The number of firms that could face delisting from South Korea’s secondary Korea Securities Automated Quotation (Kosdaq) market would escalate this year under the country’s reinforced external audit act.

According to multiple industry sources on Sunday, more than 30 Kosdaq-listed companies could receive a disclaimer of opinion this year as the country’s revised external audit act is expected to force auditors to conduct more thorough review of the companies’ accounting books than before.

A disclaimer of opinion is issued when an auditor is unable to complete the audit report due to insufficient information, and the companies getting a disclaimer of opinion is generally expelled from the secondary market. Last year, 20 Kosdaq-listed companies received a disclaimer of opinion.

Korea Exchange data, in particular, showed that 25 Kosdaq-listed companies have incurred losses for the last three years or more in a row, raising the possibility for them to miss the audit review standard that has been reinforced this year.

In November, the country’s external audit act was amended in line with growing demand for stricter auditing process after a number of local companies had been found guilty of accounting frauds despite regular audits by external audit companies. In 2016, Deloitte Anjin, one of major three accounting firms in Korea, was even accused of window dressing audit reports of debt-ridden Daewoo Shipbuilding & Marine Engineering Co. (DSME).

Under the amended act, auditors will be replaced periodically so that they can cross check reviews of stock-listed companies. Also, the revised act calls for external auditors to spend double the time they spend in auditing.

Korean companies with fiscal year ending December 31 are subject to receive the stricter external audit for last year under the country’s amended external audit act. Listed companies will have to submit twice more documents to their external auditors this year compared with previous years to meet requirements of the new external audit act.

Industry insiders noted that accounting firms hired by stock-listed companies as external auditors will be under more pressure to look into the financial statements of companies more thoroughly this year as the revised law gives more responsibility to accounting firms for lax auditing practices.

If companies are found guilty of accounting frauds, external auditors will be subject to a criminal punishment of up to 10 years or under, up from previous five to seven years. They will also be subject to a penalty of up to three times the unfair profit amount, up from in between 50 million won and 70 million won. The prescription period of damage suits against accounting firms has also been extended from three years to eight years.

By Jin Young-tae and Lee Eun-joo

[ⓒ Pulse by Maeil Business Newspaper & mk.co.kr, All rights reserved]