[Public Voices] Corporate Value-Up and Reflections on the Auditor Rotation System

Jung Woo-yong, Vice Chairman of Policy, Korea Listed Companies Association.

Corporate value-up programs aimed at resolving the Korea Discount are gaining attention. Although various institutional support measures have been proposed, the problems of the external audit system, which is one of the difficulties faced by companies, have not been addressed.

The accounting fraud issue triggered by Daewoo Shipbuilding & Marine Engineering's accounting scandal in 2016 became a major social issue, and many companies were stigmatized as engaging in accounting fraud. As a result, from 2020, listed companies were required to undergo audits by government-designated accounting firms under the pretext of improving the accounting quality and transparency of listed companies. Companies opposed this, pointing out various side effects arising from the infringement of autonomy and the collapse of the principle of private autonomy.

How can the auditor rotation system be evaluated after five years? Research results on improving accounting quality and transparency show mixed evaluations, contrary to the rationale claimed for the introduction of the system. The reason is that measuring accounting quality and transparency is more difficult than expected, and more precisely, the rotation system is not the perfect remedy for improving accounting transparency. In other words, the rotation system is far from improving accounting quality and transparency, and other remedies are needed.

Since the introduction of the rotation system, dissatisfaction in the field has increased, and audit fees have nearly doubled over five years. Previously, auditors and the audited employees collaborated as equals, but after the rotation system, many complaints have arisen that auditors make unreasonable demands or push contracts that they did not do during free appointment. In other words, the achievements of improving accounting quality and transparency, which were presented as a noble cause, are ambiguous, while the side effects are objectively clear.

What about the situation in advanced countries? Not only major advanced countries but also countries based on market economy systems have not introduced the rotation system. Then why do advanced countries allow companies to freely contract audits? It is because this is not a public area where the government should intervene. In Korea’s case, it can be seen that such measures were taken because of the high public interest in corporate accounting at the time, making government intervention unavoidable, but whether this should be maintained continuously is questionable.

According to the 2020 report by the Association of Certified Fraud Examiners (ACFE) on the detection routes of occupational fraud, whistleblowing accounts for 43%, internal audits 15%, management review procedures 12%, and external audits only 4%, with employees being the highest whistleblowers at 50%. This means that detecting fraud through external audits is by no means easy.

It is reasonable to prevent accounting fraud through strengthening internal whistleblowing, enhancing punishment and supervision of those responsible for fraud, and strengthening education for corporate owners and accounting personnel, and this is not a solution that the rotation system can provide. Although it takes time, researching to improve accounting quality and establishing it through transparency education is the remedy that aligns with global standards.

We should not dismiss the words of a certain businessperson who said, "The introduction of the rotation system has declared to the world that Korea’s listed companies are dishonest companies that make accounting opaque. Isn’t it natural that Korean listed companies are undervalued?" as mere complaints, and we must remember that this system is also one of the causes of the Korea Discount.

Jung Woo-yong, Vice Chairman of Policy, Korea Listed Companies Association