Firms face more auditing scrutiny

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Firms face more auditing scrutiny

Conglomerates and financial companies will now be under tougher auditing scrutiny, including the government having the final choice when selecting accounting firms that will be auditing the balance sheets, while lifting the maximum ceiling on penalties for accounting fraud and raising the compensation for whistle blowers.

The reforms are aimed at preventing the kind of accounting fraud committed recently by large companies such as Daewoo Shipbuilding and Marine Engineering (DSME) and SMEs that were once deemed innovative companies such as Moneual.

The Financial Services Commission on Sunday announced measures targeted at improving the credibility and transparency of auditing. The FSC is hoping to finish the revision of related laws within the year while giving a two-year grace period, which means if the revised bill passes the National Assembly then the new accounting firm selection regulation will be applied in 2019.

Under the new rule, companies will be allowed to select an accounting firm to audit its balance sheets for six years, then for the next three years the Securities and Future Commission will choose from three accounting firms that the company proposes. The companies that have not chosen an auditor in the last six years will be the first to undergo the new regulation.

The new rule will apply to conglomerates whose total assets amount to over 5 trillion won ($4.3 billion) and those that are considered vulnerable to accounting fraud.

These are companies whose majority stakeholder owns more than 50 percent stakes in the company, including friendly shares owned by family members or business partners, as well as those who have had frequent changes of majority stakeholders in the last three years; more than two changes of companies listed on the benchmark Kospi and more than three on companies traded on the secondary market Kosdaq.

The rule will also apply to companies with unstable financial situations, such as those seeking public investment more than thee times in the last two years, or receiving unsecured grants from others more than 20 times.

The FSC expects the new regulation to apply to roughly 40 percent of companies listed on the stock markets. It also expects the new system to help raise the independence of the accounting firms auditing companies’ balance sheets.

As of last year, 6.9 percent of the companies listed on the local stock market had the financial authority to pick auditors. These were companies that were under special monitoring by the government due to excessive debts or falsified auditing results.

However, even under the new regulations there are some exceptions.

These include companies that are being traded on overseas stock markets, including the New York Stock Exchange and the London Stock Exchange, as well as companies that have a special auditor selected according to foreign investment contracts.

But the special auditor has to be an international accounting firm with members in over 100 countries.

The FSC said it has decided to give exceptions to companies that are traded in major overseas stock exchanges as these, in most cases, are also audited according to the overseas markets’ regulations.

“Recently there has been the need to fundamentally reforming the system in selecting auditors as there has been accounting fraud involving the accounting firm and major companies,” said Kim Tae-hyun, FSC director on capital market . “We have designed the system so that companies that have huge influence on the economy or those vulnerable to fraud are excluded from selecting their own auditor.”

BY LEE HO-JEONG [lee.hojeong@joongang.co.kr]

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