducted in cases of gross negligence in violation of accounting standards. For auditors, the motive judgment for violations of audit procedures will be comprehensively considered as during the guidance period, and escalation of responses will be applied only in exceptional cases.

A Financial Services Commission official stated, "By providing guidance on the supervisory direction related to the internal accounting control system, we expect to contribute to companies and auditors smoothly adapting to the changed system," and added, "This guidance is expected to help companies’ voluntary inspections and improve auditors’ audit capabilities."

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