Financial authorities are moving to overhaul the system to swiftly expel listed companies that commit accounting fraud from the market. They plan to drastically shorten the review and inspection cycle for detecting accounting fraud from the current 20 years to 10 years, and introduce "comprehensive discretion" that would allow the immediate delisting of listed companies where intentional accounting fraud is confirmed.
According to the securities industry on the 26th, the Financial Supervisory Service plans to draw up within the year a roadmap to shorten the accounting review and inspection cycle and to strengthen inspection tools, including these measures. The aim is to increase the reliability of accounting information and strengthen shareholder protection as the number of stock investors grows.
◇ "Preemptive prevention" through shorter inspection cycles
The Financial Supervisory Service will first shorten the review and inspection cycle to detect accounting fraud. Accounting inspections involve the Financial Supervisory Service scrutinizing corporations it has reviewed where it determines there is a possibility of intentional window dressing. Previously conducted once every 20 years, the plan is to reduce the cycle to 10 years for KOSPI and 5 years for KOSDAQ. By shortening the inspection cycle, the plan is to preemptively block accounting fraud by listed companies.
Korea's inspection cycle has long been criticized as excessively long compared with major countries overseas, delaying the detection of accounting fraud. In practice, the United States conducts inspections about every three years, and the United Kingdom about every five years. In Japan, while there is no fixed rotation cycle, the Financial Services Agency operates a theme risk–based framework that selects review targets each year through its review of annual securities reports.
Hwang Sun-o, a vice governor at the Financial Supervisory Service, said at a press briefing, "We will push strongly to shorten the inspection cycle to make clear that accounting fraud will inevitably be detected," and noted, "As the factors for window dressing have grown after the tightening of delisting criteria, we will conduct close monitoring of insolvent corporations."
◇ "Stronger post-response" through the introduction of comprehensive discretion
At the same time, financial authorities are reviewing a plan to grant "comprehensive discretion" to the exchange. Comprehensive discretion would empower the exchange to immediately take delisting action when a listed company commits accounting fraud with major social repercussions, such as window dressing.
Currently, after the Financial Supervisory Service conducts accounting reviews and inspections, the Securities and Futures Commission under the Financial Services Commission determines intent; once that result is notified to the Korea Exchange (KRX), a substantive examination is conducted to decide whether the listing will be maintained. The substantive examination is a system in which, when qualitative grounds such as a material violation of accounting standards or embezzlement and breach of trust arise, the exchange conducts a quantitative review and delists the company.
However, the substantive examination has been criticized for a slow pace of market cleanup, taking an average of two years to expel insolvent companies. The idea is to introduce comprehensive discretion so the two-year substantive review period can be reduced to immediate expulsion. That said, it will be operated on a limited and exceptional basis, not as a general rule applied to all corporations.
◇ Staffing expansion and refining exchange rules remain tasks
Some also say that to ensure the system's effectiveness, the Financial Supervisory Service needs to expand its inspection staff and reorganize its structure. The Financial Supervisory Service currently has about 60 people handling accounting inspections for roughly 2,700 listed companies. That means about 45 corporations per person on average. This is two to three times more than in the United States (13) and the United Kingdom (20), raising concerns that simply shortening the inspection cycle could degrade the quality of investigations.
Accordingly, the Financial Supervisory Service plans to expand its dedicated inspection personnel and shift from the existing small team–centered operation to a "large-team system" in which accounting, investigative, and IT specialists are deployed together.
In addition, institutional refinements, such as amending the Korea Exchange (KRX) listing rules, will proceed in parallel to introduce the exchange's comprehensive discretion.
Meanwhile, the Financial Supervisory Service sees that incentives for accounting fraud have increased due to stronger listing maintenance standards, such as raising the sales threshold and expelling penny stocks. Accordingly, it plans to strengthen monitoring of high-risk groups, such as companies designated for administrative attention and those with uncertainty as a going concern, while expanding the number of review targets by about 30 times compared with the current level.