On November 15, 2023, the Financial Supervisory Service released a public notice for a bill (“Amendment Bill”) to amend the Detailed Enforcement Rules of the Regulation on External Audit and Accounting, Etc. (“External Audit Regulation”). The Amendment Bill is designed to integrate Internal Accounting Management System Evaluation and Reporting Standards into the Detailed Enforcement Rules of the External Audit Regulation, in line with the amended External Audit Regulation, which took effect on September 14, 2023. It is also intended to establish Industrial Expertise Standards of Designated Auditors with an aim to improve audit quality and efficiency.
Key details of Amendment Bill
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1. |
Establishment of Internal Accounting Management System Evaluation and Reporting Standards |
The Amendment Bill establishes the Internal Accounting Management System Evaluation and Reporting Standards (Table 6 of the Amendment Bill) based on the Best Practices for Internal Accounting Management System Evaluation and Reporting (published by the Korea Listed Companies Association), which have hitherto been used as voluntary rules.
Key details
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(1) |
The representative director (internal accounting manager) of a company is responsible for evaluating the internal accounting management system of the company. |
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① Identification of financial reporting risks |
② Identification of controls |
③ Evaluation of effectiveness of control design and operation |
④ Documentation of evaluation results |
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(2) |
The representative director must (i) evaluate the internal accounting management system of the company, (ii) assess deficiencies and take the necessary measures to address them, (iii) prepare a report on operation performance, and (iv) submit such report to the general meeting of shareholders, the board of directors, and the auditor (or audit committee). |
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① Deficiency assessment |
② Take measures against deficiencies |
③ Evaluate effectiveness control design and operation |
④ Report operation performance |
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(3) |
The auditor (or audit committee) of a company must (i) independently from the management, evaluate the operation performance of the internal accounting management system, (ii) prepare a report on the evaluation results of such system, (iii) report the results to the board of directors, and (iv) ensure corrective measures are taken to address the deficiencies or vulnerabilities identified in its report. |
These newly established Standards are set to become effective and apply from the fiscal year beginning on or after January 1, 2024. But businesses will be granted a transition period from one year during which they will be allowed to continue using the existing Best Practices published by the Korea Listed Companies Association for their fiscal year beginning on or after January 1, 2024.
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Establishment of Industrial Expertise Standards of Listed Companies’ Designated Auditors |
Under Articles 14 (8) 3 and 15 (5) 8 of the amended External Audit Regulation, the Securities and Futures Commission may decide not to designate an auditor who lacks industrial expertise or replace a disqualified, incumbent auditor with a new, qualified one. The Industrial Expertise Standards of Designated Auditors were established under the Detailed Enforcement Rules of the External Audit Regulation. The key terms are as follows.
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(1) |
These Standards (Table 7 of the Amendment Bill) will apply to 11 named businesses: ① manufacturer of basic chemicals; ② manufacturer of medical substances and pharmaceuticals; ③ supplier of electricity, gas, steam, and air control business; ④ build-to-order business such as construction, ⑤ transportation and warehousing business; ⑥ communications, entertainment, and broadcasting businesses; ⑦ software development business; ⑧ banking and savings banking business; ⑨ insurance business; ⑩ financial business including capital markets; and ⑪ scientific and technical services. |
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(2) |
A listed company that operates any of the named businesses may choose to require its designated auditor to have industrial expertise, in which case it must indicate such decision on its basic data report (“Report on Basic Data”) as required by law. |
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① Submission of Basic Data Report |
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② Classification of industrial expertise |
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③ Notification of auditor designation (FSS → Company, Auditor) |
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④ Application for auditor re-designation (Company, Auditor → FSS) |
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(3) |
Under these Standards, an audit team must include at least 1 industrial expert, and only an auditor who provided audit or non-audit services to companies in related industries for more than 200 hours within the past ten years or completed more than 20 hours of industrial education provided by related industry associations within the past three years may qualify as an industrial expert. |
These Standards will take effect sequentially based on the specific business, taking into account the time required for accounting firms to secure a sufficient number of industrial experts; the Standards will apply to build-to-order businesses, banking and savings banking business, insurance business, and financial business (including capital markets) starting from January 1, 2024 and to the remaining businesses from January 1, 2025.
The Government intends to implement the Amendment Bill by the end of this year following the advance public notice period (November 15, 2023 to December 5), 2023. Businesses that are required to have an internal accounting control system and comply with the designated auditor system under the Act on External Audit of Stock Companies, Etc. (listed companies and unlisted companies of a certain threshold size) are advised to be aware of the above timeline.
