"Excessive Corporate Burden"... Auditor Designation System Undergoes Overhaul After 4 Years (Comprehensive)

Daewoo Shipbuilding & Marine Engineering Accounting Fraud Case Spurs Accounting Reform
"Audit Costs Double" vs "Audit Cost per Hour Decreases"
Financial Services Commission "Open to Full Review, Task Force Discussions Underway"

[Asia Economy Reporter Ji Yeon-jin] The auditor designation system, introduced as part of accounting reform, has come under scrutiny after four years of implementation. The auditor designation system was established under the 'New External Audit Act,' created in response to the case where Anjin Accounting Corporation overlooked the 5.7 trillion won accounting fraud at Daewoo Shipbuilding & Marine Engineering. According to this system, large companies, including listed companies, that freely appoint auditors for six consecutive years must then entrust audits to accounting firms designated by the government for the following three years. However, with more than half of listed companies recently receiving designated auditors, concerns have been raised about the sharp increase in audit costs since the system's implementation, placing a heavy burden on companies. As a result, there is a plan to promote improvements to the system, including a comprehensive review of the periodic auditor designation system.

On the 6th, the Financial Services Commission announced that it has formed the 'Accounting Reform Evaluation and Improvement Task Force' to assess the performance of key provisions of the New External Audit Act and prepare improvement measures. The task force held its first meeting on the 1st. It consists of members from the Financial Services Commission, Financial Supervisory Service, Listed Companies Association, KOSDAQ Association, Federation of Korean Industries (FKI), Korean Institute of Certified Public Accountants (KICPA), two accounting firms, and academia. During this meeting, the task force shared opinions from companies and the accounting industry regarding the systems introduced as part of accounting reform and selected topics for future discussion, including the standard audit hours system, mandatory external audits of internal accounting management systems, and the expansion of the periodic designation system.

Introduced in 2018, the New External Audit Act aims to ensure transparent accounting by preventing collusion between companies and accounting firms through measures such as the auditor designation system, standard audit hours, and internal accounting management systems. However, the significant increase in audit hours due to the standard audit hours and the burden on companies required to pay audit fees as demanded by government-designated accounting firms have been pointed out as side effects. According to a survey by the Korea Listed Companies Association, the average audit fee for listed companies surged more than twofold from 125 million won in 2017 to 283 million won last year.

However, the accounting industry argues that this increase is due to longer audit hours, and the hourly audit fee has actually decreased. According to KICPA, the hourly audit fee steadily declined from 102,000 won in 2008 to 78,000 won in 2017. In 2020, the hourly audit fee was 98,000 won, slightly lower than 99,000 won in 2010. At the task force's first meeting, KICPA stated, "The hourly audit fee for U.S. listed companies rose from $216 in 2009 to $283 in 2019, an average annual increase of 2.7%, which is higher than the U.S. average annual inflation rate of 1.8% during the same period." They added, "It is necessary to consider that in a free appointment market, competition among accounting firms has not reflected the increased audit workload in audit fees, resulting in a decline in hourly audit fees."

On the other hand, the Listed Companies Association described the periodic auditor designation system as a "short-term steroid treatment" with severe side effects, emphasizing the need to focus on "fundamental and effective principled treatments," even if they take time. The association proposed long-term measures such as promoting whistleblowing, strengthening criminal penalties, enhancing supervision, and reinforcing audit functions.

According to the Financial Services Commission, the proportion of listed companies receiving designated audits increased from 8.4% in 2017 to over 54% last year. With 177 companies scheduled for new periodic designation this year, more than half of listed companies will continue to receive designated audits. Academia acknowledges that audit fees, which were excessively low to the point that normal audits were impossible in the past, have normalized since the implementation of the New External Audit Act, but also stresses the need for discussions on system improvements considering the burden on companies. A Financial Services Commission official said, "We intend to comprehensively review 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 on a full-scale improvement of the system, including a review of the periodic designation system."

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