[Woori Bank Embezzlement] FSC "Assets Must Be Verified" vs Accounting Firm "Crime Unidentifiable"

Woori Bank's 61.4 Billion Won Embezzlement Began in 2012
That Year, Financial Authorities Approved Revision of 'Accounting Audit Standards'
"Auditors May Fail to Detect Fraud" Acknowledged
Responsibility for Detecting Fraud and Errors Firmly Assigned to 'Management'

[Image source=Yonhap News]

Financial authorities and the Korean Institute of Certified Public Accountants (KICPA) are understood to have revised the auditing standards in 2012, the year when the embezzlement incident at Woori Bank began. The revision explicitly stated that "an audit is not an investigation," acknowledging its limitations. This has led to analyses suggesting that it may be difficult to hold the accounting firm responsible for Woori Bank accountable. Depending on the Financial Supervisory Service's (FSS) audit results and disciplinary decisions, conflicts with the accounting firm are expected to intensify.

According to financial authorities on the 3rd, at the end of 2012, the Financial Services Commission approved comprehensive revisions to the format and content of auditing standards, including amendments in 33 areas. Auditing standards are rules that must be followed when auditing corporate accounting. Each standard is drafted by the KICPA and approved by the Financial Services Commission.

Among these, "Standard 200," which defines the auditor's purpose and performance, was revised. In particular, the nature of the audit, which had not been previously specified, was clarified. The standard described the nature of the audit as "not a public investigation aimed at uncovering criminal suspicion." It also added that "auditors are not granted specific legal authorities such as search rights."

The limitations of auditors were also acknowledged. Since corruption committed by companies and their executives often involves "sophisticated and meticulously planned schemes" to conceal wrongdoing, it may be difficult to detect such acts through audit procedures. Document manipulation was cited as an example. The standard explained, "Audit procedures are not effective in detecting distortions when documents have been manipulated," and "auditors are not trained as experts in verifying the authenticity of documents, nor can such expectations be placed on them."

"Standard 240" is similar. This standard deals with the auditor's responsibility regarding fraud. It clearly states that the responsibility to prevent and detect corruption and errors such as embezzlement lies with "the company's governing body and management." This means that accounting firms are not obligated to detect crimes committed by companies and their executives.

It also mentions that "auditors may suspect the occurrence of fraud and, rarely, may identify it," but "do not make legal judgments on whether fraud has actually occurred." Furthermore, it states that "even if auditors plan and perform audits appropriately according to the standards, there is a risk that material misstatements in financial statements may not be detected due to the inherent limitations of an audit."

Accountants Boiling Over Responsibility Debate... "If So, Give Us Judicial Authority"

In this context, voices are emerging that it may be difficult to hold the accounting firm responsible for the audit during the Woori Bank embezzlement incident. Currently, the FSS is investigating the circumstances surrounding employee A of Woori Bank embezzling 61.4 billion KRW of company funds over six years starting in 2012. The last embezzlement in 2018 is known to have been possible due to A manipulating documents. Accordingly, the FSS has initiated an unscheduled inspection of Woori Bank and started an audit of the accounting firm responsible for the audit at that time. The accounting firm then was Deloitte Anjin LLC.

On the other hand, Jeong Eun-bo, Governor of the Financial Supervisory Service, is leaving open the possibility of holding the accounting firm responsible. On the 29th of last month, after a meeting with CEOs of foreign financial companies, Governor Jeong told reporters, "Basically, accounting firms should verify whether cash on hand actually exists and whether inventory assets are present," adding, "There is a question as to why such things were missed during the audit and external audit." This implies that the accounting firm should have checked whether the assets actually existed.

However, industry insiders argue that accounting firms cannot examine all details. Verification of inventory assets is conducted only in specific cases where errors or fraud are suspected, not for all accounting items.

Nevertheless, if the FSS holds the accounting firm partially responsible, conflicts between the authorities and the industry are expected to intensify. Already, complaints against financial authorities are emerging within communities of accounting firm employees. One accounting firm official sarcastically said, "Document forgery is completely impossible to detect through any audit procedure," adding, "Put methods for detecting forged seals in the auditing manual and give accountants judicial authority as well."