Financial authorities will revamp the auditor designation system so that capable mid-sized accounting firms can also be designated as auditors for large listed companies. In addition, large accounting firms will be required to set up audit quality oversight committees centered on external experts, and the eligibility requirements for CEOs of listed companies' auditors will be strengthened to raise the overall quality of audits.
The Financial Services Commission said on the 24th that it will preannounce legislation for a partial amendment to the Regulations on External Audit and Accounting reflecting these details. This amendment is a follow-up to the measures to enhance accounting and audit quality released in February.
The core of the amendment is to expand opportunities for large listed-company audits to mid-sized accounting firms with excellent audit quality. Previously, only group A accounting firms could take on designated audits for large listed companies, but going forward, firms that meet certain conditions—such as scoring at least 95% of the group A average in the audit quality evaluation and ranking in the top 20% within group B—will also be eligible for designated audits. However, they must secure damage compensation capacity of at least 150% of the existing group B standard.
According to the Financial Supervisory Service, group A includes accounting firms that meet requirements such as having at least 500 certified public accountants and damage compensation capacity of at least 100 billion won, and includes the "big 4" of Samil, Samjeong, Anjin, and Hanyoung. Group B includes major mid-sized firms such as Daejoo, Shinhan, Hanul, and Ichon that meet requirements such as having at least 100 certified public accountants and damage compensation capacity of at least 10 billion won.
In addition, the Financial Services Commission (FSC) decided to uniformly double the required level of damage compensation capacity in light of rising litigation amounts.
Differentiated evaluation based on audit quality will also be expanded. Currently, only up to a 10% bonus is granted based on quality evaluation results, but going forward, a penalty of up to 10% will be introduced and relative evaluation by group will be adopted so that audit quality is reflected more directly in auditor designation.
For the big 4 in group A, the installation and operation of an audit quality oversight committee, an internal public-interest check mechanism within accounting firms, will be mandatory. The committee must be composed so that a majority of the Commissioners, including the Chairperson, are independent external experts with no conflict of interest with the firm. The committee will monitor whether management, focused on short-term profitability, neglects audit quality.
Requirements for accounting firm CEOs and quality control directors will also be strengthened. CEOs must have at least seven years of external audit experience, and quality control directors must have at least five years. Currently, one can become CEO with 10 or more years of experience including accounting advisory work.
The Financial Services Commission (FSC) plans to preannounce this amendment through Sept. 2 and then implement it after resolutions by the Securities and Futures Commission and the Financial Services Commission.