Financial Supervisory Service and Big 4 Accounting Firms Develop Measures to Improve Audit Practices... Transparency in Fee Calculation, etc.

Financial Supervisory Service, Yeouido, Seoul. Photo by Jinhyung Kang aymsdream@

The Financial Supervisory Service (FSS) and the top four domestic accounting firms (Samil, Samjong, Han Young, Anjin) have devised improvement measures in response to corporate complaints arising during audit contracts and audit processes.

On the 18th, the FSS held a meeting with the accounting industry's 'Big 4' and announced the 'Audit Practice Improvement Plan' reflecting the discussions held so far.

The main discussion points included strengthening the transparency of audit fee calculation. Companies have expressed difficulties in negotiations as they have not received detailed information affecting audit fee calculations during audit contracts, such as audit hours by rank of participating certified public accountants and hourly rates. An examination of the Big 4's audit contract processes over the past two years revealed insufficient provision of specific information related to audit fees and variations in hourly rates among companies. Additionally, although most audit contracts specify reasons for additional fee increases and refunds, actual refunds have not been properly executed.

Accordingly, it was decided to provide information on audit hours by rank of participating certified public accountants and hourly rates during audit contracts, and accounting firms will establish and operate internal standards to ensure consistent audit fee determination. The improvement plan also includes explaining refund regulations in detail during audit contracts and actively issuing refunds when actual audit hours decrease compared to expected input hours.

Furthermore, the appropriateness of incidental expense claims was discussed. Companies pay actual expense reimbursements such as travel expenses in addition to audit fees, but accounting firms sometimes do not provide detailed statements during negotiations of these incidental expenses. Some of the incidental expenses claimed by the Big 4 included items difficult to classify as actual expense reimbursements, and there was low attention to incidental expenses, revealing deficiencies in the accounting firms' aggregation and internal control procedures for incidental expenses.

Therefore, an improvement plan was established to mandatorily provide detailed statements when claiming incidental expenses and to refrain from claiming expenses whose actual reimbursement nature is unclear. Accounting firms will clarify internal standards for incidental expenses, strengthen user education, and establish systems to review incidental expenses within the firms.

Unreasonable practices in external audits will also be improved. As demands for external evaluations and forensic audits by accounting firms increase during external audits, corporate dissatisfaction is rising. Accounting firms have expressed concerns about companies appointing low-cost, poor-quality external evaluation firms, resulting in inadequate valuation. To address this issue, when requesting external evaluations, the necessity will be explained in detail to the audited companies and documented in the audit working papers. While respecting the company's opinion in selecting evaluation agencies, prior discussions with the quality control office within the accounting firm will be held when re-requesting external evaluations or forensic audits.

Meanwhile, regarding complaints that audit fees borne by companies have increased due to designated audits, while the burden on companies has increased due to the increased involvement of junior accountants and they do not receive high-quality audit services, a policy was established to limit the assignment of junior accountants to important account items. It was agreed to strengthen education for junior and entry-level accountants and to be careful not to concentrate junior accountants on specific companies.

Jang Seok-il, a professional deliberation committee member of the FSS who attended the meeting, said, "While external audits by accounting firms should be conducted strictly, it is necessary to provide companies with more transparent information during audit contracts and audit processes and strengthen internal processes in line with the expanded scale and heightened social role." He urged, "We hope that large accounting firms such as the Big 4 set exemplary precedents to induce a virtuous cycle throughout the entire accounting industry."

The head of the audit division of the Big 4 accounting firms said, "We will improve the discussed matters by November this year," adding, "We will also pay attention to preventing unjustified audit fee increases regardless of audit risk, expand the rights and convenience of audited companies, and continuously strive to enhance the trust of capital market participants."

An FSS official explained, "We will continuously monitor the improvement process of the discussed matters and plan to work with accounting firms to improve practices that burden companies in the future."

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