[Opinion] Capital Market Soundness and Audit Quality

Choi Gukhyun, Professor at the College of Business Administration, Chung-Ang University

More than 99% of Korean listed companies adopt a fiscal year from January 1 to December 31, and most tend to hold their shareholders' meetings in the 3rd or 4th week of March, which is referred to as the shareholders' meeting season.

After the shareholders' meeting season ends, the company's previous year's business performance, financial status, and related disclosure items are electronically disclosed to the public (dart.fss.or.kr), and independent external auditors' audit reports on the company's financial statements and disclosures are made public. A few days later, unusual points in the audit reports of listed companies that have completed their shareholders' meetings begin to come to our attention.

Among these, the news that draws the most attention is related to the audit opinions on the financial statements of listed companies, specifically news about companies subject to delisting. According to the Korea Exchange's announcement on April 3 this year, adverse audit opinions were submitted for 4 companies listed on the KOSPI market and 38 companies listed on the KOSDAQ market, resulting in grounds for delisting.

By listing as a stock company, the company enables the free trading of shares representing ownership interests in the market, allowing listed companies to receive appropriate valuations and, if necessary, to smoothly raise additional capital through the capital market. Investors can decide to hold shares and freely liquidate (cash out) their shares in the market.

However, if a company is delisted, capital raising and share liquidity become very difficult, and companies involuntarily delisted experience a sharp vertical plunge in share prices due to the seriousness of the delisting causes. Among adverse audit opinions in audit reports, a “qualified opinion due to scope limitation,” an “adverse opinion” indicating that the financial statements were not prepared according to accounting standards, and a “disclaimer of opinion” expressed when the auditor cannot perform the audit or when the company’s going-concern is seriously in doubt are grounds for delisting in both the KOSPI and KOSDAQ markets.

However, delisting of companies subject to delisting causes is not implemented immediately. The Listing Committee (Corporate Review Committee) of the KOSPI (KOSDAQ) market listens to the company's objections and begins discussions on the delisting decision. Generally, companies subject to delisting causes have their objections accepted and are granted an improvement period of about 10 days after the statutory deadline for submitting the next business report.

The controversial issue here is that granting most companies subject to delisting causes a minimum one-year improvement period disrupts the capital market and creates a market mixed with lemons, acting as a discount factor for the entire capital market.

Some argue that sending such companies to the over-the-counter (OTC) market, providing limited but real opportunities for rehabilitation while protecting investors and securing the soundness of exchange markets, limits discount factors in Korea’s capital market and represents a systemic improvement for capital market development. They claim that such systemic improvements protect listed companies and investors and enhance the market’s self-correcting function, increasing the efficiency of scarce economic resources in the market economy, including Korea’s economy.

With the enactment, revision, and maintenance of the “Act on External Audit of Stock Companies” and related laws and regulations in 2017, efforts to enhance this market self-correcting function are hoped to become a pillar to overcome the difficult domestic and international situations surrounding Korea’s economy and capital market.

[Choi Guk-hyun, Professor, College of Business Administration, Chung-Ang University]