To Companies Excelling in Governance and Utilizing Digital Audit Technology... Reduction in Standard Audit Hours

Exemption and Partial Application of Standard Audit Hours for Burdened Medium and Small Enterprises

The financial authorities have decided to extend the exemption and partial application measures for the standard audit hours for mid-sized and small-to-medium enterprises (SMEs), which were originally set to expire this year, considering the burden on companies. Additionally, starting next year, if a company demonstrates excellent corporate governance or enhances audit efficiency by utilizing digital audit technologies, the standard audit hours can be applied at a reduced rate.

Extension of Exemption and Partial Application Measures for Mid-sized and SMEs

According to the Financial Services Commission on the 4th, the Korean Institute of Certified Public Accountants finalized the standard audit hours to be applied for three years from next year through deliberations by the Standard Audit Hours Deliberation Committee.

Standard audit hours refer to the benchmark setting the general and average audit hours that external auditors must invest, categorized by industry and company size. It establishes the minimum time external auditors must spend to ensure a certain level of audit quality and protect stakeholders.

The committee decided to extend the exemption and partial application measures for standard audit hours, considering the burden on mid-sized and SMEs. Since the introduction of the standard audit hours system raised concerns about a sharp increase in monitoring costs for companies, the application of standard audit hours has been differentiated based on listing status and company size.

First, the deferral of the application of standard audit hours for small companies with total assets under 20 billion KRW, which was set to last until this year, will be extended until 2027. The application rate for listed and unlisted companies with total assets under 2 trillion KRW will also be extended through next year without any additional increase, maintaining the same rate as this year. However, the decision on whether to extend the partial application beyond 2026 will be reviewed by the committee in the second half of next year.

Consideration of Corporate Governance Improvement Efforts and Use of Digital Audit Technologies

The Financial Services Commission decided to consider characteristics such as companies' efforts to improve corporate governance and accounting transparency, and the use of digital audit technologies in determining standard audit hours. If a company either (1) independently appoints external auditors and has excellent governance that effectively checks and supervises management, or (2) the auditor integrates audits of internal accounting control systems and financial statements or enhances audit efficiency by utilizing digital audit technologies during the audit process, the standard audit hours can be applied at a reduced rate. Reducing standard audit hours can lower audit costs.

Furthermore, the system was supplemented to allow reasonable calculation of standard audit hours by considering specific characteristics of each company. For example, small subsidiaries with low audit input hours can be deducted from the number of subsidiaries when calculating standard audit hours for consolidated financial statement audits, and standard audit hours can be reasonably applied according to the characteristics of account items.

Lastly, amendments to laws aimed at reducing the burden on companies regarding internal accounting control systems were reflected. Due to amendments in external audit laws, the reduced audit burden related to internal accounting control systems can now be deducted from the standard audit hours.

The revised standard audit hours will be applied from fiscal years beginning on or after January 1.

Strengthening Neutrality in Standard Audit Hours Deliberation

Meanwhile, the External Audit Act requires reviewing the validity of standard audit hours every three years, considering changes in the audit environment, and publicly re-estimating them.

To this end, the Korean Institute of Certified Public Accountants listens to stakeholders' opinions and reflects them through procedures prescribed by presidential decree, including deliberations by the Standard Audit Hours Deliberation Committee.

Notably, from this committee onward, the neutrality of the standard audit hours deliberation has been strengthened. In response to criticisms that the committee was composed in a way favorable to the accounting industry, the enforcement decree of the External Audit Act was amended to change the recommending institution for members representing accounting information users from the president of the Korean Institute of Certified Public Accountants to the Financial Supervisory Service Commissioner. Additionally, the number of members recommended by the president of the Korean Institute of Certified Public Accountants was reduced from nine to five, and the chairperson of the committee is now a member recommended by the Financial Supervisory Service Commissioner instead of one recommended by the Korean Institute president.

The committee reached a unanimous decision on the current standard audit hours after five meetings, private expert research projects, stakeholder meetings, and public hearings.

The Financial Services Commission explained, "The unanimous approval of this revision to the standard audit hours is the result of mutual understanding between the accounting industry and the corporate sector and their cooperation toward the common goal of enhancing accounting transparency."

The Korean Institute of Certified Public Accountants stated, "We have reasonably improved the standard audit hours to alleviate the difficulties faced by companies, who are partners in accounting reform, amid challenging economic conditions. Going forward, we will continue efforts to enhance accounting transparency while listening more carefully to the voices of companies and communicating with them."