Regulation major obstacle to growthKorea Herald |
The heavily regulated environment in which Korean accounting firms must operate is an obstacle to the development of the industry, said Manoj P. Singh, Asia-Pacific CEO of Deloitte Touche Tohmatsu.
"Instead of increasing regulations at every chance, the government should create an environment characterized by rational measures so that it contributes to the growth of the industry," he told The Korea Herald.
Deloitte is an organization of member firms providing professional services and advice regarding audits, taxation, enterprise risk, financial advisory, mergers and acquisitions, among others. Globally, it recorded revenue totaling $15 billion in the year ending 2003.
Singh noted that while Korea is striving to adopt international accounting standards, time is still needed for these changes to settle in as general practice at Korean firms.
Recently, the government announced accounting improvement measures such as requiring greater liability for accounting information producing firms, better accuracy and timeliness of accounting information and more liability for external auditors.
"If such reform measures are soundly implemented, they could result in greater accounting transparency. However, any possible confusion that may result from radical government-oriented policy reform measures should not be taken for granted. The government must put effort into mitigating any possible side effects resulting from new accounting systems such as the class-action lawsuit system, periodical changing of accounting firms and the restriction of the consulting scope of accounting firms," he said.
He noted that despite the fact that the class-action lawsuit system is expected to take effect next year in Korea, detailed regulations still do not exist. If this system is implemented without proper restrictions and careful prior preparation, it could result in side effects such as exhaustive and reckless lawsuits.
Class actions are often used to seek monetary damages and other relief resulting from violations of antitrust laws, securities laws, consumer fraud, human and civil rights violations, employee benefits disputes and environmental issues.
"If implementation is inevitable, then clear regulations and acknowledgment of the requirements of the class-action lawsuit system should first settle in as a precondition," he said.
As accounting fraud incidents began to surface, he noted, accounting firms are said to be putting less importance on accounting services due to time spent on providing consulting services. This means that the accounting firm may be compromising fairness and objectivity due to lack of independence.
"To avoid this, restrictions have been placed on non-auditing services provided to audit clients in the U.S., and the same system should take place in Korea as well," Singh noted.
If auditing firms are replaced every six years, as mandated by the government, the company's cost burden not only increases but there is also the possibility that the quality of the external audit itself might fall. Placing an obligation on firms to replace audit companies periodically may result in cherry picking by companies, he said.
If the current issues such as replacement of accounting firm, separation of audit and consulting operations, and others are resolved, accounting transparency is sure to improve. However, if thorough investigation and preparation is not observed, it may just turn out to be an unsound remedy.
"Instead of enacting new regulations, existing laws and systems should be modified so they operate properly. Effective monitoring of the existing system and operating entities may turn out to be a more realistic measure," he said.
By Rambabu Garikipati ( ram@heraldm.com)
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