Financial Services Commission Announces Amendment to External Audit Regulations... "Establishing Evaluation Criteria for Designation Grace Period"

Basis and evaluation criteria for periodic auditor designation exemptions will be established for companies with excellent accounting and audit governance.

The Financial Services Commission announced on the 15th a partial amendment to the regulations on external audits and accounting, including these contents. From that day until the 28th, after the notice of regulatory changes, it is expected to be promptly finalized and implemented through deliberation and resolution by the Securities and Futures Commission and the Financial Services Commission.

First, grounds and evaluation criteria for exemption from periodic designation for companies with excellent accounting and audit governance will be established. The amendment includes 17 detailed evaluation items across five major evaluation areas related to accounting and audit governance: ▲independence of audit functions ▲expertise of audit committees ▲effectiveness of accounting and audit systems ▲transparency of auditor appointment procedures ▲efforts to enhance accounting transparency.

In addition, if it is difficult to immediately meet the evaluation criteria due to factors such as the term of audit committee members or the cycle of audit contract conclusion, alternative measures such as amendments to the articles of incorporation or submission of commitment letters will be allowed. However, grounds will be established to cancel the exemption decision if these alternative measures are not fulfilled after submission. Along with this, to select companies exempted from periodic designation, the basis for establishing an 'Accounting and Audit Governance Evaluation Committee' to professionally evaluate corporate governance will be codified.

The overlapping burden of periodic designation and discretionary designation will also be alleviated. Until now, if a reason for discretionary designation arose during the period when a listed company was under periodic designated audit, the government designated an auditor again for three years after the audit ended. However, the uniform additional discretionary designation led to excessively long designation periods. There was also a problem of excessive audit burden due to frequent auditor changes.

Going forward, even if a reason for discretionary designation arises during the periodic designation period, if it is not related to problems with the current auditor or to accounting fraud or audit deficiencies, the existing auditor will continue to conduct the audit. However, financial authorities will notify the current designated auditor of the occurrence of discretionary designation reasons and consider related risks when establishing and implementing audit procedures.

The method of applying auditor designation scores will also be improved. Currently, auditor designation scores are calculated for each accounting firm based on the number of certified public accountants and quality control levels. Auditors are then designated in order of highest scores to companies with larger asset sizes, and scores are deducted by a certain ratio each time a company is assigned.

However, there were criticisms that the proportion of designated companies assigned to the so-called 'Big 4' accounting firms was high and that the score deduction when assigning companies with assets over 2 trillion won was unfair. To address these shortcomings, the weighting (scale-based weighting) applied when deducting auditor designation scores will be rationally differentiated by considering audit fees, audit input hours, and the level of audit quality improvement to date.

Separately, the Financial Services Commission and the Financial Supervisory Service will operate a 'Task Force (TF) for Reforming Auditor Designation Methods' starting this month to restructure auditor designation criteria and methods focusing on 'audit quality' and 'industry expertise.' Through this, they plan to discuss ways to significantly expand 'designation audit incentives' for accounting firms with excellent inspection quality and high expertise in specific industries, thereby promoting competition in audit quality among accounting firms.

When discretionary designation is applied to unlisted companies, the companies' choice rights will also be guaranteed. For unlisted companies, the discretionary designation period is set at 1 to 2 years. When the period ends, the auditor must be mandatorily replaced. However, frequent auditor changes lead to auditors with low understanding of the company and industry being appointed, resulting in a decline in audit quality. There were also opinions that corporate burdens increase. To improve this, if the company wishes, an extension option will be introduced allowing the same auditor to conduct designated audits for three years from the time of designation.

Basis for applying penalty reductions to value-up excellent award companies will also be established. Since May this year, the Financial Services Commission plans to annually award value-up excellent companies to those that disclose and make efforts to comply with corporate value enhancement plans. For companies receiving 'ministerial-level awards,' the level of measures based on audit results will be reduced by one step for the next three years, and fines may be reduced by up to 10% (limited to one time). However, companies with serious accounting standard violations such as intentional accounting fraud will be excluded from incentive eligibility.