Samil PwC "External Audit Determines Corporate Value by Quality, Not Price"

On the 23rd, the Samil PwC Governance Center suggested that “to achieve high-quality external audits within an appropriate budget, auditors should first be selected based solely on audit quality, and then audit fees should be determined later based on standard audit hours.”

On the same day, the Samil PwC Governance Center announced the publication of ‘Governance Focus Issue No. 27,’ which includes a special contribution by Professor Jeong Seok-woo of Korea University containing this proposal. The article, titled ‘Effects and Improvement Directions of Accounting System Reform,’ outlines considerations for audit committees when selecting external auditors capable of performing high-quality external audits.

According to the article, since the 2018 accounting reform, various systems have been introduced to enhance accounting transparency and reliability. Among these, the selection of external auditors by the audit committee is considered the most critical, as it guarantees the independence of external auditors and helps ensure higher-quality external audits.

Several empirical studies in academia have shown that, following the accounting reform, both audit fees and audit hours generally increased, and audit quality improved. Furthermore, companies that invested more audit hours or paid higher audit fees were reported to have better audit quality.

However, according to last year’s survey of outside directors conducted by Samil PwC, the proportion of audit committees that practically select external auditors averaged 58% (69% for listed companies with assets over 2 trillion KRW, and 47% for those with assets under 2 trillion KRW). This suggests that in many companies, management still effectively selects the external auditors. Notably, only 47% of companies with assets over 2 trillion KRW (31% for those under 2 trillion KRW) have detailed appointment procedures for external auditors, and auditor appointments are made accordingly.

The importance placed on audit fees and audit hours, which are key indicators in auditor selection, varied depending on company size. Companies with assets over 2 trillion KRW prioritized audit hours (41%) followed by audit fees (36%), whereas companies with assets under 2 trillion KRW prioritized audit fees (42%) followed by audit hours (31%). Professor Jeong analyzed, “If audit hours are considered first, efforts to improve audit quality will be made while determining audit fees. However, if audit fees are considered first, audit hours may be decided within the fixed audit fee, which could negatively affect actual audit quality.”

Professor Jeong Seok-woo of Korea University proposed a method where auditors are first selected based solely on quality criteria excluding fees, and then fees are negotiated with the selected auditor based on standard audit hours. He stated, “Optimal auditor selection ultimately leads to improved accounting transparency and enhanced corporate value, which can contribute to resolving the Korea discount (undervaluation of the Korean stock market).” More details can be found on the Samil PwC website.