In the future, penalty surcharges will be imposed on beneficial owners who hold the titles of chairman or vice chairman without receiving salaries from the company. Additionally, intentional accounting fraud and long-term unfair accounting practices will be subject to harsher penalties. The financial authorities are concerned that strengthening criminal penalties for accounting fraud could stifle corporate activities, so they plan to focus on economic sanctions, such as imposing penalty surcharges, to eliminate incentives for accounting fraud.
The Securities and Futures Commission noted on the 27th that it discussed the "measures to strengthen penalties against accounting fraud" during a regular meeting. The key aspect of this plan, prepared by the Financial Services Commission, is to significantly increase the penalty surcharge burden on listed companies and their executives for intentional accounting fraud. It also includes provisions to reduce penalties if the accounting fraud is corrected when a company's major shareholder changes.
The financial authorities view accounting fraud as a significant crime that hinders the activation of the capital market and have prepared relevant measures. Particularly, intentional accounting fraud is often closely linked to unfair trading activities such as embezzlement, breach of trust, insider trading, and fraudulent transactions. Kwon Dae-young, the chairman of the Securities and Futures Commission, who presided over the meeting for the first time since taking office, said, "Crimes related to accounting fraud, such as false disclosures in financial statements that undermine market trust, should be strictly sanctioned through penalty surcharges to the extent that they deprive economic incentives."
The financial authorities are planning to establish legal grounds to impose penalty surcharges on beneficial owners of corporations who have not been punished despite the occurrence of accounting fraud. This is in consideration of the fact that many cases of accounting fraud are being led by beneficial owners, who hold titles of chairman or vice chairman without receiving salaries, rather than the presidents who receive salaries, to adopt effective punitive measures.
Until now, even if beneficial owners led accounting fraud, they were excluded from penalty surcharge targets if the final decision-maker did not receive a salary from the company. This is because the penalty surcharge against company officials involved in accounting fraud has been calculated based on the financial compensation received from the company. For instance, if a beneficial owner who holds dual roles as representatives of companies A and B in a corporate group entangled in equity relationships instructs A's accounting fraud yet only receives a salary from company B, until now, there was no way to punish them.
A government official stated, "The amount embezzled or wrongfully taken by a beneficial owner and responsible for fraudulent accounting will be regarded as economic benefits derived from misconduct and will be subject to penalty surcharges." Compensation and dividends received from affiliates will also be included as economic benefits.
For those involved in accounting fraud where it is difficult to calculate the penalty surcharge, or where financial compensation is significantly low in light of social norms, the minimum standard amount for penalty surcharges (100 million won) will be newly established and applied in reference to other laws such as the Capital Markets Act.
This measure also includes plans to impose harsher penalties for intentional accounting fraud and accounting fraud that occurs over multiple years. For intentional accounting fraud involving falsification of audit materials, concealment, and manipulation, the penalty surcharge will be raised to the same maximum level as associated unfair trading cases such as embezzlement and breach of trust.
If accounting misconduct is prolonged for a long time, the penalty surcharge will be increased according to the duration of the violation. Currently, there is no difference in the amount of the penalty surcharge between committing accounting fraud for one year and five years. However, from the perspective of investors, the damage is greater when investing in companies that have prepared fraudulent financial statements over an extended period.
Accordingly, the financial authorities decided that for intentional accounting violations exceeding one year, the penalty surcharge would be increased by 30% for each additional year, and for gross negligence accounting violations exceeding two years, the penalty surcharge would be increased by 20 for each additional year.
The Financial Services Commission included what is known as a "carrot" in its measures. This refers to the opportunity for major shareholders to detect ongoing accounting fraud and improve it when they change. The Financial Services Commission stated that when there is a change in management due to the change of a major shareholder, if the new major shareholder inspects and corrects past accounting fraud, they will reduce or completely waive the penalty surcharge. It is expected that such incentives will prevent new major shareholders from hiding or covering up past accounting fraud.
In addition, if a company submits false materials to external auditors or the Financial Supervisory Service, it will be considered intentional accounting fraud without exception. Companies may face sanctions such as designation of auditors for three years, recommendations for termination of CEOs and responsible executives, six-month work suspensions, and criminal complaints against the company and its employees if they obstruct internal auditing or external auditors' activities or interfere with the authority's financial statement reviews.
The Financial Services Commission and Financial Supervisory Service plan to improve systems, such as the External Audit Act and its enforcement regulations, to ensure that the measures discussed are implemented in the first half of next year.