An evaluation committee to assess and select corporations with excellent accounting and auditing governance held its first meeting (kick-off) and began its full-scale activities. Seven external experts will choose the corporations that will have their auditors' periodic designation postponed for three years.

On Mar. 13, the Accounting and Audit Governance Evaluation Committee kickoff and meeting is taking place at the Government Seoul Building in Gwanghwamun, Seoul. /Courtesy of Financial Services Commission
On Mar. 13, the Accounting and Audit Governance Evaluation Committee kickoff and meeting is taking place at the Government Seoul Building in Gwanghwamun, Seoul. /Courtesy of Financial Services Commission

The Financial Services Commission announced on 13th at the Seoul Gwanghwamun Government Complex, chaired by Deputy Commissioner Kim So-young, that it held the first meeting and discussion of the "Accounting and Audit Governance Evaluation Committee." Participants included Yoon Soo, a standing commissioner of the Securities and Futures Commission, seven evaluation committee members, Yoon Jung-sook, a professional advisory committee member from the Financial Supervisory Service, and Lee Jung-ui, a vice president of the ESG Standards Institute.

Previously, the Financial Services Commission and the Financial Supervisory Service noted that they would postpone the periodic designation of auditors for corporations with excellent governance related to accounting and auditing based on the "Plan for the Postponement of Periodic Designation of Excellent Corporations in Accounting and Audit Governance" announced in December last year. Subsequently, they formed an evaluation committee to assess and select corporations based on the criteria for outstanding corporation selection.

The evaluation committee is an advisory body to the Securities and Futures Commission, which ultimately decides on the postponement of designations under the external audit law. Seven external experts recommended by the corporate, accounting, and regulatory sectors will serve as evaluation committee members, including Professor Cho Jong-hak from Seoul National University (evaluation committee chair), Professor Kwon Jae-yeol from Kyunghee University, Professor Kim Yi-bae from Duksung Women's University, Vice Chair Seowon Chung from the Korean Institute of Certified Public Accountants, Professor Song Min-seop from Sogang University, Professor Yoon Seung-young from Hankuk University of Foreign Studies, and Professor Ji Seung-min from Korea University.

At the discussion that day, Deputy Commissioner Kim So-young said, "Since the interests of corporations and auditors are often in conflict, we formed the evaluation committee to be balanced and neutral. This is the first time this system is implemented, and as we have gathered the best experts as commissioners, we ask for rigorous and fair evaluations."

The commissioners discussed the criteria for selecting excellent corporations during the first meeting and also deliberated on the operation plan for the evaluation committee and future plans. The commissioners evaluated that the evaluation criteria announced by the financial authorities in December last year were highly consistent with overseas cases and major research results, reflecting realistically feasible and quantifiable criteria.

The commissioners stated that the role of accounting experts within the audit committee needs to be expanded to ensure that the audit committee, which supervises and monitors the financial situation of the company, can fully fulfill its functions. They also agreed that assessing whether a dedicated support organization is well established and independent from management to complement the operational limitations of audit committees, typically composed of part-time commissioners, is an important evaluation criterion given the conditions of Korea's audit institutions.

Professor Cho Jong-hak, the inaugural chair of the evaluation committee, said, "We will place significant importance on evaluating whether the support organization is well established to enable the audit committee to operate effectively, whether the audit committee can select high-quality auditors without interference from the company, and whether communication between the audit committee and auditors can occur freely without company intervention."

Accounting and Audit governance evaluation process. /Courtesy of Financial Services Commission

To effectively evaluate the efficacy of accounting support organizations, the evaluation committee suggested that it would be more desirable to assess the overall accounting and auditing organization of corporations, including internal accounting management operation organizations, rather than just reflecting the existing dedicated support organization of the audit committee.

Opinions were also raised about expanding the deduction range for corporations involved in social controversies related to accounting, introducing incentives for corporations that consistently disclose governance reports, and increasing qualitative evaluation scores for internal accounting management processes where quantitative measurement is challenging. The Financial Services Commission decided to reflect as many of the opinions presented that could be implemented within the year after discussions with the accounting sector and corporations.

Meanwhile, in order to ensure the fair operation of the evaluation committee, the Financial Services Commission agreed that individual commissioners with conflicts of interest with the companies subject to review should recuse themselves, and that qualitative evaluations, such as efforts to enhance accounting transparency, which may vary by commissioners' perspectives, would be supplemented by reflecting average scores after excluding the highest and lowest scores.

The Financial Services Commission stated that starting with this first meeting of the evaluation committee, they plan to legislate a "Regulation on External Audits" and an amendment to the "External Audit Regulation" to formalize the postponement system for periodic designations of corporations with excellent accounting and auditing governance by announcing them in March. The revision work is expected to be completed in May, and they plan to hold a corporate briefing with relevant organizations between April and May. Following that, they aim to begin accepting postponement applications in June and complete the selection of corporations for periodic designation postponement after evaluations and deliberations by the evaluation committee and the Securities and Futures Commission from July to September.