FSS Discusses Improvement of Internal Controls with Accounting Firms and Financial Companies

[Asia Economy Reporter Lee Jung-yoon] The Financial Supervisory Service (FSS) announced on the 11th that it held a meeting to discuss with the representatives of seven accounting firms ways to link the improvement tasks of internal controls in financial companies with external audits.

At this meeting, discussions were held on how external auditors can review or audit internal accounting control systems and check for deficiencies in financial companies' internal controls to encourage improvements. As financial accidents caused by poor internal controls in the financial sector have occurred repeatedly, trust has been damaged, and questions have been raised about the effectiveness of external audits of financial companies.

The participants agreed that although there are inherent limitations to external audits, external auditors should actively play a role in improving financial companies' internal controls to prevent the recurrence of financial accidents.

The plan to link external audits with improvements in financial companies' internal controls was set with a basic direction to evaluate the appropriateness of the design of internal control activities related to financial reporting included in the internal accounting control systems jointly prepared by the FSS and the financial industry. Additionally, the effectiveness of the operation of the designed internal controls will also be checked.

In particular, measures to strengthen control functions in vulnerable areas prone to accidents were included. These measures include ▲ enhancing the effectiveness of rotation systems and mandatory leave systems ▲ strengthening access controls such as segregation of duties for high-risk tasks ▲ reinforcing verification systems for documents at each approval stage ▲ strengthening self-execution management of project financing (PF) loans ▲ establishing regular verification procedures for joint funds of creditors ▲ enhancing authenticity verification of documents submitted during loan processing ▲ and strengthening management of automobile financing.

Furthermore, to enhance financial companies' own internal control capabilities, measures such as ▲ improving the effectiveness of self-inspections ▲ strengthening banks' own continuous monitoring systems ▲ and solidifying the operation of audit organizations in mutual financial cooperatives were also included.

In addition, measures to establish a sound internal control culture were proposed, such as enhancing the effectiveness of whistleblower systems and actualizing financial companies' own 'Financial Accident Prevention Guidelines.'

Previously, the Bank for International Settlements (BIS) recommended in 2015 the establishment of a four-line defense system involving supervisory authorities and external auditors to strengthen internal controls in financial companies. The four-line defense system includes external auditors and supervisory authorities in addition to the three-line defense system within financial companies. Accordingly, the FSS explained that it has established a triangular monitoring system composed of internal auditors, external auditors, and supervisory authorities by strengthening the monitoring roles of independent supervisory authorities and external auditors to complement financial companies' internal audits.

Jang Seok-il, a specialist committee member of the FSS, stated, "We will actively support financial companies if they face difficulties or have inquiries during the review and audit process of internal accounting control systems," and added, "In future audit inspections, external auditors will check the reasons for financial accidents at audited financial companies that were not detected during the internal accounting control system audits."

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