FSS Governor Lee Chan-jin holds meeting with accounting firm CEOs

Pledges selective reviews of firms showing signs of substandard audits

Vows to shorten audit cycle for listed companies to match advanced economies

Urges firms to prepare for K-IFRS 1118 and tighten digital audit security

FSS Governor Lee Chan-jin speaks at a meeting with bank holding company board chairs at the Financial Supervisory Service in Yeongdeungpo-gu, Seoul, on Oct. 28. [Yonhap]
FSS Governor Lee Chan-jin speaks at a meeting with bank holding company board chairs at the Financial Supervisory Service in Yeongdeungpo-gu, Seoul, on Oct. 28. [Yonhap]

Financial Supervisory Service Governor Lee Chan-jin said Tuesday he would tighten oversight of companies and auditors showing signs of substandard audits, as intensifying fee competition among accounting firms threatens to erode audit quality.

Lee made the announcement at a meeting with accounting firm CEOs and industry experts held at the FSS that morning.

Attendees included Lee, FSS Senior Advisory Committee member Yun Jeong-suk, Korean Institute of Certified Public Accountants President Choi Un-yeol and the CEOs of eight major accounting firms. Korea Accounting Association President Kim Ki-young, MoneyToday Broadcasting Center Director Kim Su-heon and Korea Ratings CEO Patrick Yoon also took part.

In his opening remarks, Lee highlighted the decline in audit quality across the accounting industry.

Intensifying competition for audit mandates has driven down fees and reduced the number of staff and hours deployed on the ground, raising concerns that overall accounting transparency could weaken. Average audit fees for listed companies fell about 4.5 percent — from 264 million won ($194,000) in 2022 to 252 million won this year — according to the FSS. Average audit hours dropped by a similar margin over the same period, from 2,458 to 2,348.

In response, Lee said the FSS would select targets for regular auditor inspections based on each firm's risk profile and conduct additional selective reviews of companies and auditors showing warning signs such as a sharp drop in audit hours.

The FSS also plans to monitor whether "audit quality oversight committees" established within large accounting firms are functioning as intended. The committees are internal bodies designed to ensure that firms' decision-making processes center on audit quality.

Lee also pledged a significant reduction in the review and inspection cycle for listed companies. "The current cycle for domestic listed companies stands at about 20 years, far exceeding the typical executive tenure of three to five years, making it difficult to detect accounting fraud in a timely manner," he said. "To close this supervisory gap, we will build a regular review system on par with major advanced economies such as the United States and the United Kingdom." The US reviews all listed companies every three years, while the UK reviews the top 350 companies on the London Stock Exchange — the FTSE 350 — every five years.

Lee said the FSS would apply a zero-tolerance policy to serious accounting fraud. "When intentional accounting fraud is discovered, we will apply zero tolerance and impose strict sanctions," he said, adding that oversight would be further strengthened for firms with a repeated record of audit failures.

Lee also made clear that accounting firms would be held accountable for failures in internal controls. "In the past, there was a tendency to treat incidents as the misconduct of individual accountants, but going forward, firms must develop fundamental remedies at the organizational level," he said. The FSS plans to reform the regulatory system to expand firms' supervisory responsibilities in line with international trends, noting that major countries including the United States already hold accounting firms and their management accountable for legal violations stemming from internal control failures.

Lee also raised two issues related to current industry concerns. He urged accounting firms to build the expertise needed for the stable implementation of K-IFRS 1118 — covering the presentation and disclosure of financial statements — set to take effect next year, and to conduct thorough audits accordingly. He also called on firms to review their security systems to prevent sensitive corporate information collected during digital audits using AI and other tools from being leaked externally.

"I hope the accounting industry will reach a meaningful inflection point — moving away from price competition and into an era of quality competition," Lee said in closing. "The FSS will continue to do its utmost to enhance the effectiveness of accounting oversight and strengthen trust in the capital markets, and we will maintain ongoing communication with the industry."


an@heraldcorp.com