[Accounting Reform Pros and Cons③] Haphazard Audit Hours... Quality Control Remains a 'Challenge'

All 13 Accounting Firms Under This Year's Audit Quality Control Review
Criticized for Inadequate Audit Time Management
Financial Authorities to Impose Penalties for Declining Audit Quality via Amendment of External Audit Act Enforcement Decree

[Asia Economy Reporter Ji Yeon-jin] "Inadequate management of audit work hours."

According to the results of the "2021 Audit Firm Quality Control Inspection" released last month by the Securities and Futures Commission, all 13 audit firms disclosed this time among the 40 audit firms registered as auditors for listed companies included such improvement recommendations. The top two firms in the accounting industry, Samil Accounting Corporation and Han Young Accounting Corporation, were also included. In the case of Induk Accounting Corporation, multiple instances were detected where "audit work hours were entered and approved or the entry and approval were delayed before participating in audit work," or "the managing director of the work approved unreasonable audit work hours entered by some members without reviewing their appropriateness."

Since the enforcement of the External Audit Act (New External Audit Act), audit fees, which companies have strongly opposed, are calculated by multiplying audit hours by the hourly audit fee. With the introduction of the standard audit hour system, basic audit hours were set by industry, and the proportion of audit input hours was determined according to the proficiency of the accountants involved in the audit. However, audit work hours were managed in a haphazard manner, such as not entering audit hours on time or approving audit hours without proper review. The number of quality control issues pointed out for the 13 audit firms disclosed this time reached 181 cases.

As controversies over audit quality continued after the enforcement of the External Audit Act, the Financial Services Commission significantly strengthened supervision of the audit quality management of the 40 audit firms eligible for designated audits through an amendment to the Enforcement Decree of the External Audit Act earlier this month. Audit firms with inadequate audit quality management will be subject to a kind of "penalty" that imposes exclusion points from auditor designation. Auditor designation is done by matching audit firms and designated companies arranged by auditor designation scores (calculated based on the number of affiliated accountants, etc.) and total asset size order, respectively, and the method excludes from designation the number of companies corresponding to the exclusion points. Additionally, if a firm receives a corrective recommendation in the quality control inspection and fails to comply, its registration as an auditor for listed companies will be canceled. A Financial Services Commission official warned, "For auditors judged to have insufficient integrated quality management system construction or that are not effectively operated, auditor designation exclusion points will be imposed to the extent that they cannot be designated as auditors in the next fiscal year at the latest."

Measures to reduce companies' audit fee burdens were also introduced. Previously, if a designated auditor made an excessive audit fee demand or other unfair requests, the designated audit would be canceled only after disciplinary action by the Korean Institute of Certified Public Accountants. Going forward, if the designated auditor continues to refuse adjustment after a report of unfair conduct, the auditor designation will be canceled first without going through the ethics committee, followed by disciplinary procedures.

The Financial Services Commission plans to introduce an incentive system this year to allocate more designated audits to audit firms with high external audit quality management levels. A Financial Services Commission official said, "We are well aware that the burden on companies has increased since the introduction of the New External Audit Act and have improved some institutional shortcomings," adding, "Since this is a unique system worldwide, we will continue to pursue institutional improvements to reduce the burden on companies."

Regarding the periodic auditor designation system, which the business community has long advocated to abolish, the 212 companies first designated in 2019 will receive government-designated audits for three years and will be free to appoint accounting firms starting this November. Professor Jeon Gyu-an of Soongsil University said, "Since the External Audit Act is still in its early stages, it is necessary to observe how the first cycle operates for a while," and added, "If transparent accounting is established, it will not be too late to abolish the periodic auditor designation system."

Last year, South Korea ranked 37th in accounting transparency among 64 countries evaluated by the International Institute for Management Development (IMD) in Switzerland. Although it ranked last (63rd) among 63 countries in the 2017 evaluation, it jumped 26 places after the enforcement of the External Audit Act.

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