Half of Listed Companies Subject to Designated Auditor System...Financial Authorities "Strengthening Supervision of Audit Service Quality"

[Asia Economy Reporter Park Jihwan] This year, 1,253 companies, about half of all listed companies, are expected to receive auditor appointments through the designated auditor system. Financial authorities plan to strengthen supervision to improve the quality of audit services by accounting firms as the number of companies receiving auditor appointments continues to increase.

According to the Financial Services Commission on the 17th, the number of listed companies with designated auditors has been increasing annually. The proportion of listed companies with designated auditors was 7.8% in 2017, rising to 12.7% in 2018, 34.7% in 2019, and reached 44.5% last year. This year, it is expected that 51.6% of listed companies will have designated auditors.

The financial authorities announced the "Model Code of Conduct for Designated Audit Work" to strengthen supervision aimed at enhancing the audit quality of designated auditors. First, companies and designated auditors are now required to consult in advance on audit contract matters such as audit personnel, time, and fees. Auditors must present the audit contract terms along with supporting documents to the company.

Measures are also being implemented to prevent designated auditors from abusing their position by demanding unreasonable documents from companies. Companies are restricted from being asked to obtain verification related to accounting treatments from third parties without reasonable grounds.

If a designated auditor determines that the previous year's financial statements need to be revised, they are required to consult with the company and the previous year's auditor. This is because cases of disagreement between previous and current auditors have increased since the enforcement of the new External Audit Act. If differences cannot be resolved after consultation, inquiries can be made to the Financial Supervisory Service or the Korea Accounting Standards Board, or the company can coordinate opinions through the "Previous and Current Auditor Opinion Adjustment Council."

The guidelines also include authoritative interpretations regarding standard audit hours. Until now, there was a market misconception that if audit hours fell short of the standard audit hours, the accounting firm would be disciplined by the Korean Institute of Certified Public Accountants and the company would be required to appoint an auditor. However, in reality, penalties are imposed only when audit hours are unreasonably and excessively low compared to other companies or the previous year's audit hours.

There are plans to strengthen sanctions against accounting firms in the future. If a designated auditor refuses to cooperate without reasonable grounds despite reports of unfair practices, their auditor designation will be canceled. Subsequently, after investigations by the Financial Supervisory Service and related agencies, sanctions such as exclusion points and disciplinary actions will be imposed.

This model code is scheduled to be finalized next month following the administrative guidance enactment procedures. The Previous and Current Auditor Opinion Adjustment Council will complete its preparation by the end of the year and begin accepting adjustment requests from January 1 of next year.