Starting next year, domestic corporations must include in their annual reports not only their auditor but also the status of non-audit service contracts with network accounting firms.
The Financial Supervisory Service (FSS) said on the 16th that disclosures in annual reports will be expanded so investors can see the status of non-audit service contracts with network accounting firms. This applies to annual reports that corporations submit on or after Jan. 1 next year.
A network accounting firm operates separately from the auditor but shares the brand name and collaborates, such as consulting firms. Previously, only non-audit service contracts that the company subject to filing the annual report signed with its auditor were disclosed. But in Dec. last year, the "Code of Ethics for Professional Accountants" was revised, expanding the disclosure scope for non-audit services to network accounting firms.
When disclosing the status of non-audit service contracts with network accounting firms, the company must include the contract date, the scope of services, the service period, and the service fees. Cases in which the company signs a service contract with a third party and the auditor or a network accounting firm provides services to the third party in a subcontracting arrangement are also subject to disclosure.
The Financial Supervisory Service (FSS) urged both the company and the auditor to carefully verify the network accounting firms subject to disclosure and to take special care to ensure the auditor's independence is not compromised.
Before signing a non-audit service contract with a network accounting firm, the company's internal audit body must review whether the auditor's independence is being observed. Not only the "Big Four" but other accounting firms may also have network accounting firms, so verification is necessary. The auditor must also consult with the company's internal audit body on independence issues related to non-audit services.
The Financial Supervisory Service (FSS) said that with mandatory disclosure of non-audit service contracts by network accounting firms, auditors will make greater efforts to comply with independence in performing external audits, which is expected to improve accounting transparency.
An official at the Financial Supervisory Service (FSS) said, "We plan to strengthen inspections of auditor independence compliance and audit quality control through future audits of auditors."