'Periodic Designation System' Grace Period Criteria Revealed... 35-40 Sites Likely to Pass

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Detailed criteria for a policy that grants a 3-year exemption from the periodic auditor designation system (periodic designation system) only to companies with excellent accounting and audit governance were disclosed on the 31st. The more audit committee members are separately elected, the higher the accounting expertise of the audit committee members, and the more professional the dedicated audit support organization is, the higher the likelihood of passing the regulatory review.

The Financial Services Commission, together with the Financial Supervisory Service, announced the 'Periodic Designation Exemption Plan for Companies with Excellent Accounting and Audit Governance' on the same day.

Companies eligible to apply for the periodic designation exemption review are listed companies that have established an audit committee and have received designated audits for more than one year since the new External Audit Act was implemented in 2018. As of 2024, there are 749 companies listed on KOSPI and KOSDAQ that have established an audit committee.

The detailed criteria are composed in a quantifiable manner. The authorities set that companies scoring '800 points or more' out of 1,000 points will, in principle, be eligible for the designation exemption. The highest 300 points are allocated to audit function independence, followed by effectiveness of the audit support organization (250 points), expertise of the audit body (200 points), transparency of the auditor appointment process (150 points), and self-effort (100 points). Additionally, bonus points are given for external awards (50 points), and penalty points are applied for social controversies (50 points).

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Taehyeon Su, head of the Accounting System Team at the Capital Markets Bureau of the Financial Services Commission, explained, "The criteria are structured so that no single indicator dominates the overall result," adding, "Since independence means that a company does not have to undergo the periodic designation system, the highest score was assigned to the independence of the audit function."

The reason for checking whether the audit contract is signed before the start of the fiscal year is that accounting audits are concentrated in the early season. The accounting expertise of audit committee members and the audit committee chairperson is also highly valued. The focus is on enhancing the effectiveness of the dedicated support organization and encouraging companies to conduct auditor appointments and public offerings transparently, instead of relying on 'blind' personal recommendations.

When companies with excellent accounting and audit governance apply for the designation exemption review according to the evaluation criteria, the evaluation committee composed of private experts will assess them, and the Securities and Futures Commission will make the final selection of exemption recipients. The Financial Supervisory Service, which handles auditor designation tasks, will lead the evaluation process, supported by the ESG Standards Institute, which specializes in governance evaluation.

Team leader Taehyeon Su said, "In our internal simulation, about 5-10%, or 35-40 out of approximately 750 companies, are expected to pass smoothly," adding, "We anticipate that about 80 companies could exceed the criteria if they make efforts." However, this is not a definitive figure.

The financial authorities plan to form the evaluation committee in the first quarter of 2025. They will proceed with legal amendments and additional public consultations regarding the evaluation criteria. Subsequently, applications from companies wishing to receive the designation exemption will be accepted around June to July, and the exemption recipients will be decided through evaluation committee assessments and Securities and Futures Commission resolutions in the third quarter. This periodic designation exemption plan will be primarily operated for three years from 2025 to 2027 until a fundamental review is conducted.

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