Korean companies call for easing in auditor system four years after adoption

[Photo by MK DB]

Korean companies are calling for an easing or abolishing the so-called auditor rotation system, which was introduced in 2019 to enhance Korean companies’ accounting transparency following a scandal involving executives of Daewoo Shipbuilding & Marine Engineering Co., due to higher cost pressure.

The Korea Chamber of Commerce and Industry (KCCI) announced on Wednesday that it submitted its opinion to the Financial Services Commission that demands abolition of the auditor rotation system.

“Auditor rotation undermines audit quality and only adds to the burden of companies as it is solely focused on strengthening independence such as breaking collusion between auditors and auditees,” KCCI said.

Under the system, the Securities and Futures Commission of the FSC appoints a new auditor for the next three years if a company has appointed the same auditor for six years. It was introduced to prevent companies from manipulating their accounts while being audited by the same auditor for a long time. The system took effect in 2019 and started applying from fiscal year 2020.

There are concerns that easing the restriction just four years after it was introduced may eventually make the system obsolete. The FSC plans to hear feedback through its accounting reform evaluation board established last year.

The business circle agrees that auditor rotation helps improve auditors’ independence but maintains that mandatory designation of auditors comes with social cost as it could undermine the qualifications of auditors and discourage competition. They say the system has to be abolished or improved to capture expertise, not just independence.

The idea is that corporate transparency can be enhanced better through whistleblowing, stricter supervision and audit committee activities. The KCCI says that even the U.S. does not require firms to rotate auditors and the U.K. focuses on improvement through market forces with reinforced supervision of accounting firms and renewed monitoring schemes.

Nevertheless, many criticize that changing a system that greatly improved accounting transparency in the last four years will have more downsides than upsides.

[Image source: Gettyimagesbank]

Those in favor of the auditor rotation say that the accounting scandal involving Daewoo Shipbuilding happened less than 10 years ago due to lack of auditor independence and that the system cannot be shaken in just four years of its birth when the Act on External Audit of Stock Companies was revised to improve the overall accounting system. The accounting industry is strongly against the abolition or amendment, saying it is as good as “retreating when hard steps are underway to enhance accounting transparency.”

They are concerned that returning to the past will harm institutional stability when, in fact, strengthening the accounting system is needed in light of the recent embezzlement cases at Osstem Implant Co. and Woori Bank last year.

Overseas investment banks, which can be relatively objective on the scene, are also positive about mandatory auditor rotation.

At the end of last year, the Financial Supervisory Service revealed a policy to strengthen communication with market actors to improve auditor rotation and disclosed the result of its meeting with industrial members. Overseas investment banks are known to have said at the meeting that auditor rotation has a positive impact on improving the weak governance of Korean companies and enhancing accounting transparency although it may not be prevalent in other countries.

Overseas investment banks said the system helped relieve the “Korea discount,” which refers to a tendency for Korean companies to have lower valuations than global peers due to factors such as the dominance of opaque conglomerates and low dividend payouts.

“Mitigating or abolishing systems aimed at accounting transparency is not compatible with creating a good environment to do business,” said an unidentified official from the accounting industry. “Korea’s accounting transparency ranking is rising from the bottom, but it is still below mid-level and the system has to be retained to keep up with Korea’s national status that has scores of global companies.”