Financial authorities overhaul guidelines on accounting fraud investigations

The Financial Services Commission (FSC) at the government complex in central Seoul / Courtesy of FSC

By Anna J. Park

External auditors will now be required to notify a company's internal audit department whenever they discover a case of accounting fraud amounting to 5 billion won ($3.9 million) or more. Companies will also be notified of accounting fraud committed by their staff members along with such violations by management, according to revised guidelines set by financial authorities on investigating accounting irregularities.

The Financial Services Commission (FSC), the country's top financial regulator, as well as the Financial Supervisory Service (FSS), announced the revisions on Sunday, aiming to enhance the transparency of the local accounting system.

The guideline was first drawn up in late 2019, following the government's introduction of the system of accounting irregularity investigations in 2018. The investigation refers to a process in which external auditors report any accounting fraud they discover during the audit process to a company's internal audit department. The internal audit department, then, appoints external experts at the company's expense to further investigate the findings and submit the case to the Securities and Futures Commission (SFC) as well as the firm's auditors.

While the number of accounting irregularities spotted through the investigative system has been on a steady increase to 15 cases last year, from five in 2019, there have been voices calling for guaranteeing the complete independence of external auditors, as well as clarifying some ambiguous parts of the system by revising the guideline.

Reflecting such opinions, Sunday's announcement came after the financial authorities closely consulted with related agencies and organizations in the field, including the Korean Institute of Certified Public Accountants and the Korea Listed Companies' Association.

The revised rule stipulated that external auditors are obligated to report any case of accounting fraud involving 5 billion won ($3.9 million) or over to the internal audit department of a company. So far, there has not been a clear monetary standard, making the reporting obligation influenced by arbitrary judgments by auditors. The revised guideline also guarantees the full independence of external experts, who will take on the role of further investigating reported accounting fraud, by excluding the appointment of experts who share economic or special interests with the management of a company.

“The FSC will strictly exercise close supervision so that the accounting irregularity investigation system is fairly and squarely operated in order to raise transparency and credibility of the accounting system,” an official from the FSC said.