Regulations Governing Auditors in Korea

1. Korea Ethics and Independence Environment Sylvie Soulier, IESBA Member IESBA Meeting New York June 29 – July 1, 2015

2. Korea Independence Environment Korea Snapshot • Advanced industrialized economy • G20, APEC and OECD member state • Global top 10 export country • Industries • 1st in shipbuilding, 3rd largest steel producer, and 4th largest oil refinery • Global top 5 automobile manufacturer • Global leader in electronics, semiconductors, LCD displays, computer and mobile phones • Leading country in construction, engineering, machinery, petrochemicals and textiles

3. Korea Independence Environment Applicable laws and regulations • Act on External Audit of Stock Companies • Statutory audit – stock companies with total assets exceeding KRW10,000m (Voluntary audits not common) • Review of internal control • Audit firm – 3 years in/3 years out partner rotation, firm liability, 2 year statutory audit firm inspection • Retention of working papers (8 years) • Up to 5 years prison sentence for accounting fraud convictions • Joint and several liability: Professional Indemnity Insurancefor audit firms

4. Korea Independence Environment Applicable laws and regulations (cont’d) • Certified Public Accountant Act • CPA services (Assurance/Attestation, Tax, Valuation) • Partnership qualifications and responsibilities, and Accounting firms qualifications • Indemnity liability (required to compensate for damages suffered by clients and third parties) • Independence (overall, consistent with IFAC standards but more ‘rule-based’) • KICPA – monitors compliance by CPAs and accounting firms • KICPA disciplinary actions (e.g., suspension or revocation of CPA license) for violations, such as material negligence/willful misconduct in Assurance/Attestation services

5. Korea Independence Environment Applicable laws and regulations (cont’d) • Financial Investment Services and Capital Markets Act • Issuer registration rules and statements • Public offerings • Disclosures including annual, semi-annual and quarterly reporting • Prohibition of unfair trading • Stock options • Issuance of new shares and acquisition of treasury stock • Financial investment firms and collective investment vehicles required to appoint statutory auditors (similar to the audit committees), who are liable to clients and third parties • Penalties

6. Korea Independence Environment Regulators and standards setting bodies

7. Korea Independence Environment Regulators and standards setting bodies (cont’d) • FSC / SFC • Financial Services Commission (FSC) is a regulatory body that governs and oversees capital markets and financial institutions. • FSC, in particular, has the ultimate power/authority over the auditing profession, proposing amendments to the applicable laws, issuing interpretation thereon, supervising the profession and imposing disciplinary actions. All Korean accounting firms are required to register with it. • Securities and Futures Commission (SFC), a special deliberation body within FSC, oversees securities and futures markets. Its principal function is to investigate market abuses like insider dealing and stock market manipulation, and to oversee the accounting and auditing profession.

8. Korea Independence Environment Regulators and standards setting bodies (cont’d) • Financial Supervisory Service (FSS) • FSS assists FSC/SFC in supervising capital markets and the accounting and auditing profession. • Its major missions include the supervision, examination and investigation of financial institutions, the enforcement of financial services regulations and performing other regulatory functions delegated by FSC/SFC. • With regard to regulation of the accounting and auditing profession, FSS performs the following: • Quality control system inspection of large accounting firms (FYI, EYHY inspected in 2009 jointly by FSS and PCAOB and no significant issue found, and to be inspected in June 2011) • Review of audit working papers for listed companies

9. Korea Independence Environment Regulators and standards setting bodies (cont’d) • Korea Accounting Standards Board (KASB) • The mission of the KASB is to independently set, revise and interpret accounting standards to improve the quality of Korean accounting standards to better reflect the economic and financial landscape in Korea. • Issues statements of Korean accounting standards. • Provides interpretation of Korean accounting standards as well as answers to questions thereon. • Conducts research on accounting-related issues. • Distributes accounting-related information to relevant academic, industry and professional communities. • Provides education and training related to Korean accounting standards.

10. Korea Independence Environment Regulators and standards setting bodies (cont’d) • The Korean Institute of Certified Public Accountants (KICPA) • As authorized under the CPA Act and delegated by FSC • Compliance with Code of Ethics by professionals • Drafting assurance and auditing standards • Continuing professional development • Quality control system inspection of small accounting firms • Audit working paper review for non-listed companies • Research, academic activities and publication • Government-delegated services • Disciplinary actions

11. Korea Independence Environment Status of the IESBA Code implementation • Korean Code of Ethics for Professional Accountants • In order to develop ethical standards conforming to global standards, KICPA has fully adopted the IESBA Code of Ethics in 2006 • The most significant issue in adopting the IESBA Code of Ethics was how to address the differences between the IESBA Code of Ethics and the Korean CPA Act and the External Audit Act • In order to ensure that professional accountants should comply with the IESBA Code of Ethics and avoid the possible breach of Korean laws, KICPA has provided the Korean Code of Ethics with the provisions of the IESBA Code of Ethics and, then, added the provisions of more stringent Korean laws to the pertinent paragraphs • Since the initial issuance of the Korean Code of Ethics in 2006, no revisions have been made

12. Korea Independence Environment Differences between the IESBA Code of Ethics and the CPA Act and the External Audit Act • Requirements on applicable to professionals and accounting firms • Under the CPA Act, a professional who would be a covered person has deposits or other accounts worth not less than KRW30m (KRW100m for accounting firms), respectively, excluding deposits worth not more than amounts protected under Deposit Protection Act in an entity, the firm should not accept the financial statements audit engagement or assurance engagement for the entity

13. Korea Independence Environment Differences between the IESBA Code of Ethics and the CPA Act and the External Audit Act (cont’d) • Requirements on performing non-audit services • Under the CPA Act, the auditor should not be involved in certain non-audit services which are having the potential for causing the conflict of interest unless the auditor both receives a consent of the statutory auditor or audit committee and apply appropriate safeguards to eliminate independence threat or reduce it to an acceptable level • In addition, the auditor may engage in certain non-audit services that are neither prohibited by the related laws and regulations nor required a consent of the statutory auditor or audit committee, provided that the identified threats to independence can be eliminated or reduced to an acceptable level

14. Korea Independence Environment Differences between the IESBA Code of Ethics and the CPA Act and the External Audit Act (cont’d) • Restriction on the types of services • Under the CPA Act, sell-side services to an audit client which involve due diligence, financial reporting, valuation and expressing opinions on the validity of certain transactions or contracts relating to the sale of the audit client's assets are prohibited during the professional engagement period • In addition, for an audit client which is a governmental entity or quasi public agency, the Korean Board of Audit and Inspection (BAI) regulations prohibit the provision of both buy-side and sell-side services which involve due diligence, financial reporting, valuation or advisory on contracts or transactions

15. Korea Independence Environment Differences between the IESBA Code of Ethics and the CPA Act and the External Audit Act (cont’d) • Korean partner rotation requirements • Under the External Audit Act, an engagement partner on the audit engagement of the same listed audit client may serve a maximum of three consecutive years in that role • After such time, the partner may not be a member of the audit engagement team or be an engagement partner for the audit client for three consecutive years • Also, for non-listed audit clients, a lead engagement partner may serve a maximum of five consecutive years in that role

16. Korea Independence Environment Differences between the IESBA Code of Ethics and the CPA Act and the External Audit Act (cont’d) • Public interest entity • Under the existing independence rules, listed entities are only defined as PIEs • However, in an effort to enhance accounting transparency, Korean regulators are currently proposing the following amendments to the existing independence rules: • Large non-listed entities and non-listed financial institutes will be defined by regulation as a PIE to be conducted in compliance with the same independence requirements such as partner rotation requirement requirements