[Initial Insight] The Season of Financial Sector Personnel Changes, Focus Should Be on Internal Control

[Asia Economy Reporter Song Hwajeong] The season of personnel changes has arrived. When the cold wind begins to blow, companies become busy preparing for year-end personnel reshuffles and organizational restructuring. Industry attention focuses on who will become the heads of major companies. The financial sector is no exception. These days, when meeting financial sector personnel, the hottest topic is who is rumored to be in line for the chairman position and who might be able to renew their term. Some financial institutions have already started the selection process for their next leader.

While the public's interest lies in who will be appointed, the most important aspect for the person becoming the head of a financial institution is internal control. Recently, regarding the appointment of CEOs in financial companies, Lee Bok-hyun, Governor of the Financial Supervisory Service, emphasized the importance of internal control compliance by stating, "If there are those who have properly established and implemented internal control standards and those who have not, the financial authorities will scrutinize the latter more closely and tighten supervision."

Following the private equity fund scandal in 2020 and this year's embezzlement of approximately 70 billion KRW at Woori Bank, financial accidents have continued, bringing the issue of internal control in financial companies under scrutiny. During this year's National Assembly audit, lawmakers criticized ongoing financial accidents such as bank embezzlement and malfunctioning internal controls, and bank presidents who appeared at the audit had to bow their heads and apologize to the public for causing concern.

Since the 1997 foreign exchange crisis, Korea introduced an internal accounting control system based on recommendations from the International Monetary Fund (IMF). At that time, the internal control system was established focusing on financial reporting, and regulations on internal control were set forth in individual financial business laws for financial companies. In 2017, with the enforcement of the Governance Act, the internal control systems previously regulated under individual financial business laws such as the Banking Act, Insurance Business Act, and Capital Markets Act were consolidated under the Governance Act. The Governance Act obliges major financial companies to establish standards and procedures that employees must follow when performing their duties to ensure compliance with laws, sound management, and protection of shareholders and stakeholders.

Experts cite passive responses as the reason why Korea's internal control system does not function properly. While Korea understands internal control mainly as compliance with legal regulations, major countries such as the United States and the United Kingdom view internal control from an enterprise-wide operational risk perspective and invest heavily in physical and human resources to strengthen internal control. Additionally, regarding violations of internal control, domestic standards for when and how to apply supervisory responsibility are unclear. Therefore, there are opinions that, similar to the US and UK, the scope of supervisory negligence should be explicitly specified to impose supervisory responsibility.

After the season of personnel changes passes and the final appointments are made, public interest, which was focused on who would be appointed, shifts to what and how the appointed leader will act. What the public expects is not just higher performance through interest income but the establishment of a reliable internal control system to prevent further embezzlement and financial accidents. The top executives of financial companies must keep this in mind.