FSC broadens auditing requirements

The country’s financial regulator will strengthen audit standards as several cases revealed that some audits fail to give investors vital information or warn against potential risks.

Under a new measure announced Thursday, the Financial Services Commission (FSC) will require all private limited companies - not just listed companies - to hire external auditors.

The primary targets are local branches of foreign companies including Apple, Google, Amazon and Chanel.

The scope of audits will be widened.

The role of auditors has been largely confined to checking for errors in financial statements submitted by corporations. The FSC will require auditors to disclose wider areas and detail risks such as labor disputes, patent expirations and disposal of important assets.

“We are not aiming to amend merely a set of rules,” said Park Jung-hoon, director general at the FSC’s capital markets bureau. “We hope that the change will form a new order in the capital market.”

The announcement came after major corporate scandals including that of Daewoo Shipbuilding & Marine Engineering in which audit reports totally failed investors and lenders. The FSC will unveil a more detailed auditing reform next month.

The new auditing measures will also toughen monitoring of corporate public disclosers by the audited companies if they are in “close call” situations.

A close call situation is when certain events or conditions could cast significant doubt on the audited company’s ability to continue as a going concern, but after reviewing the management’s plans to deal with the events or conditions, management and the auditor concluded that no material uncertainty exists.

The regulator will look at whether the entity fulfilled public disclosure requirements about the factors that led to the close call.

The agency will implement the new standard in different time frames depending on the size of the audited companies.

“Companies with 2 trillion won [$1.84 billion] in assets may need to adopt the new system starting in 2019 when auditors write a report for the 2018 fiscal year,” Park said.

He went on to note that the reforms will go into effect in 2020 for companies with 100 billion won in assets and in 2021 for companies with less than 100 billion won.

BY PARK EUN-JEE [park.eunjee@joongang.co.kr]