Non-Executive Employees' Accounting Fraud Also Subject to Internal Audit Notification

Financial Services Commission Improves Guidelines for Accounting Fraud Investigation System

From now on, individual employee accounting fraud, not just by company executives or governance bodies, will also be subject to internal audit notification. Additionally, although there was no monetary threshold for classifying an act as ‘fraud,’ if the amount is 5 billion KRW or more, the external auditor must notify the internal audit organization.

On the 16th, the Financial Services Commission announced guidelines for the ‘Accounting Fraud Investigation System’ containing these details. The Accounting Fraud Investigation System is a system where, if an external auditor discovers accounting fraud during the audit process and notifies the internal audit organization, the internal audit organization appoints external experts at the company’s expense to investigate and submit the investigation results and corrective actions to the Securities and Futures Commission and the auditor.

Since the introduction of the Accounting Fraud Investigation System in November 2018 and the establishment of guidelines in December 2019, reporting of accounting fraud investigation results by internal audit organizations has been established; however, there were issues regarding unclear notification targets and insufficient independence of external experts. Accordingly, the financial authorities have consulted with the Korean Institute of Certified Public Accountants, the Korea Listed Companies Association, and others to announce revised guidelines.

First, the meaning of accounting fraud was clarified. The concept of accounting fraud that external auditors must notify the internal audit organization now includes fraudulent transactions involving executives, governance bodies, and employees. The previous guidelines did not specify the subjects of fraudulent acts subject to notification, leading to controversy over whether individual employee fraud was subject to investigation. The phrase “It is necessary to consider including accounting fraud of 5 billion KRW or more as a notification target to the internal audit organization regardless of company size” was also added. Until now, there was no monetary threshold for accounting fraud subject to notification, so whether to notify depended on the external auditor’s judgment.

Requirements for expertise and independence to be considered when appointing external experts to conduct investigations by the internal audit organization were also established. External experts must have guaranteed independence from conflicts of interest that could unduly influence the investigation results to ensure a fair investigation. However, the previous guidelines lacked independence criteria, allowing companies to appoint external auditors or law firms that provided accounting or legal services during the investigation period as external experts.

△ Cases where there are personal or economic interests with the company or executives △ Cases where the external auditor audited the company’s (including subsidiaries) financial statements during the investigation period △ Cases where legal or accounting advisory services related to facts based on accounting fraud were provided to the company during the investigation period are excluded. Furthermore, not limited to accounting or law firms, digital forensic specialized institutions can also be utilized.

A reporting form that the internal audit organization can refer to when submitting investigation results to the Securities and Futures Commission under the Financial Services Commission was also added. Due to the lack of a standardized form, there were cases where notification details and external expert investigation periods were reported inadequately.

The Financial Services Commission stated, “We will closely manage the Accounting Fraud Investigation System to ensure it operates systematically and fairly, contributing to the enhancement of accounting transparency and reliability.”

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