South Korean auditors are refusing to sign off on more and more corporate financial statements due to tighter regulations, giving investors earlier warning signs of trouble ahead.
Auditors declined to give the green light on 37 financial statements by listed companies for 2018, about a 68 percent increase from a year earlier, according to the Financial Services Commission. The jump in rejections comes as South Korea takes more steps to ensure that auditors have independence from companies that hire them, while increasing penalties in case of fraudulent accounting.
Asiana Airlines Inc.’s troubles are a recent example: auditors said their opinion of the company’s annual report was “qualified,” before fully signing off on it a few days later. But that triggered market concern about the airline’s liquidity and ultimately led its controlling shareholder to put it up for sale. Regulators elsewhere in Asia are also getting tougher on auditors as rising defaults at companies in China to India to Singapore prompt investors to seek earlier warning signs.
“It’s appropriate for external auditors to say a dying company is dying,” said Hoonsoo Yoon, a partner and assurance leader at Samil PricewaterhouseCoopers in Seoul, in an interview. From investors’ point of view, “it would be less disastrous if they got an early warning, rather than if a firm abruptly went bankrupt without any unusual signs in its audit reports,” he said.
Asia’s fourth-largest economy implemented a new external audit law in November after several accounting scandals occurred including inflated earnings at Daewoo Shipbuilding & Marine Engineering Co. in 2016, denting global investor confidence in the quality of Korean financial statements.
Korea’s reforms include a measure that will have regulators assign auditors to companies to cut back on cozy relations between the two. Under the scheme, a company will work with auditors it picked through a competitive process for the first six years, and then for the next three years it will have auditors assigned by the Securities and Futures Commission.
External auditors will also be auditing the internal control systems for financial reporting at some large companies from this year. Samil PwC’s Yoon said the new measure may cause consternation if some firms aren’t able to get auditor sign-offs at first, but it will pave the way for better internal accounting controls in the end.
Even as Korea’s regulators push to make the nation’s financial reporting more transparent, they may be getting concerned that the surge in auditor rejections will hurt investor sentiment.
The FSC is trying to help achieve a “soft landing” for accounting reforms including by boosting communication between external auditors and companies, to minimize any damage to investors, its Vice Chairman Kim Yongbeom said at a meeting Wednesday.
“We’re still in the midst of developing Korea’s financial reporting and external auditing system,” said Yoon at Samil PwC, the nation’s biggest auditing firm. “I think companies having audit issues will decrease as time goes by.”
