Preparing for the IFRS: Reinforcing Auditing

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The FSC, the FSS and the accounting industry discussed last week to reinforce accounting auditing regarding listed companies, and to reinforce prevention of window dressing and various kinds of accounting fraud.

Window dressing activities were witnessed recently among marginal firms, and the problem was further aggravated as accounting firms deliberately neglected these frauds. Such incidents underlined the imminent need to improve policies that can prevent window dressing and loose auditing. Also, such revision is impending when considering the wholesale introduction of IFRS in 2011.

Starting from 2011, the adoption of the IFRS will become mandatory for listed companies with asset over 2 trillion won accompanied with voluntary early adoption from 2009 except financial institutions. However, companies of which asset is less than 2 trillion won are allowed to keep their current accounting system until 2013. (For further information on the impact of IFRS introduction in Korea please see: http://fsckorea.wordpress.com/2010/02/21/how-korean-companies-will-be-affected-by-adopting-ifrs/)

The foremost problem to be addressed amidst the introduction of IFRS is the improvement of the quality of auditors. The auditors will need to register themselves to the Securities and Futures Commission (SFC) so that the commission can periodically inspect their qualities as auditors. In addition, the SFC is expected to have broader rights in appointing auditors especially to listed companies which are undergoing fallout.

Accordingly, the auditing will become stricter. A new provision will be established to allow criminal prosecution of acts of coercion towards auditors. It has been found out that auditing activities had been seriously hindered due to blackmailing and coercion of auditors. The new law resembles that of the U.S which penalizes coercive activities towards auditors by fining maximum of 5 million dollars.

The regulations have not been yet revised nor enacted; however inspection definitely has been reinforced. The accounting industry has recently reinforced its auditing standards: listed companies are faced with strong inspection and are under risk of being disqualified as listed companies. The accounting firms have already announced ‘rejection’ to over 24 firms, including one firm of which the aggregate value of listed stock was over 0.4 trillion won. Furthermore, the accounting firms are ruling harshly towards late submission of audit report, which usually had not been expected as a rejection criterion.

Such phenomenon is the result of the reinforcing inspection of auditing itself: the accounting firms now have more risk to become regulated by the financial regulatory branch. Along with revision of the regulations by the FSC, the FSS recently announced to embark on auditing 8 accounting firms and 240 listed companies, focusing on their financial statements.

The improvements regarding the overall auditing policies by the FSC will be prepared during the first half of this year and are expected to be legislated.

Eunhou Song (amber1547@gmail.com)

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