[Viewpoint] Building trust in financial authority

One of the fundamental reasons behind the financial crisis of 2008 was financial company managers’ negligence about risk management. In other words, it was a man-made disaster through which we realized the importance of human resources management.

When it comes down to it, the failure of the risk management departments of financial companies to keep sales teams fully in check probably bears a large part of the responsibility. This simply highlights the important role the auditor plays. With this in mind, Korean financial companies appoint external auditors instead of internal auditors to keep an eye on management.

In this situation, the most appropriate people to audit financial companies are, ironically, government authorities. They have better expertise on risk management than anyone based on their auditing experience and can keep management fully in check, too.

However, employment in related fields is largely restricted for them by the civil servant ethics law. Improving national competitiveness through open employment is important, but the prevention of back-scratching alliances through work relations is even more important. The Civil Servant Ethics Committee keeps government workers from being employed in fields where there is a chance of corruption through thorough evaluations.

The Korean civil servant ethics law limits the employment of public servants in related fields at a much higher degree than other major advanced countries. Executives at the Financial Supervisory Service, a subject of debate recently, are restricted from employment in fields related to their experience for three years before retirement and for two years after retirement. The United States and the United Kingdom focus on contradictory relations by limiting contact with supervisory officials after employment, for example, and employment restrictions are set at a minimal standard.

The intention of such measures is probably not just to improve national competitiveness by using experts and respecting the freedom to choose one’s job, a basic right of the people, but also to block any possible side effects thoroughly. Japan also focused on employment restrictions before retirement, but it recently decided to abolish those rules to improve national competitiveness.

Meanwhile, Koreans continue to insist that the strong employment restrictions under the current law are not enough, and employment in related fields should be fundamentally stopped.

These views are largely shaped by memories of a time when the economy was ruled by the government, so financial authorities can be seen as largely responsible. However, as the recent financial crisis showed us, risk management by financial companies is very important. For the best possible risk management the most appropriate people need to be put in charge. In order to do this, I think that instead of strengthening the current employment limitation system, the current standard should be maintained and appointments of a variety of experts should be permitted while further strengthening post-employment rules to prevent corruption after officials have left the government.

Appointing auditors through a mandatory, transparent and fair bidding process should be another solution. Such a process would completely eliminate pressure from financial authorities and guarantee the autonomy of financial companies.

Financial authorities need to show that they have changed in order to wipe away any misunderstanding that retired officials are getting jobs as auditors simply to avoid any major responsibilities.

Until now, retired officials have by custom enjoyed the privileges of their former post, but in the future, these perks should be eliminated so that retired authorities are being evaluated by the market.

Financial authorities should strictly supervise all personal contact between a retired official appointed as a financial company auditor, and any cases of inappropriate corruption found should be punished as a warning to others.

*Translation by the JoongAng Daily staff.
The writer is the dean of Dongguk University Business School.

By Yang Dong-hoon