Last Year's Business Report Financial Items Show 40% Deficiency Rate... Increased Compared to Previous Year

The Financial Supervisory Service (FSS) announced on the 13th that the deficiency rate in the financial matters of the 2022 business reports reached 40% after inspection.

According to the FSS, a comprehensive inspection of financial matters found deficiencies in the business reports of 1,163 out of 2,919 companies (39.8%), marking a 3.4 percentage point increase compared to the previous year.

The FSS explained that this was due to the increase in inspection items from 11 to 14, and that excluding the new items, the number of companies with deficiencies was 981 (33.6%), which is a 2.8 percentage point decrease from the previous year.

The deficiency rates by market were as follows: KONEX (88 companies, 67.7%), KOSDAQ (685 companies, 43.3%), unlisted companies (195 companies, 42.4%), and KOSPI (195 companies, 26.1%).

The main deficiency items were the name of the accounting auditor, audit opinion, emphasis of matter, and key audit matters (14.1%), changes in accounting auditors (9.7%), and inventory status (7.6%), in that order.

The FSS emphasized, "Even if emphasis of matter in the audit opinion is not stated in the main text of the business report, it is necessary to check the audit report to see whether the audit opinion has been modified or if there is uncertainty about the going concern." They added, "It is also important to review the financial statements in the business report and audit report to determine whether the company’s profit and loss structure, including sales, is changing rapidly or if the company is in a state of capital erosion."

Furthermore, regarding the inspection of non-financial matters, out of 120 companies inspected, 25 companies (21%) were rated satisfactory or above, while 43 companies (36%) were rated deficient or below, indicating an overall poor level of disclosure. By listing market, the KOSPI market had 23 companies rated satisfactory or above, whereas KOSDAQ had only 2, showing relatively poorer performance. Based on market capitalization, larger companies tended to receive better evaluations. Among the items, the disclosure of 'financial condition and business performance' was the most satisfactory, but analysis of causes of changes and sustainability was found to be insufficient.

The FSS stated, "Most companies prepare management performance reports focusing on numerical increases or decreases, so it is necessary to raise management’s awareness to ensure that the Management’s Discussion and Analysis (MD&A) contains sufficient information about the current situation and future forecasts of the company." They added, "Even if the content is recorded in other sections of the business report, any information included in the MD&A preparation standards must be fully disclosed without omission."

The FSS selected a total of 2,919 companies subject to business report submission for the financial matters inspection, and for non-financial matters, 120 listed companies were selected to inspect the appropriateness of MD&A disclosures.

An FSS official said, "We plan to add companies with deficiencies in emphasis of matter as one of the risk factors for selecting samples for financial statement audits," and "We will hold disclosure explanation sessions to support companies in enhancing their disclosure capabilities, including improving the completeness of business report disclosures."

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