Contributors from South Korea were asked three questions: What were the highlights/trends in your market last year? (i.e. important mergers, regulatory changes, economic situation etc.); What are the opportunities and challenges for accounting firms in the market?; What are the expectations for the future short/medium/long term?
By Michael Oak, international liaison partner of BDO Korea
In the beginning of 2017, the Financial Supervisory Service (FSS, regulatory body of finance in Korea) took disciplinary actions against Deloitte Korea on neglecting fraudulent accounting of Daewoo Marine & Shipbuilding Co., Ltd(DSME). This had led the Seoul Central District Court to issue warrants of arrest to Deloitte Korea executives and partners, and strengthen appointment of auditors by the FSS on statutory audits for listed companies in the Korean Stock Exchange Market.
As BDO Korea was newly launched as a “single firm” in April 2016 and is now a network member firm of BDOI, it is the only accounting firm in Korea other than the Big 4 to utilize an online audit platform such as the Audit Process Tool (APT) for auditing Korean clients. Therefore, the quality of our audit works can be maintained and will be able to match the performance of professional services with international standards. As regulations by the FSS are becoming more intensified, BDO Korea will have an advantage being appointed as statutory auditors to key clients due to the quality of our services.
In 2017, we are projecting an increased revenue of KRW 30 billion(USD 26.6 million) and expanding professional staffs to a total of more than 100 CPAs, while still maintaining our specialized services in tax and advisory services. In 3 to 5 years, our objective is to increase revenues to KRW 70 billion with 300 CPAs to become the 5th biggest accounting firm in Korea.
By Seok Hyoung, partner in the department of foreign company Osung Accounting Corporation, KICPA
2016 can be described as a period where Korean consumers familiarized themselves with the dynamic changes in innovative technology. After the big match between Deepmind’s AlphaGo and the top Go player Lee Sedol on March 12th 2016, the nation’s large tech companies such as Samsung Electronics, LG, and the largest telecom carrier SK Telecom have each announced AI based products.
Samsung announced their first AI-based voice recognizing smartphone S8, LG plans to unveil home appliances based on deep learning technology that provide customized services by learning the owner’s habits and surroundings. Market consulting firm IDC predicts that the AI market will grow 55% annually on average up to $47 billion in 2020.
Another technological industry that showed promising future during 2016 was the EV market. With the emission scandals and the government planning on increasing tax on diesel fuel, along with the debut of US automaker Tesla Motors and Chinese electric car maker BYD Auto, domestic car makers such as Hyundai Motors and Kia Motors are expecting fierce competition which would only get worse outside Korea as they take up a strong 87% of the domestic market share.
Moving on to the Electronic Storage System (ESS) market, major Korean battery makers Samsung SDI and LG Chem are still concerned over their future performance in the Chinese market as they both have taken major blows earlier last year when the Chinese government excluded the two from the subsidy list as they have “failed to acquire the necessary battery certification”.
China’s protectionism moves have heightened towards Korean corporates following the political dispute between the two nations considering the installment of the Terminal High Altitude Area Defense (THAAD) system. Along with the opaque future in the Chinese market, Tesla rises as a new competitor in the previously three-party competition. Despite the obstacles in China, LG Chem and Samsung SDI stand strong in the global ESS market topping with market shares of 21% and 19% respectively. Provided that the threshold for the two companies in China will be placated, these numbers are expected to increase further.
The Korean market trend as well as consumption tendency is fluctuating more than ever. Past data are becoming obsolete at a faster pace, and it is only going to speed up. One fact that shocked the Korean industry in general was the unprecedented consumer behavior during 2016. Economists safely forecasted that consumption of luxury goods will decrease and price will be the most considered factor leading to purchase due to the stagnant economy.
The Korean consumers proved them wrong. Consumers reached for premium health products, expensive hobby-related products, and tour packages. Restraint was once thought to be an important virtue which is why Korea used to mark one of the highest rates of saving in the world. Nowadays, Koreans are choosing to enjoy life more. Kim Nan-do, a consumer studies professor at Seoul National University calls this the “YOLO (You Only Live Once) trend”. Though times may be rough, Korean consumers will still open up their wallets if they think it is worth their while.
Experience based department stores where consumers can try the products prior to purchase, are booming with consumers more than ever. Starfield Hanam specializes in delivering such element of entertainment on top of shopping, which is why 2 million consumers visit it every month whereas other department stores struggle to make sales.
Similar to such unprecedented consumer behavior, more and more individuals are quitting their desk jobs to start their businesses. Start-ups have increased at an alarming rate during 2016. More and more newly established sole-proprietorships and corporations are pouring in and out of Korea seeking financial services and international incorporation. Though increasing demand for financial service and advisory may be an opportunity for accounting firms in the market, this is only the case with new business owners being Korean nationals.
Foreign invested companies coming to and Korean businesses expanding outside Korea are also increasing in accordance, and are in need of financial services. To serve these companies, accounting firms need to familiarize themselves with not only the tax laws and procedures for incorporation in their countries, but also in other countries as well. Overseas affiliation between accounting firms is becoming more and more popular. The need to establish an international network is pivotal to keep up with the rising demand of overseas private/corporate advancements to and from Korea.
By Jun-Hyoung Cho, assurance partner Grant Thornton Korea
Last year, politically while faced with the first impeachment of President in Korean constitutional history, our economy has maintained a slight recovery trend driven by the export and investment of semiconductor manufacturing, but it’s pace is moderating as production growth slows down. Full-fledged employment improvement in the labor market has still been delayed.
In recent years, there has been a controversy over EPC (Engineering, Procurement, Construction) industry represented by shipbuilding and construction industry in Korea. As the so-called 'Big Bath' phenomenon, in which major corporations of EPC industry realized their profits and converted to large-scale losses at a time, continued, the supervisory Authorities introduced the Key Audit Matters that modified the KAM of the international Standards on Auditing(ISAs).
However, companies in EPC industry are exposed to the cost information of domestic companies due to the expansion of disclosures and the introduction of Key Audit Matters by major supervisory authorities, resulting in a disadvantage in competition against foreign companies. On the other hand, the supervisory authorities are willing to continue to pursue related policies.
In order to strengthen the transparency of accounting and to overcome auditing failure, the supervisory authorities plan to toughen corporate auditing regulations, including limiting the duration of a contract with the same accounting company to a maximum of six years, the extension of designated auditing and securing audit time at adequate level.
Our new President Moon, was elected in this May, and his government are going to change in the delicate relationships with neighboring North Korea and with the two international players involved, China and the United States. Regarding economic policy, he is not seen as likely to implement the radical changes that he has promised, with voters tired of dull economic growth, initiatives slowed by an aging population and the conservative attitude of a mixture of political and economic powers. One of his announced goals is to create 810,000 public-sector jobs through raising taxes on the wealthy.
In the short and medium term, our companies have to be more focused on our new government’s economic democracy policies and more competitive markets, and accounting firms have to be more focused on enhanced audit regulatory environment. In the long term, aging populations pose a challenge to the fiscal and macroeconomic stability of our societies through increased government spending on pension, healthcare, and social benefits programs for the elderly. To overcome it, we will have to focused on the development of new products and services to optimize consumer’s and client’s utilities in new economic markets and environments.