Mid-sized Accounting Firms' 'Audit Power Abuse' to Be Prevented... Financial Services Commission Revises Designated Audit System

Large Corporations with Assets of 2 Trillion Won, Big 4 Accounting Firms Assigned as Designated Auditors
Auditor Group Classification Reorganized from 5 Groups to 4 Groups
Penalties Imposed on Companies Requesting Reassignment

Decrease Expected in Designated Audits by Accounting Firms with Low Audit Quality
Financial Services Commission to Launch 'Accounting Reform Evaluation and Improvement Task Force' Next Month

[Asia Economy Reporter Ji Yeon-jin] From October this year, designated audits for large companies with assets exceeding 2 trillion won will be exclusively handled by the Big Four accounting firms. Additionally, penalties will be imposed on accounting firms that apply for re-designation as auditors for companies with periodically designated auditors. This follows criticism that after the introduction of the periodic auditor designation system, there has been a concentration of designated audits among mid-sized accounting firms, which has not improved audit quality but only inflated audit fees.

The Financial Services Commission announced on the 17th that it will prepare and announce changes to the "Regulations on External Audit and Accounting," which include measures to supplement the auditor designation system.

The auditor designation system is a government-designated system where accounting firms conducting corporate audits are assigned by the government. Since the introduction of the periodic designation system as part of the 2017 accounting reform, the number of companies with designated auditors has significantly increased. The periodic designation system allows companies that have freely appointed auditors for six years to have auditors designated by the government for three years. Recently, more than half of listed companies have designated auditors.

While designated audits have enhanced auditor independence and improved corporate accounting transparency, concerns have been raised that audit costs have increased, placing a heavier burden on companies. In particular, large companies with significant overseas operations require complex accounting treatments, but there are many concerns that mid-sized accounting firms handling these audits lack quality control and the capacity to respond to audit deficiencies.

Accordingly, the improvement plan reclassifies the group of companies that accounting firms can audit, such that large companies with assets over 2 trillion won will have designated audits conducted by accounting firms with the highest audit quality management levels. Currently, 58 registered accounting firms eligible for designated audits are classified into five groups based on the number of accountants, revenue, and their ability to compensate investors in cases of accounting fraud, and accounting firms are assigned according to company size (based on total assets). The so-called Big Four accounting firms (Sam-il, Sam-jung, Han-young, An-jin), which have many accounting personnel, only conduct designated audits for large companies with total assets exceeding 5 trillion won. The improvement plan divides companies into four groups and assigns companies with total assets over 2 trillion won to the Big Four accounting firms.

The "downward re-designation system," which caused the concentration of audits among mid-sized accounting firms, will also be revised. The downward re-designation system allows companies to request re-designation to a lower-tier accounting firm if they were assigned an accounting firm from a higher-tier group than their own, accounting for 72% of auditor re-designation reasons since 2016.

Therefore, downward re-designation will be restricted for companies with high audit risks such as accumulated deficits and management issues, while re-designation within the same group will be permitted. To prevent accounting firms from demanding unreasonably high audit fees, a penalty will be introduced where companies applying for auditor re-designation will receive a deduction in their auditor designation score.

Additionally, the auditor designation score, which is based on the number of accountants, will reflect the results of quality control inspections and quality control evaluations.

The amendment will be approved by the Financial Services Commission in September and implemented immediately, applying from the periodic auditor designation for the 2023 fiscal year starting this October.

A Financial Services Commission official stated, "The decision on whether to improve the auditor designation system will be thoroughly reviewed through an objective evaluation of its operational performance and social discussions," adding, "In August, we will form an Accounting Reform Evaluation and Improvement Task Force (headed by the Director of the Capital Markets Bureau) involving academia, companies, and the accounting industry to begin practical discussions."

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