[2023 Financial Forum] Lee Hyoseop: "Failure of Internal Controls in Korean Financial Firms Due to 'Short-Term Performance Focus'"

"Internal Control Recognized as Cost... Neglect of Investment"
"Board of Directors and Audit Lack Management Oversight Function"
Emphasis on Clarifying Responsibility and Enhancing Information Transparency

Lee Hyo-seop, Head of the Financial Industry Division at the Korea Capital Market Institute, emphasized on the 25th that the root cause of internal control failures in domestic financial companies is a "short-term performance-oriented culture," and stressed the need to strengthen the management's duty and responsibility for internal control.

Lee Hyo-seop, Head of the Financial Industry Department at the Korea Capital Market Institute, is giving a presentation on the topic "Reasons Why Internal Control Systems Do Not Work in Korean Financial Companies and Solutions" at the 12th Seoul Asia Financial Forum held on the 25th at the Chosun Hotel in Jung-gu, Seoul. Photo by Kang Jin-hyung aymsdream@

At the 12th Seoul Asia Financial Forum held at the Westin Chosun Hotel in Jung-gu, Seoul, Lee stated, "Improving internal control involves significant costs, but the investment effects tend to appear only after the CEO's term ends," adding, "Domestic financial company CEOs pursue short-term profits for reappointment and neglect investments in improving internal control." He explained that internal control is perceived as a "cost," which leads to a lack of human and material investment. He also pointed out that employees tend to overlook internal controls such as legal compliance within a short-term performance-oriented culture.

He also criticized the legal ambiguity regarding the subject responsible for internal control. Lee said, "The current Corporate Governance Act vaguely and abstractly stipulates the subject responsible for internal control, the obligation to establish standards, and sanctions for violations," explaining, "In countries like the United States and the United Kingdom, the management's responsibility for internal control is codified, and CEOs can be held accountable for negligence in internal control, but under domestic law, it is difficult to impose responsibility on supervisors such as management."

He identified the corporate governance of domestic financial companies as another cause. He noted, "There are criticisms that outside directors act as rubber stamps for major shareholders, and the lack of expertise among auditors results in inadequate internal accounting audits and operational audits," diagnosing that "monitoring of management and key executives through outside directors, auditors, and shareholders is weak." He also pointed out the lack of protection for minority shareholders, citing low shareholder returns and insufficient shareholder derivative lawsuits as problems.

Lee Hyoseop, Head of the Financial Industry Department at the Korea Capital Market Institute, is giving a presentation on the topic "Reasons Why Internal Control Systems Do Not Work in Korean Financial Companies and Solutions" at the 12th Seoul Asia Financial Forum held on the 25th at the Chosun Hotel in Jung-gu, Seoul. Photo by Kang Jinhyung aymsdream@

Lee argued that clarifying the subject responsible for internal control is necessary to improve the internal control system. He explained, "The CEO should be given the duty to manage internal control and held ultimately responsible for internal control failures." He added, "The supervisory authority should require prior reporting and approval of a responsibility structure chart that clearly defines the supervisor's responsibilities." He also emphasized strengthening the board of directors' check-and-balance function, stating, "The board should be granted the authority to establish and amend internal control standards and be able to check and monitor the CEO and compliance officers."

He mentioned the need to induce internal control through incentives. For example, sanctions could be mitigated if internal control standards are established, complied with, and inspected diligently. Lee emphasized, "Investment should be made to expand internal control infrastructure, activate education, and cultivate professional personnel."

He also explained the importance of information transparency. Lee stressed, "Authorities need to regularly evaluate internal control and award additional points to excellent companies, share best practices by industry, and revise internal control standards when new tasks and risks arise."

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