Reform of Accounting Practice Underway - International Law Office

Background
Heightened Responsibilities for Listed Companies
Restrictions on Auditors
Penalties

Background

On November 7 2002 a joint task force comprised of members from the Ministry of Finance and Economy, the Financial Supervisory Service (FSS), the Financial Supervisory Commission and other government agencies announced a plan to reform accounting practice in Korea. The plan:

• requires the chief executive officers and chief financial officers of companies listed on the Korean Stock Exchange or registered with the Korean Securities Dealers Automated Quotation to certify certain reports and documents (eg, securities reports and audited financial statements) which the company is required to file with the FSS, as required under the Securities and Exchange Act;
  
  
• limits the scope of non-audit consulting services (eg, the preparation of company financial statements) that may be provided by an auditor; and
  
  
• defines the requirements for members of a company's audit committee.
  

Since the plan was announced, in light of public opinion and recent accounting fraud cases, more dramatic changes have become necessary to increase transparency in accounting practice. Accordingly, the task force finalized the plan with stricter rules and submitted a proposal to Congress for amendments to the relevant laws (ie, the Securities and Exchange Act, the Act on External Audit of Stock Companies and the Certified Public Accountant Act) reflecting the finalized plan.

Heightened Responsibilities for Listed Companies

Under the reforms, the duties of listed companies are as follows:

• Corporate officers (eg, the chief executive officer) of a listed company are required to certify the reliability of the company's FSS reports. Reporting false information on FSS reports will lead to the imposition of civil liability on those who approved the reporting.
  
  
• A listed company is prohibited from extending a loan (or providing a guarantee for a loan) to a shareholder who owns 10% or more of the listed company, a related party to such shareholder or officers of the listed company, although providing fringe benefits to officers (eg, small loans for education and housing expenses) is allowed. Other loans may be extended only through a resolution of the board of directors and after approval from the shareholders meeting.
  
  
• Audit committees of stock companies (whose total assets are equal to or more than an amount prescribed by presidential decree) and listed companies must include one or more members with finance and accounting expertise.
  
  
• Rules and policies regarding the internal accounting management of companies subject to external audit must be codified.
  
  
• Improvements will be made afford better protection to whistleblowers.
  

Restrictions on Auditors

From 2006 listed companies must change their auditors every six years. However, this six-year rotation requirement will not be imposed if:

• the members of the audit committee unanimously approve the appointment of the same auditor for more than six years;
  
  
• the listed company has been audited by one auditor for the past five years and, for the sixth year, is jointly audited by that auditor and another auditor;
  
  
• the listed company is a foreign-invested company and it would be difficult to change auditors due to the relationship with the foreign parent company; or
  
  
• the listed company is also listed on the New York Stock Exchange or London Stock Exchange.
  

An auditor will be prohibited from providing its client with certain non-audit services that may create potential conflicts of interest. For example, provision of the following non-audit services will be prohibited:

• book-keeping or other services related to the accounting records or financial statements of the client;
  
  
• internal audit outsourcing services; and
  
  
• financial information systems design and implementation.
  

An auditor will be required to maintain its clients' audit records for at least seven years.

Penalties

The penalties under the new regime are as follows:

• A corporate officer of a listed company who signs and certifies an FSS report knowing that such report contains false information is punishable by imprisonment for up to five years or by a fine of up to W30 million.
  
  
• A shareholder, related party or officer who receives an illegitimate loan from a listed company is punishable by imprisonment for up to five years or by a fine of up to W30 million.
  
  
• A violation of the six-year auditor rotation requirement carries a penalty of up to three years' imprisonment or a fine of up to W30 million.
  
  
• If an auditor fails to maintain its clients' audit records for at least seven years, the auditor may be punished by imprisonment for up to five years or by a fine of up to W50 million.
  
  
• Anyone who discloses the identify of a whistleblower may be punished by imprisonment of up to five years or by a fine of up to W30 million. Also, if a company directly or indirectly harms a whistleblower (eg, if the company wrongfully discharges the whistleblower), the company may be fined up to W30 million.

For further information on this topic please contact Sang Moon Chang or Doo Song Kim at Woo Yun Kang Jeong & Han by telephone (+822 528 5200) or by fax (+822 528 5300) or by email (smchang@wooyun.co.kr or dskim@wooyun.co.kr).