[Editorial Note] A 'Second DSME Scandal' Is Only a Matter of Time

Accounting Firms as the Subordinate in Contract Competition
Lowering Audit Fees and Sacrificing Quality
Trust in the Accounting Industry Is an Asset to Be Protected by the Industry Itself

When auditors visit companies to conduct audits, who pays for their meals? Initially, the auditors pay for the expenses themselves and later bill the company for reimbursement. This is because an audit is a service provided at the request of the company, and meal expenses are considered essential out-of-pocket costs required to perform the service. The same applies to lodging and travel expenses.

However, it is said that auditors are cautious when claiming these expenses from companies. This is because they want to maintain a good relationship with the company in order to secure future audit contracts. Auditors are extremely careful to avoid any negative remarks from the company’s accounting staff, such as, "We won’t contract with that accounting firm next time." In fact, auditors sometimes find it difficult even to request necessary documents for the audit. Although they are supposed to act as the 'watchdogs' of corporate finances, in reality, they are often in a subordinate position.

This hierarchical relationship seemed to ease after the introduction of the 'periodic auditor designation system' following the Daewoo Shipbuilding & Marine Engineering (DSME) accounting fraud scandal, which broke out between 2012 and 2014 due to inflated sales and overstated capital. At the time, the undermining of auditor independence and the practice of low-price bidding were cited as the main causes of the scandal. The system was changed so that after companies freely select their auditors for six years, the financial authorities designate the auditor for the following three years. As auditors effectively became agents of the financial authorities, both audit fees and their status increased. However, this effect did not last long.

Currently, the accounting industry is reverting to the practices seen before the DSME scandal. To win contracts, firms are voluntarily lowering their prices. In the last fiscal year (2025), the average audit fee received by the Big Four accounting firms (Samil, Samjong, Anjin, Hanyoung) from freely contracted listed companies fell to its lowest level in the past five years. To make ends meet, firms are reducing both audit personnel and hours.

Price competition in the accounting industry can only be justified if it does not compromise service quality. Accounting firms, beyond being private enterprises, play a public role in ensuring the reliability and transparency of capital markets. If audit quality declines, it can lead to losses for investors who trust financial statements and participate in the stock market, and ultimately to a crisis in the capital market. The purpose of introducing the auditor designation system was to ensure that all audits are conducted as rigorously as designated audits, not only when designation is in effect. Trust is an asset that the accounting industry itself must protect.

Institutional support is also necessary. Low-price bidding is the result of the interests of companies seeking to reduce costs and accounting firms trying to secure more contracts aligning, and this cannot be resolved by leaving it unaddressed. If audit fees and hours have decreased compared to before, the reasons should be disclosed so that investors can make informed judgments. The relaxation of auditor designation criteria also needs to be approached with caution. The moment regulatory oversight is loosened, a 'second DSME scandal' will only be a matter of time.