Four Years of Accounting Reform... New External Audit Act's 'Periodic Designation System' Undergoing Surgery

[Asia Economy Reporter Ji Yeon-jin] The 'New External Audit Act,' now in its fourth year of implementation, has come under scrutiny. Enacted in November 2018 as part of accounting reforms, the core of the act is the designated auditor system, where the Securities and Futures Commission appoints auditors for listed companies and large unlisted companies that have freely appointed auditors for six consecutive years, for a period of three years. However, since the implementation of this law, audit fees have surged, provoking strong opposition from companies, and with more than half of the companies being assigned periodic auditors, the government plans to pursue improvements to the system, including a comprehensive review of the periodic designation system.

On the 6th, the Financial Services Commission announced that it had formed the 'Accounting Reform Evaluation and Improvement Task Force' to assess the performance of key systems under the New External Audit Act and to prepare improvements, holding its first meeting on the 1st. The task force is composed of the Financial Services Commission, the Financial Supervisory Service, the Listed Companies Association, the KOSDAQ Association, the Federation of Korean Industries (FKI), the Korean Institute of Certified Public Accountants (KICPA), two accounting firms, and academia.

At the meeting, the Listed Companies Association stated, "Instead of a 'short-term steroid treatment' with severe side effects, it is necessary to focus on a 'fundamental and effective principled treatment,' even if it takes time," proposing the activation of whistleblowing, strengthening criminal penalties, enhancing inspections, and reinforcing audit functions. The association pointed out that "(the New External Audit Act) includes systems that seriously affect companies, but there was a lack of discussion on the effects of introducing important regulations."

On the other hand, KICPA said that before supplementing the periodic auditor designation system, it is necessary to compare and analyze the inefficiencies caused by auditor changes and the effectiveness of independence enhancement resulting from the implementation of the periodic designation system, and then make a judgment. KICPA stated, "By reflecting the voices of companies and auditors in the field well, it is necessary to supplement and improve the New External Audit Act so that companies and auditors maintain balance and do not lose sight of the goals of accounting reform," adding, "We hope that in-depth discussions on this matter will take place within this task force."

Academia emphasized, "The increase in audit fees after accounting reform was partly due to the effects of newly introduced systems, but also because audit fees, which were excessively low to the point that normal audits were impossible in the past, have been 'normalized.' However, since the burden on companies has increased, discussions on system improvements are necessary."

According to the Financial Services Commission, the proportion of companies receiving designated audits rose from 8.4% in 2017 to over half, 54%, last year. A Financial Services Commission official said, "We intend to comprehensively inspect and evaluate whether the systems introduced after the implementation of the New External Audit Act are operating as originally intended," adding, "We will keep the door open for discussions including a review of the periodic designation system and a full-scale improvement of the system."

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