[Initial Perspective] Accounting, No Matter How Strict, Is Never Excessive

Conflict Between Corporations and Accounting Industry Over Reform of Periodic Auditor Appointment System
Concerns Raised That Regulatory Easing May Weaken Financial Audits

[Asia Economy Reporter Lee Seon-ae] "Accounting involves human desires. We want to hide them, but they must be revealed. It becomes a source of conflict, but all the more reason accounting must be honest."

A representative of an accounting firm conveyed the nature and destiny of accounting in this way. His explanation can be summarized with three keywords: desire, conflict, and honesty. The flow of money reflects how human desires move. Accounting is the analysis of this. If there is any manipulation or concealment in this process, accountants must correct it immediately. On the other hand, companies try to choose accounting firms that suit their preferences. The problem is that side effects inevitably follow in the 'accounting shopping' process where companies select accounting firms.

Following the 2001 accounting scandal of energy company Enron, the United States passed the Sarbanes-Oxley Act, an accounting reform law, in July of the following year. It is credited with enhancing accounting transparency by strengthening auditor independence and increasing penalties for those involved in accounting fraud. South Korea introduced an even stronger 'Korean version of the Sarbanes-Oxley Act,' known as the new External Audit Act. This was triggered by the accounting scandal at Daewoo Shipbuilding & Marine Engineering. Since 2019, the 'periodic auditor designation system' has been implemented, where if a listed company autonomously appoints an auditor for six consecutive years, the government designates the auditor for the following three years.

This has caused conflicts between companies and the accounting industry. The financial authorities, seeing that companies’ burdens are increasing due to rising audit fees, have begun efforts to ease regulations. In fact, the periodic auditor designation system is a 'Galapagos regulation' unique to Korea. Companies criticize that audit fees have increased every year, and that designated auditors have been engaging in profiteering and abusing their authority. They argue that this only enriches the accounting industry and runs counter to the global trend based on a free engagement system. Conversely, the accounting industry counters that auditor independence has improved and accounting transparency has advanced.

At present, it is difficult to judge whose argument is more accurate. To verify the effectiveness of the system’s foundation, the '6+3' model, at least nine years must pass, but calls for system improvements have emerged before even one full cycle has passed.

However, regardless of controversy and conflict, it is problematic to overlook the 'importance of accounting.' Last year, the accounting industry was tainted by embezzlement cases involving Osstem Implant and Woori Bank. Due to the nature of capital markets, accounting fraud is inevitable. Therefore, no matter how strict the emphasis on rigor is, it is never excessive when it comes to accounting audits. There is concern that the accounting system might loosen under the pretext of easing corporate burdens in line with the government’s deregulation policy. According to the government’s plan, listed companies with assets under 100 billion won will be exempt from external audits of internal accounting control systems. The scope of large unlisted companies will also be raised from 100 billion won to 500 billion won.

The Korean Accounting Association disclosed the results of a research project commissioned by the Financial Services Commission on the 10th. It proposed alternatives such as the '9+3' method, where companies freely appoint auditors for nine years and then receive designated audits for three years, and the '6+2' method. The accounting industry, which inevitably has to consider the authorities’ stance, seems to favor the '6+2' method.

Korea’s international accounting credibility ranking among 64 major countries rose from 61st, near the bottom, to 37th in 2021, but fell back to 53rd last year. To grant companies autonomy from a deregulation perspective while maintaining auditor independence, self-regulatory efforts from both companies and the accounting industry are necessary. Accounting fraud erodes trust in capital markets. It must be remembered that the aftershocks of accounting failures return as burdens to companies, investors, and ultimately the public.

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