The South Korean financial authorities are planning to revive the auditor registration system to allow the external audit of listed corporations and financial companies to be carried out only by accounting firms meeting certain size and performance requirements.
According to the financial authorities’ plan, any accounting firm that is to do the job has to meet the criteria of a review committee including external experts and government personnel and register itself with the Securities & Futures Commission of the Financial Services Commission. At present, the job can be done by any accounting firm that has a capital of 500 million won or more along with at least 10 certified public accountants.
The financial authorities are referring to the example of the Public Company Accounting Oversight Board (PCAOB) of the United States, a private-sector accounting watchdog established in 2002. Similar restrictions are in place in Britain and Japan, too.
Some of those in the industry are predicting that this mandatory registration will lead to a wider gap between major and minor accounting firms. They are also pointing out that the size-based regulation is inappropriate in that the names of major accounting firms have been found over and over with regard to the possibility of poor auditing during the ongoing restructuring of large companies.
The financial authorities are also mulling over allowing merger and division to accounting firms. According to the current law, merger and division of accounting firms are possible only when a new firm is established by resigning staff and another firm employs resigning staff. This tends to nullify previous audit contracts and increase the complexity of accounting firms’ governance structures, which is why accounting firms in South Korea have been reluctant to do M&A.