A simple math problem too difficult for FSC?

Financial Services Commission Chairman Eun Sung-soo Korea Times file

By Lee Kyung-min

• Published Oct 21, 2020 4:46 PM KST
• Updated Oct 21, 2020 9:10 PM KST

By Lee Kyung-min

The Financial Services Commission (FSC) had abruptly removed a clause in a revision governing businesses having to select an accounting firm, in a desperate, last-minute attempt at saving face following what essentially was a simple failure to “do the math,” according to sources, Tuesday.

The country's top financial authority's careless mistake was brought to the public's attention only because the Ministry of Government Legislation identified the error during a review.

According to the revision, the FSC reduced the number of members in a committee needed to hire an accounting firm to five, down from seven. Such a committee must be set up by listed firms, large non-listed firms and financial firms in accordance with relevant laws to comply with corporate audit procedures.

The reduction reflected criticism from many firms to whom forming a committee is increasingly becoming difficult due to the low participation of shareholders in general, not to mention strict requirements to qualify as a member at all.

Before the revision, the related law stipulated that the committee should be comprised of least seven of a certain firm including one auditor, one worker from an institutional investment company with the most common shares of the firm, at one to two outside directors, two shareholders with the most common shares excluding the firms' largest shareholder, board members and institutional investors. One each is needed from financial organizations that lent money to the firm.

Yet the revision sought to allow the committee to have only five members, without alterations to the existing mandatory makeup, which the government legislation ministry said was the reason why the plan could not be approved.

“We found out there was an error in the revision when we conducted the review in early September,” an official from the legislation ministry said. “We sent it back to the FSC to check again informing them about the possibility of the clause becoming open to misinterpretation.”

The FSC belatedly removed the clause in question, and put forth the remaining part of the revision to a Cabinet meeting. The revision was approved and took effect Oct. 13.

Highlighting the obvious nature of the mistake was that the FSC had the revision disclosed for public notification, a 20-day period needed before any revised legislation takes effect. This is considered the final step in a revision of related ordinances, or presidential decrees, made by government organizations.

The mistake lacks common sense, according to an industry figure who refused to be named.

“The misstep is inexcusable,” the official said. “Allowing only five members when at least seven are required by law is a mistake that cannot be justified.”

The FSC was unavailable for comment.

Meanwhile, the revision was part of “accounting reform,” which the accounting industry views as a critical step to soft-land a related law that passed in 2017 and has since been implemented in stages.

It requires private companies be audited by an accounting firm designated by the Securities and Futures Commission under the Financial Services Commission for a minimum of three years.

The new law helps accountants remain relatively free of the influence of firms under audit, as they have long held control over the “temporary hires.” This influence is the main reason many of them were afraid and reluctant to vocalize their opposition to what could later become an issue of corporate mismanagement.

The industry says the businesses and the financial authorities should understand the need for and efficacy of embracing the revision, thereby making them willing to pay a much heftier fee than before.

The industry says the auditing fee is not merely a costly business expense but necessary spending for high-value creation that will benefit both the firms and their investors.