Unveiling the '3-Year Grace Period for Designated Audits' Detailed Conditions... Discussion at Tomorrow's TF Meeting

Discussion with Accounting and Business Sectors at Tomorrow's Private TF Meeting
Final Step Before December Government Final Proposal Announcement
Evaluation of Audit Committee Independence and Internal Accounting Control System

Yonhap News

On the 12th, financial authorities will hold a task force (TF) meeting to discuss a plan to postpone the application of the "Periodic Auditor Designation System (Periodic Designation System)" for companies with excellent governance for three years. This meeting will serve as an opportunity to hear opinions from the accounting industry and the business community, and it is expected to be the final meeting before the government announces its plan next month.

According to the government and the financial investment industry on the 11th, the Financial Services Commission will hold a TF meeting on the 12th to discuss detailed criteria for selecting companies eligible for the postponement of the Periodic Designation System, with participation from the accounting industry and the business community. The meeting will be held privately and is planned to take place once or twice this month. The Financial Services Commission has prepared detailed plans based on a draft prepared by the Korea ESG Standards Institute.

The Financial Services Commission has held more than five TF meetings involving the accounting industry and the business community to coordinate positions between the two sides. As the two industries have been sharply divided over the relaxation of the Periodic Designation System, the financial authorities have taken on a mediating role. The accounting industry has argued for maintaining the Periodic Designation System citing "accounting transparency," while the business community has advocated for its relaxation due to "audit burdens."

Although the detailed evaluation criteria have not yet been finalized, the focus is on selecting companies that ▲ have no concerns about accounting fraud, ▲ have an independently and professionally composed audit committee, ▲ operate effectively, and ▲ demonstrate excellence in internal accounting management efficiency. The evaluation committee, which will be launched in 2025, will decide on the postponement targets based on these criteria.

It is known that the financial authorities are considering a condition for evaluating the independence of audit committees, where companies elect two or more audit committee members separately. According to the current Commercial Act, listed companies with total assets of 2 trillion won or more must establish an audit committee, and at least one audit committee member must be separately elected at the shareholders' meeting. If companies elect two or more audit committee members separately beyond this condition, they are more likely to be recognized for audit independence and excellence in governance.

However, it is estimated that the business community's acceptance of the strengthened condition for separate election of audit committee members will be limited. Companies have continuously expressed dissatisfaction, citing increased concerns about management interference by speculative capital since the introduction of the separate election system for audit committee members. Amid ongoing discussions on amendments to the Commercial Act, similar issues have been raised, with companies expressing concerns about management instability. The Korea Chamber of Commerce and Industry criticized in a report on the 5th, stating, "Since the 2020 amendment to the Commercial Act requiring the separate election of one audit committee member, holding companies can only exercise 5.1% of their internal shareholding of 48.7%."

The evaluation criteria for internal accounting management efficiency are also a highly interested area for the industry. Since 2019, audits of internal accounting management systems have been conducted for listed companies with total assets of 2 trillion won or more, and in 2023, this was expanded to consolidated financial statements. Listed companies with total assets below 2 trillion won have been exempted until 2029. It is expected that companies that have successfully institutionalized the system as a model beyond mandatory requirements will be targeted. A Financial Services Commission official explained, "It is undecided whether to apply differentiated criteria by company size," adding, "Among the companies granted postponement, some are voluntarily seeking improvements."

Unlike the initial policy announcement, the Financial Services Commission's evaluation criteria now include a necessary condition that the company must have "no concerns about accounting fraud." This is a supplementary measure accepting criticism from the accounting industry that postponing the Periodic Designation System hinders corporate value enhancement. Companies with weak accounting and audit governance or significant concerns about accounting fraud are expected to be excluded from the postponement targets.

The accounting industry maintains the position that companies should enhance accounting transparency through strict audits. Especially since the inauguration of Choi Un-yeol, chairman of the Korean Institute of Certified Public Accountants, known as the "father of the External Audit Act," the focus has been on defending the original plan of the Periodic Designation System. Even after the postponement incentive direction was finalized in June, he has publicly voiced concerns about accounting transparency through inaugural press conferences and media interviews.

In this process, the expression "exemption from the Periodic Designation System for a certain period," which the Financial Services Commission had used since the early stages of the policy, was recently replaced with "postponement of the application of the Periodic Designation System." This change caused some misunderstanding that the incentives for companies had weakened, but the financial authorities clarified, "There was significant market misunderstanding that it was a permanent exemption rather than a conditional one for a certain period, so this was corrected." They added, "This has been shared with the industry since the TF discussions, and the substance remains the same."