Financial Services Commission: "Mid-Sized Accounting Firms with High Audit Quality to Be Allowed to Audit Large Listed Companies"

Preliminary Notice of Amendments to the External Audit Regulation
Major Accounting Firms Required to Establish External Oversight Bodies

The auditor designation system will be revised to allow mid-sized accounting firms with high audit quality to audit large listed companies. In addition, to raise audit quality at major accounting firms, it will become mandatory for these firms to establish oversight bodies composed of external members.

The Financial Services Commission announced on the 24th that it will conduct a preliminary notice of changes regarding a partial amendment to the 'External Audit Regulation' reflecting these measures. This is a follow-up action to the plan for improving accounting and audit quality announced in February.

The reward system for accounting firms with excellent audit quality will also be strengthened. Taking into account the growth of the capital market and the recent increase in litigation amounts, the Financial Services Commission plans to double the required level of indemnification capacity across the board and introduce a special advancement scheme, thereby giving competent mid-sized accounting firms more opportunities.

Previously, only major accounting firms could be designated as auditors for large listed companies. However, moving forward, mid-sized accounting firms that achieve top marks in audit quality evaluations will be able to be designated for companies with asset sizes allowed for upper tiers. However, for mid-sized accounting firms designated to audit large listed companies, they will be required to secure indemnification capacity 1.5 times higher than the standard to prepare for potential incidents.

To improve the audit quality of major accounting firms, the Financial Services Commission will also make it mandatory to establish audit quality supervision bodies within these firms. There have been concerns that decision-making within accounting firms has often prioritized short-term profitability over audit quality management, as such oversight bodies, when existing, were operated only by internal members. To address this, major accounting firms will now be required to establish independent audit quality oversight committees.

The committee must have a majority of its members, including the chairperson, composed of independent external experts. Through this measure, the Financial Services Commission aims to ensure that the committee serves as an internal oversight body for public interest within the accounting firm.

The eligibility requirements for the CEO of an auditor responsible for listed company audits and the executive in charge of quality control work will also be strengthened. Currently, the eligibility requirement for the CEO is at least 10 years of experience in accounting or external audit. In the future, however, the CEO will be required to have at least seven years, and the executive responsible for quality control work at least five years, of external audit experience. This change is based on the view that the practice of appointing CEOs solely based on accounting advisory experience, without external audit experience, does not align with the intent of the auditor registration system.

The revised regulation will take effect following the preliminary notice of changes from today until September 2, and the resolutions of the Securities and Futures Commission and the Financial Services Commission. The full text of the amendment can be found on the website of the Financial Services Commission.

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