93% of Companies Say "Three Major Accounting Regulations in the New External Audit Act Must Be Improved"

62% of Companies Respond No Change in Audit Quality... 10.5% Say "Quality Decline"

(Photo by Federation of Korean Industries)

[Asia Economy Reporter Minwoo Lee] Most companies oppose the three major accounting regulations introduced under the new External Audit Act in 2018, which aimed to improve audit quality through the External Auditor Designation System, Standard Audit Hours System, and Internal Accounting Management System. They argue that the burden is significant while the effect on audit quality improvement is minimal.

Professor Dojin Jung of the Department of Business Administration at Chung-Ang University announced these survey results on the afternoon of the 3rd at the Federation of Korean Industries Conference Center in Yeouido, Yeongdeungpo-gu, Seoul. The seminar titled "Pros and Cons of the New External Audit Regulations" was jointly hosted by the Federation of Korean Industries, Korea Listed Companies Association, KOSDAQ Association, and the Korean Accounting Policy Association.

According to the survey conducted by Professor Jung on corporate perceptions and the burden caused by these three major accounting regulations, 94.2% of respondent companies reported an increase in economic burden. 62.2% said there was no significant change in audit quality, while 10.5% reported a decline in audit quality. Regarding the need to improve the three major regulations, 93.4% (55.5% urgent, 37.9% mid-to-long term) stated that improvements are necessary.

The three major regulations are ▲External Auditor Designation System (companies freely appoint external auditors for six years, after which the Financial Services Commission designates auditors for three years) ▲Standard Audit Hours System (legally stipulates the standard hours auditors must spend based on company size and characteristics), and ▲Internal Accounting Management System (strengthening the external auditor’s certification level from ‘review’ to ‘audit’ for internal accounting management).

Professor Jung said, "The periodic (external auditor) designation system is an unusual system internationally," and proposed, "The current External Auditor Designation System, where the Financial Services Commission (FSC) designates auditors, should be reformed into a ‘selective designation system’ where companies recommend multiple external auditors and the FSC selects one. In the long term, it should be normalized into a free appointment system where companies appoint external auditors themselves."

Regarding the Standard Audit Hours System, he also demanded improvements to guarantee corporate management autonomy by presenting a range of standard audit hours instead of strictly applying it by industry and company size. He emphasized that the expansion of the Internal Accounting Management System should be suspended until its effectiveness is confirmed and that, in the long term, conditions should be created for companies to implement it autonomously.

Criticism of the designated audit system continued during the subsequent discussion. Kyungjin Kang, Executive Director of the Korea Listed Companies Association, said, "Even excluding the three major accounting regulations, there are sufficient measures to enhance accounting transparency," and argued that "the periodic designation system and Standard Audit Hours System, introduced as short-term measures, should be sunset and scaled back."

Junseon Choi, Emeritus Professor at Sungkyunkwan University School of Law, stated, "Introducing a designated audit system for normal companies is unprecedented worldwide," and emphasized, "Recently, the UK discussed introducing a designated audit system in special cases such as when audit quality issues arise, but decided not to implement it because it infringes on corporate management autonomy and shareholder interests."

Sungkyu Son, Professor of Business Administration at Yonsei University, explained, "The system introduced in 2018 has both advantages and disadvantages," and added, "To compensate for the drawbacks of the auditor designation system, the supervisory authority can recommend multiple accounting firms and allow the audited entity (company) to choose."

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