[Viewpoint] The New External Audit Act and Accounting Credibility

Professor Choi Guk-hyun, Chung-Ang University Business School

Recently, South Korea's KOSPI market has been fluctuating around the 3000 mark. Compared to its previous movements, the KOSPI has shown relatively stable fluctuations within a certain range. Previously, it was common for the KOSPI to fall to less than half of its peak during cycles of rises and falls. Such extreme volatility in South Korea's capital market has hindered the healthy growth of the capital market and has been a source of frustration and disillusionment for many investors.

Moreover, companies have secured funding not when needed for research, development, and investment, but rather in response to the fluctuations of the KOSPI. This kind of corporate financing leads to the accumulation of low-productivity surplus funds within companies, resulting in declines in various investment indicators and amplifying uncertainty among internal and external stakeholders due to moral hazard. Thus, the high volatility of South Korea's capital market causes investors to avoid the market and undermines the efficiency of corporate capital procurement.

It is noteworthy that South Korea's capital market has recently shown relative stability amid the peak uncertainty of international political and economic situations. Although countless events influence the fluctuations of the capital market, long-standing research in economics, finance, and accounting consistently argues that a company's market value converges to its intrinsic value. In this regard, the recent relative stability of South Korea's capital market is meaningful in several respects. First, the financial structure improvement and competitiveness enhancement of companies listed on the KOSPI have been remarkably achieved over the past 20 years. Institutional and legal improvements aimed at enhancing corporate financial reporting transparency have been steadily maintained.

As is well known, South Korea's capital market has been undervalued due to the 'Korea Discount,' caused by backward corporate governance, opaque financial reporting, and anti-business institutions and laws. In fact, South Korea was ranked last (63rd out of 63 countries) in the 2017 International Institute for Management Development (IMD) national accounting transparency evaluation. In response, the South Korean government took extraordinary legislative and institutional measures, known as 'financial reform,' including the Act on External Audit of Stock Companies. This 'New External Audit Act' has been implemented gradually since November 2018 and is scheduled to be fully applied to all target companies by 2024. Additionally, companies are undergoing rapid and transformative changes through ESG (Environmental, Social, Governance) responsible management, aiming to support corporate sustainability and grow together with society.

Whether due to these public and private efforts, South Korea's accounting transparency ranking improved to 37th out of 64 countries in 2021, reaching a mid-level evaluation. It seems to be escaping the downward gravitational pull that had continued until the late 2010s. Furthermore, the series of domestic and international efforts and reforms in institutions and laws serve as a beacon guiding through the rapidly expanding uncertainties at home and abroad. In this way, the resilience of South Korea's capital market is gradually becoming stronger.

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