Despite Problems, Accounting Reform to Gain Speed

Listed firms, accounting firms and investors are suffering from major chaos due to the new Act on External Audit of Stock Companies which went into effect in November last year.

When Asiana Airlines Inc. was issued a qualified opinion by external auditor Samil PricewaterhouseCoopers (PwC) in the last week of March before the deadline for submitting an audit report, it had its shares suspended from trading on Korea Exchange, triggering an “accounting shock.” The company saw its operating profit disappear by tens of billions of won and net profits by 100 billion won (US$86.39 billion) in the process of the auditor changing its negative opinion. Moreover, the shock exposed the company’s unclear financial structure and forced Kumho Group chairman Park Sam-koo to resign and sell off his stake in it.

Capital market players, such as listed firms, accounting firms and investors, are suffering from major chaos due to the amended Act on External Audit of Stock Companies which went into effect in November last year. Since stronger accounting standards were established without any preparation, there have been a lot of problems and resistance that even financial authorities could not expect.

A case in point is a series of inappropriate audit opinions on listed companies caused by accounting firms’ strict audit procedures. Last year, 37 companies listed on the benchmark KOSPI market and the secondary KOSDAQ market received inappropriate audit opinions, including qualified opinion and disclaimer audit opinion. The figure increased by 48 percent compared to a year ago.

After the authorities tightened the standards, accounting firms have not been turning a blind eye to listed firms which submitted insufficient data. A considerable number of listed companies managed to avoid receiving inappropriate audit opinions right before the deadline of submitting an audit report after they suffered from a sudden change of attitudes of accounting firms, which they thought that they had been on the same side for decades, and their request for vast amount of unimportant data. An executive from a listed firm said, “Accounting companies’ excessive request for data cause business management inconvenience with frequency. I am perplexed with the excessively stricter audit standards.”

With higher accounting standards, surging costs of audits are also a big burden on listed companies. After the standard audit time system has been introduced, stricter audit procedures require more time. Accordingly, related costs have increased and it has led to lower profits of listed firms. The average cost of audits by 2,148 listed companies stood at 160 million won (US$138,230) in 2019, up 18.7 percent from last year and some companies saw the costs surge by two to four times.

According companies, which incur the resentment of listed firms saying “customers who act like owners” are also complaining of difficulty. If they neglect audits, they can go out of business, beyond a suspension of performing their duties, with the introduction of the amended Act on External Audit of Stock Companies, including dismissal of accounting firms’ CEO and stronger punishment regulations. Therefore, they are being extra careful not to be the first victim of the amended law. An official from an accounting company said, “Accounting firms still vividly remember that an accountant received a prison sentence in March last year on charges of connived in accounting fraud of Daewoo Shipbuilding & Marine Engineering Co.” In addition, accounting companies are spending a huge amount of money on improving the quality of audits, including a sharp increase in labor costs, in order to meet the audit standards which are required by the revised act.

Sudden announcement of inappropriate audit opinions right before the general meeting of shareholders also lead to a huge loss of investors. Financial authorities came up with delisting improvement plans in a hurry in March and postponed a series of delisting by one year. However, 14 companies are experiencing feuds over management and civil lawsuits over the result of audits, such as YD Online Corp., People & Telecommunication Inc. and Hwajin Corp. as well as Conbuzz Co. which was filed with an injunction on June 3 asking for permission to call a general shareholders' meeting to vote on whether to dismiss the existing management. The shareholders filed a suit to actively exercise the shareholders’ rights, including cancellation of agenda of general shareholders’ meeting, reading financial statements and injunction against stockholders’ list. Minority shareholders in companies which are not sued yet join hands to protect their rights. Not only the finance department of listed companies which received an inappropriate audit opinion but also accounting companies which issued an inappropriate audit opinion are receiving a barrage of complaint phone calls.

A partner accountant from a large accounting firm said, “Interested parties in the capital market are all in chaos now because of the introduction of the amended act on external audit which they have never experienced.”

'It is Nonsense that 98 S. Korean Listed Firms Received Unqualified Opinion'

Nevertheless, accounting reform is expected to gain speed as the main points of the revised Act on External Audit of Stock Companies, including a periodic auditor designation system, auditor registration system and standard audit time system, are to take effect in November. 

Experts agree that the accounting reform is an inevitable process despite complaints by interested parties. Accounting transparency is considered the biggest factor of “Korea Discount,” which refers to an investment terminology that the stock value of Korean companies have been undervalued compared with that of other Asian countries. Switzerland-based International Institute for Management Development (IMD) said in its annual report that South Korea ranked 61st in terms of the effectiveness of the boardroom’s check in management and the appropriateness of accounting and audit which are the index of company’s accounting transparency in the global competitiveness among 63 countries surveyed. The ranking moved up by one and two notches from 63rd in 2017 and 62nd in 2018. Considering the fact that “auditing chaos” is in the march this year, however, it clearly shows that South Korean companies still lack of accounting transparency in the view of outside.


Although more inappropriate opinions have been issued, the ratio of unqualified opinions is still at a high level. In an exhaustive study of companies listed on the benchmark KOSPI market and the secondary KOSDAQ market which submitted an audit report in 2018, 2,081 out of 2,068 companies whose fiscal year ended at the end of December, or 98.2 percent, including 763 firms listed on the KOSPI and 1,305 listed on the KOSDAQ, received an unqualified opinion. The number of firms which received a qualified opinion stood at 37, up from 25 a year earlier, and the ratio increased by nearly 50 percent. However, the ratio of firms which received an unqualified opinion to the total of listed ones slightly fell from 99.1 percent to 98.2 percent.

A partner from a large accounting firm said, “The fact that 99 percent of listed companies receive an unqualified opinion in a country that ranks at the bottom in terms of accounting transparency itself is nonsense. The amended act on external audit is an extreme measure but we will not get another chance to address chronic accounting problems if we miss this opportunity.”

On the contrary, an increasing number of experts say that auditors need to improve the financial situation of listed companies by issuing accurate audit opinions based on strict standards and eliminate zombie firms from the market in order to make the investment ecosystem sound despite the chaotic situation this year.


Hwang Jin-woo, a senior analyst of Daishin Corporate Governance Research Institute, said, “20 out of 37 companies that received a qualified opinion, which are more than half in terms of amount of asset, had less than 100 billion won (US$86.61 million) market cap. They relatively lack in their ability to settle accounts and have a high level of uncertainty in business sustainability. There is a good chance that the listed firms which received a qualified opinion already have worrying internal problems, such as submission of insufficient data and concerns over impaired capital regardless of the introduction of the new Act on External Audit of Stock Companies.

Listed companies are complaining about the time and cost of audits but South Korea’s investment in accounting and value addition are insufficient compared to major advanced countries. The actual audit costs in South Korea stood at the 11 percent level of the United States and the 31 percent level of Japan, according to a thesis on comparison of audit costs in South Korea, Japan, China and the United States published by Kwon Soo-young, professor of Economics at Korea University in Korean Accounting Association’s accounting journal. The figure also was at the 61 percent level of China which had a belated start in the capital market. The ratio of companies which received an unqualified opinion in South Korea was estimated at 99 percent, which was higher than China with 96 percent and Japan with 72 percent and the United States with 66 percent.


Even the securities industry expects that South Korean companies will be able secure business confidence if the implementation of the amended Act on External Audit of Stock Companies properly takes root. Choi Joong-kyung, chairman of the Korea Institute of Certified Public Accountants (KICPA), said, “The new act contains creative ideas, such as a periodic auditor designation system and a standard audit time system. Foreign countries are keeping an eye on South Korea. If the system is well established, it will kick out zombie companies and lower the interest rate on bonds of financially healthy firms, leading to efficient distribution of resources.”

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