FSS Strengthens Monitoring of Accounting Fraud... Enhances Capabilities of Accounting Firms

As economic uncertainty grows, financial authorities are strengthening their detection and monitoring functions against accounting fraud. Additionally, they aim to enhance the audit quality and capabilities of accounting firms.

On the 9th, the Financial Supervisory Service (FSS) announced the '2023 Accounting Review and Audit Operation Plan' containing these details.

The FSS plans to protect investors and stakeholders and establish the reliability of the capital market through strengthened detection of accounting fraud, strict audits, and sanctions. To this end, it will intensify monitoring of high-risk companies involved in accounting manipulation. For serious accounting fraud causing social controversy, such as embezzlement, breach of trust, and involvement in unfair trade, the FSS will respond firmly through focused audits and strict measures.

Furthermore, detection capabilities will be enhanced through industry specialization and process improvements, and strengthened sanctions will be applied to intentional accounting violations. Through full-scale audits of internal accounting control systems, violations of accounting standards caused by breaches of internal accounting management regulations will be subject to aggravated measures.

According to the FSS, the number of listed companies fined has been 17 in 2020, 14 in 2021, and 14 last year. During the same period, the number of accounting firms fined has steadily increased from 2 to 3, and last year to 8.

The FSS will also improve the efficiency of reviews and audits. It will focus on timely accounting issues and introduce a selection and concentration approach by reorganizing the criteria for selecting audit targets. The accounting issues selected as themes for this year include ▲ revenue recognition ▲ existence of cash and cash equivalents and cash flow statement presentation ▲ loss allowances for financial assets measured at amortized cost ▲ and business combinations.

To improve the audit quality of accounting firms, the FSS will enhance supervisory effectiveness and promote improvements in audit quality levels through streamlining auditor audits and stabilizing new systems.

The FSS plans to focus inspections on key matters and strengthen thematic inspections for timely responses to issues. It will also partially supplement the quality control level evaluation system first implemented in January. The quality control level evaluation assesses the quality control standards of registered accounting firms, utilizing the results for accounting supervision and providing incentives.

Additionally, detailed standards related to sanctions for violations of registration maintenance obligations, scheduled for full implementation this year, will be established to ensure stable operation of the system. The FSS will check whether registered auditors of listed companies maintain registration requirements and impose corrective actions and auditor designation exclusion points if deficiencies are found.

Alongside this, the FSS will continuously improve work processes and operate the 'Accounting Review and Audit Digital Innovation Promotion Task Force (TF)' to utilize artificial intelligence (AI) and big data technologies in financial statement reviews and audits. It will also promote enhancement of audit capabilities through improvements in internal infrastructure and processes.

This year, the FSS plans to conduct financial statement reviews and audits for 160 listed companies and auditor audits for 14 accounting firms. Approximately 100 companies will be selected for sample reviews, and about 50 companies suspected of violations will be selected based on accounting error corrections, reports of accounting fraud, and other supervisory tasks. For auditor audits, 10 firms whose three-year audit cycle has come due will be prioritized, with 4 additional firms selected considering market size and quality control levels.

An FSS official stated, "We will focus supervisory capabilities on vulnerable sectors such as companies with increased accounting risks and serious accounting fraud, and take strict measures to suppress incentives for accounting manipulation. Through the establishment of a new supervisory system centered on prevention, we will encourage autonomous competition in audit quality."

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