Last year, Company A, which was delisted from the KOSDAQ market, was fined after financial authorities discovered fraudulent accounting. According to an investigation by the Financial Services Commission, Company A established a shell subsidiary to raise funds and inflated the value of virtually unrecoverable bonds in its financial statements.
It is suspected that this fraudulent accounting was made possible by the assistance of an external accounting firm that evaluated the assets. While the incorrect asset evaluation by the external appraisal agency ultimately led to fraudulent accounting, current laws do not provide means to penalize external appraisal institutions.
As corporate accounting transparency has been emphasized, the role of external appraisal institutions, such as accounting firms, is increasing, but it appears that there are virtually no regulatory measures to ensure their objective and fair evaluations. In response, financial authorities are considering measures to regulate institutions that conduct external evaluations, such as accounting firms.
On the 24th, a financial authority official said, "We are reviewing the establishment of a relevant regulatory system to ensure that external evaluations conducted during the accounting process are carried out independently and fairly."
As the domestic capital market grows rapidly, the role of external appraisal institutions is increasingly expanding. With the emphasis on transparent corporate accounting, their importance has grown even more. For companies to prepare financial statements, they must accurately assess the value of retained equity, including unlisted firms, and the recoverability of assets, and reflect fair value, which is mostly handled by specialized appraisal institutions.
The revision of the Capital Markets Act enforcement decree last year is also a representative example that significantly increased the valuation of external appraisal agencies. According to the revised enforcement decree, when listed companies pursue mergers with non-affiliated companies, they must receive an external evaluation and disclose it. This mandates the selection of accounting firms, credit rating agencies, or financial investment businesses that have no special relationship with the merger to receive an independent assessment of the appropriateness of the merger price.
The problem is that there are no relevant regulations. When an external appraisal institution provides poor evaluations, whether intentionally or through negligence, there are insufficient measures to remedy or penalize the damages incurred.
The only situation in which external evaluations are mandatory is during the process of mergers among corporations, where there are work guidelines and quality control regulations for external appraisal institutions under the Capital Markets Act. However, there are no relevant regulations for external evaluations in accounting processes that do not involve mergers.
In the case of large accounting firms, they operate international-level evaluation manuals directly, and The Korean Institute of Certified Public Accountants also operates self-regulatory measures, but it is, in fact, self-regulation. Moreover, external appraisal institutions, such as credit rating agencies or securities firms, which are not regulated by the Certified Public Accountant Act or the External Audit Act, are in a regulatory blind spot.
Financial authorities agreed that improvement is necessary regarding the lack of appropriate regulation for external appraisal institutions. The Financial Services Commission and the Financial Supervisory Service are exploring various responses to external appraisal firms' poor evaluations. An official stated, "We are at the stage of researching how and where to institutionalize this," adding, "We are reviewing several options and overseas cases."
However, it is expected to take time before specific measures are proposed. An official emphasized, "We are at the stage of brainstorming all options, and no concrete discussions have been made yet."
Consideration must also be given to the situation in which related parties complain about the burden due to regulatory strengthening. Voices in the industry indicate that if value assessments were regulated as strictly as accounting audits, it would impose excessively large burdens on external evaluators.