97 Cases of Internal Accounting Control System Violations... 7 Listed Companies Among 58 Firms

[Asia Economy Reporter Ji Yeon-jin] The Financial Supervisory Service (FSS) announced on the 26th that a total of 97 violations were found after inspecting compliance with regulations related to the internal accounting control system for the fiscal years 2019 and 2020.

The internal accounting control system refers to the internal accounting control regulations and the organization that manages and operates them. It is part of the internal control system designed and operated to verify whether a company's financial statements are prepared and disclosed in accordance with generally accepted accounting principles. Companies must self-verify their established internal accounting control systems, and auditors must review reports on the operational status of these systems.

The FSS inspected the internal accounting control systems of listed companies and large unlisted companies with total assets exceeding 100 billion KRW, discovering 41 violations in 2019 and 56 in 2020, totaling 97 cases. This is somewhat higher than the average of 40.5 violations over the four years since 2015, which is interpreted as a result of strengthened operational inspection procedures following the enforcement of the new External Audit Act.

Among the violations, 58 cases involved companies, 28 involved representatives and auditors, and 11 involved auditors. The Securities and Futures Commission under the Financial Services Commission imposed fines ranging from 3 million to 15 million KRW on 48 of these cases.

Of the 58 violating companies, 7 were listed companies (1 on the KOSPI, 6 on KOSDAQ), and 51 were unlisted companies. The FSS reported that most of these were companies in a management vacuum state unable to properly establish and operate internal accounting control systems due to management disputes.

Furthermore, in cases where corporate rehabilitation or bankruptcy procedures are underway, it is considered difficult to establish, operate, and manage internal accounting control systems, so fines should be exempted. However, companies in the fiscal year prior to the commencement of rehabilitation procedures and those undergoing workout programs are subject to the establishment obligation but violated regulations due to misunderstanding.

There were 28 cases of violations related to reporting and evaluation obligations of the internal accounting control system's operational status, mainly caused by insufficient knowledge of regulations due to simple mistakes or ongoing rehabilitation procedures.

In particular, representatives and auditors often failed to document the operational status and evaluation results and report them to the general shareholders' meeting, board of directors, and auditors. Of the 28 violating companies, 18 (26 individuals) were fined between 3 million and 9 million KRW each.

Among the 11 violating auditors, 2 were registered accounting firms authorized to audit listed companies, while the remaining 9 were general accounting firms authorized only to audit unlisted companies. The audit opinions for the 12 companies audited by these 11 auditors were 7 unqualified opinions and 5 disclaimers. It was pointed out that most auditors considered expressing an opinion on the internal accounting control system unnecessary due to simple mistakes or disclaimers of audit opinions related to the violations of the 11 single auditors and the 12 audited companies.

An FSS official stated, "The importance of the internal accounting control system is being highlighted as large-scale embezzlement cases have frequently occurred recently," adding, "It is necessary to effectively design and operate the internal accounting control system to prevent and detect fraudulent acts such as embezzlement and to strive to enhance the reliability of financial statements and accounting transparency."

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