External Audit Act and Application of International Accounting Standards - Focusing on Samsung BioLogics Issue [Economic Policy Forum]

Professor Kwon Jae-yeol, Dean of the Graduate School of Law at Kyunghee University presented about the topic of "Applying the External Audit Law and International Accounting Standards" in the ‘Korea Business Policy Forum from the Perspective of Global Standards’ at the Korea Press Center Foreign Correspondents' Club on the 27th, Wednesday.

Professor Kwon explained that in order for the capital market which buy and sell financial investment products to effectively operate, transparency of information must be ensured. Financial statements of a company are the most fundamental and important among various means to obtain information to make investment in the company. 

In order to enhance the credibility of financial statements, government made it mandatory for companies to prepare financial statements according to accounting standards established by domestic public organizations, he said. 

Moreover, Professor Kwon explained that as the border of capital market has gradually disappeared and investment has become globalized, single and unified international accounting standards has been expected to emerge. 

After a long time of waiting, International Accounting Standards (IFRS) emerged in response to this expectation. It was established after reviewing the accounting standards of each country by the International Accounting Standards Board (IASB), a non-profit private international organization founded in London in 1973 to establish common accounting standards for the world, he added.

Professor Kwon said that in Korea, Financial Supervisory Commission applies IFRS translated into Korean in accordance with the External Audit Law of Korea to listed companies and companies preparing for future listing.

He illustrated that IFRS does not provide a series of rules or regulations related to accounting treatment but simply presents principles and grounds to judge appropriateness of accounting treatment. Some experts assess it as ‘Big Bang of Accounting Standards’ that Korea abandoned its previous position in accounting which used to be performed in accordance with rules and regulations and radically adopted principle-based IFRS instead. 

However, he insisted that it is a farce that supervisory authority merely forces auditees to change their awareness into principle-centered one while its attitude has not changed a bit into forward-looking one.

Professor Kwon explainted that the United States, world's super power, stays away from the big bang of accounting standards. The U.S. has long considered whether to introduce IFRS or not but is directing its position not to adopt it. 

The country looks squarely at the problem that introduction of IFRS with unclear standards would not only make it difficult for companies to comply with the standards and but also make it cumbersome for administrative authorities to impose sanctions on violations of standards by the companies. Japan has not introduced IFRS either, he added.

Professor Kwon said that although Securities and Futures Commission under (the umbrella of) Financial Services Commission recently charged Samsung Biologics to the prosecution for deliberately having committed accounting fraud and it took administrative measure of recommending that the CEO of the company be dismissed. 

The court cited petition from the company for preliminary injunction of execution suspension of the administrative measure and made related administrative disposition, he emphasized.

Professor Kwon pointed out tha this corroborates that it is not sensible of the government to implement unclear accounting standards and pass the responsibility of the ineffectiveness caused by vagueness of IFRS over to the auditees. 

Repealing already introduced IFRS and moving back to regulation-centered system is no different than trying to scoop up already spilt milk and now it is time for supervisory authorities to break down existing regulation-centered mind-set and practice as soon as possible though already belated, he argued. 

<Professor Kwon, Jae Yeol>

- S.J.D. from Georgetown University

- Member, Special Committee on Commercial Code, Ministry of Justice, - Research Jurist, Supreme Court of Korea

- Member, Committee on Listing and Disclosure, Korean Exchange - Director, Korea Commercial Law Association

- Dean & Professor, Kyung Hee University Law School

 Lee Kyung ah [WikiLeaks Korea]