Increase in Fines After Implementation of Shinwoegam Act... 66.7 Billion Won Over 5 Years

Since the enforcement of the revised External Audit Act (Amendment to the External Audit Act), the total amount of fines imposed as a result of accounting inspections over the past five years has shown an increasing trend.

According to the Financial Supervisory Service on the 23rd, from January 2019 to March 2023, a total of 66.65 billion KRW in fines were imposed on 92 entities as a result of accounting investigations and inspections over the past five years. Fines under the Capital Markets Act accounted for 46.22 billion KRW, representing 69.3% of the total. This amount increased from 5.16 billion KRW in 2019 to 9.36 billion KRW in 2020. In 2021, it reached 19.34 billion KRW, and last year it rose to 29.03 billion KRW.

By subject of imposition, fines imposed on companies amounted to 56.78 billion KRW, accounting for 85.2%, followed by company affiliates with 5.85 billion KRW (8.8%), and auditors with 4.01 billion KRW (6.0%).

During the same period, fines under the External Audit Act amounted to 20.43 billion KRW, representing about 30.7%. There were no cases of fines imposed in 2019, but the amount increased from 1.97 billion KRW in 2020 to 3.32 billion KRW in 2021. Last year, it surged to 12.35 billion KRW.

Fines under the External Audit Act have been possible to impose on financial statements prepared after November 2018, and since the first imposition in July 2020, the total amount imposed annually has shown an increasing trend. The first quarter of this year recorded 2.79 billion KRW.

Fines on companies accounted for the largest share at 12.65 billion KRW (61.9%), followed by company affiliates with 5.54 billion KRW (27.1%), and auditors with 2.24 billion KRW (11.0%).

If financial statements are prepared and disclosed in violation of accounting standards, monetary sanctions can be imposed on companies and others under the Capital Markets Act and the External Audit Act. Under the Capital Markets Act, fines are imposed when financial statements violating accounting standards are disclosed in securities registration statements and business reports.

Furthermore, with the enforcement of the revised External Audit Act, fines can also be imposed on companies and auditors who violate accounting standards or audit standards. The subjects of imposition include all companies subject to external audits and persons involved in illegal acts. The amount imposed on companies is 20% of the amount violating accounting standards, 5 times the monetary compensation such as remuneration for executives and company affiliates, and up to 5 times the audit fees for auditors. The imposition standard is that only the amount exceeding the fine calculated under the Capital Markets Act is imposed as a fine under the External Audit Act.

The Financial Supervisory Service evaluated the effect of imposing fines under the External Audit Act, stating that for companies, the scope of monetary sanctions for violations of accounting standards now includes unlisted companies subject to business report submissions, significantly increasing both the subjects and amounts of fines imposed.

Additionally, the scope of those subject to fines has expanded to include all parties related to accounting fraud such as auditors and executives, resulting in a significant increase in company affiliates receiving fines. For auditors, most of the imposed amounts exceed audit fees, indicating that the fine system has been established as an effective monetary sanction for negligence in audit procedures.