Overview of the Accounting Supervision regime in Korea
30 Jun 2018
The financial regulatory authority in Korea conducts accounting supervision of the companies subject to independent external audit under the Act on External Audit of Joint Stock Companies to verify whether proper accounting treatments and audit procedures have been performed. The accounting supervision regime seeks to examine whether applicable accounting and auditing standards have been followed, and if any violations of the standards have occurred, sanctions are put in place against the party responsible for the violations. The Accounting Supervision regime will improve the integrity of the accounting information, and contribute to the protection of the stakeholders and sound business development of the companies.
The Accounting Supervision can be broadly classified into 1) Audit Review of companies subject to external audit and 2) Quality Control Inspection of the independent auditors. In this issue of the newsletter, we will briefly look at the major procedures involved in the Audit Review of companies subject to external audit.
2. Main contents
An Audit Review employs a two-tier system: The ‘Screening Inspection’ first examines the target company’s financial statements to identify any irregularities, and if there are any specific items that are highly likely to have been violated, a ‘Detailed Inspection’ is carried out to verify whether any violations have actually occurred.
At the Screening Inspection stage, the financial regulatory authority performs a financial analysis on the target company’s published financial information and determines whether any violations of the standards exist. The Screening Inspection is carried out through a voluntary cooperation of the target company, and if the identified irregularities can be reasonably explained by the target company, the case would be closed and no further inspection such as the Detailed Inspection would be performed.
However, if the company cannot reasonably explain the reasons for the identified irregularities, a Detailed Inspection is performed to investigate and verify whether any violations of the accounting standards have actually occurred. During this stage, the financial regulatory authority is given the right to request information submission to the target company, such that an investigation into the accounting books and relevant information can be performed.
If any violations have been identified during the Detailed Inspection, the case would be subject to an official review by the Inspection Committee and be required to be resolved by the Securities and Futures Commission. In case where the penalty resulting from the inspection exceeds KRW 500 million, the case would need to undergo a resolution of the Financial Services Commission.
The work flows during the Screening Inspection, Detailed Inspection and the Review/Resolution stages are as illustrated below:
3. Concluding Remarks
In order to improve efficiency in precautionary accounting oversight and inspection function, the Financial Supervisory Services (or “FSS”) has introduced “Theme Supervision” in 2014, in which companies are notified in advance of certain accounting issues that FSS will focus in a year. In each year, the FSS discloses major inspection cases on its website.
Furthermore, the accounting scandal at Daewoo Shipbuilding & Marine Engineering Co., ltd. has triggered the FSS to expand its targets and accordingly, it is becoming increasingly important for the companies to actively respond to the accounting supervision conducted by the financial regulatory authority. Therefore, to avoid receiving any sanctions from lack of understanding of the accounting supervision regime and the relevant procedures, it may be worthwhile to take precautionary measures to deal with the accounting supervision through an accounting or inspection expert.
In next month’s newsletter, we will look closely into the overview of the “Theme Supervision” regime introduced by the FSS and the themes that are at the center of attention for the year 2018.