The Financial Commission is set to expand audit opportunities for mid-sized accounting firms with strong audit quality, while mandating major firms to establish external expert-led audit quality oversight bodies as part of a reform of the accounting and auditing system.
On July 24, the Financial Commission announced a proposed amendment to the 'Regulations on External Audits and Accounting.' This amendment follows the 'Measures to Enhance Accounting and Audit Quality' announced in February, aiming to provide incentives for high-quality accounting firms and strengthen internal quality control systems at large firms.
First, the compensation system for firms with excellent audit quality will be enhanced. Previously, accounting firms were categorized into groups A to C based on the number of certified public accountants and their liability capacity, allowing only group A firms to conduct audits for large listed companies. This structure has drawn criticism for making it difficult for mid-sized firms with strong audit quality to audit large companies.
In response, the Financial Commission plans to double the liability capacity requirements and introduce a new 'group elevation exception.' Mid-sized firms that achieve top-tier scores in audit quality evaluations will be allowed to audit companies with asset sizes permitted for higher groups. However, to audit these higher-tier companies, they must secure liability capacity of at least 150% of the standard for that group.
For example, if a group B firm scores 95% or higher compared to the average score of group A and ranks within the top 20% of group B while maintaining liability capacity above 150% of group B standards, it will be designated as an exception group A firm and can audit companies with assets ranging from 2 trillion to 5 trillion won.
The method for calculating auditor scores will also be improved. The current system, which only allows for a maximum 10% bonus based on quality evaluation results, will be revised to include a potential 10% penalty and introduce relative evaluations by group to widen the score differences based on audit quality.
For major accounting firms, the Financial Commission will establish an external expert-led audit quality oversight system. It will require group A firms auditing large listed companies to set up an independent 'Audit Quality Oversight Committee.'
This committee must consist of a majority of independent external experts, including the chairperson. Their role will be to monitor whether the management of accounting firms is neglecting audit quality for profitability reasons and to oversee key related decisions in advance. The Financial Commission is also considering expanding this oversight system to all registered auditors for listed companies in the medium to long term after evaluating its operational performance.
Additionally, the requirements for the CEO and the director responsible for quality control of registered auditors will be revised. Going forward, the CEO must have at least seven years of experience in external audits, while the quality control director must have at least five years. Previously, the CEO only needed to meet a 10-year experience requirement in accounting or external audits, which allowed individuals without external audit experience to qualify based solely on accounting advisory experience.
The Financial Commission will announce the proposed changes for public comment from today until September 2, after which it will be finalized and implemented following approval from the Securities and Futures Commission and the Financial Commission.
* This article has been translated by AI.
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