‘Audit monopoly’ hurts transparency; Samil, Samjong, Anjin, E&Y dominate large firms’ market

Updated : 2014-03-27 18:54

‘Audit monopoly’ hurts transparency

Samil, Samjong, Anjin, E&Y dominate large firms’ market
By Na Jeong-ju
In Korea, it is extremely difficult for small accounting firms to compete against major companies in the same industry.
Most conglomerates only employ the services of big accounting firms to conduct external auditing.
There is a “customary rule” in this industry ― big auditors work for big firms and small auditors for small companies.
In 2006, the government made it compulsory for conglomerates to change their external auditors every six years to prevent possible “collusive ties” between conglomerates and major accounting firms, and to provide a level playing field for smaller firms.
The measure followed a massive accounting fraud case in SK Group’s trading arm SK Global. SK Global later changed its name to SK Networks.
However, this was short-lived. The government abolished the system three years later because the competition among big accounting firms became much fiercer to attract clients. This caused a sharp drop in accounting service prices, leading to the collapse of smaller competitors.
The market is now virtually controlled by four major firms ― Samil PwC, Samjong KPMG Advisory, Deloitte Anjin and Ernst & Young Korea.
Some politicians and analysts have called for a revival of the compulsory change system for external auditors since the global financial crisis in 2008. They say the “monopoly” of accounting services by big firms is damaging accounting transparency and increasing the possibility of fraud.
According to the Financial Supervisory Service (FSS), 96.4 percent of firms owned by the country’s top 10 conglomerates received audit services from the four major accounting firms last year.
Of the 83 listed firms affiliated with the top 10 business groups, only three used smaller accounting firms.
Samil PwC was the most preferred auditor for the top 10 conglomerates with a 31.3 percent share, followed by Samjong KPMG with 25.3 percent, Deloitte Anjin with 24.1 percent and Ernst & Young Korea with 14.5 percent.
Of the tallied firms, 35, including Samsung Group’s 11 affiliates, have appointed the same external auditors for over six years.
“Chaebol have selected an auditor among the four major accounting firms for a long time. This could hurt an auditor’s independence,” said Jang Ha-na, a researcher at Corporate Governance Service.
Last year, Lee Jong-kul, a lawmaker of the main opposition Democratic Party, submitted a bill to revive the compulsory auditor change system.
“We have to reflect global trends in upgrading our audit service market,” Lee said in a recent forum. “Many European countries have adopted similar systems in recent years to prevent possible fraud. They believe tighter accounting rules will help reduce systemic risks in the financial market and make firms healthier.”
“This is a lesson they learned from the recent debt crisis that swept across the region,” he said.
Sources from the four major accounting firms say Lee’s claims are out of touch with the reality.
“Even major firms are suffering from dwindling income due to fierce competition,” a source said, asking not to be named. “The government’s move to implement new accounting standards is also making the competition even fiercer.”
Under the new rules, which will take effect this year, all affiliates under the same parent group should select the same auditor to secure accounting consistency.
So far, affiliates of a conglomerate have been allowed to select different accounting firms, but doing so won’t be virtually impossible. That’s because an auditor for the parent company must assume responsibility for the audit results of its subsidiaries under the new standards.
As the battle among the top four accounting firms is getting fiercer, smaller firms are being pushed to the corner.
According to the FSS, the top four auditors controlled a combined 55 percent market share as of 2012. The remaining 45 percent was shared by some 130 smaller accounting firms. Once the new rules are implemented, the gap between the top four firms and their smaller competitors may widen further, analysts said.