South Korea’s journey towards adopting international accounting and auditing standards could evolve the structure of its professional services market, according to an industry leader.
Korean Institute of Certified Public Accountants (KICPA) president Tae Sik Suh believes government requirements for all audit firms to become IFRS capable will lead to a two-tier system where large firms serve listed clients who follow IFRS and smaller firms serve SMEs and non-listed enterprises that use local accounting standards.
Firms and certified public accountants (CPAs) are being retrained en masse in preparation for full adoption of IFRS, which becomes mandatory for listed companies in 2011 but can be applied optionally next year.
Current system In South Korea there is presently a three-tier market. This is led by the Big Four, who follow global accounting standards; a second-tier, which consists of major local firms who serve listed companies; and a third-tier of small- to medium-sized practices that usually handle private company audit, bookkeeping and tax services.
There are more than 80 accounting firms in practice and the market share of second and third tier firms for audit is relatively high at about 37 percent.
In recent years, KICPA has supported efforts to assist second tier firms to upgrade and become top-tier practices. A number of second tier firms are already associated with global mid-tier networks but will need to become fully capable in IFRS to retain their current client base, according to Suh.
“Big Four firms are fully capable in IFRS while local non-Big Four are not. The government plans in the medium term are that any accounting firm auditing a listed company must provide global level services otherwise the government will not allow them,” Suh explained.
“To survive as a tier one practice accountants have to incur costs to support staff and so on, otherwise they will give up their tier status and have to sit at tier two. [If] the government just insists on tier one for listed companies, then it is the accountants’ choice whether to target tier one or tier two.
“If it’s a two-tiered system, I do not like the idea. There should be one accounting standard. In the long term the market may decide but this is not a mature market… All should follow a one-tier system. If they do not follow then there will be two tiers.”
Currently, about 60 percent of practicing CPAs in South Korea work for Big Four firms. This proportion is predicted to grow by another 10 percent to 20 percent if a two-tier market develops as a number of second-tier practices upgrade to join the top tier.
The adoption of IFRS presents the KICPA and the profession with one of its largest ever training challenges. Courses for new accountants are being modified to educate students about international standards while qualified accountants also need to be retrained. “All universities are converting their courses for IFRS. They must introduce this in 2009. For new CPAs, those gaining two years experience must study 100 hours a year with KICPA. That will include a large amount of IFRS and will start in 2008, but universities will start IFRS training in 2009,” Suh said, noting that the KICPA has 9,448 registered members.
Training challenge Big Four firms have already set up IFRS training programmes. “Pricewaterhouse¬Coopers, for example, have prepared cyber classes totalling several hundred hours that anyone can study if they pay the tuition cost,” Suh said. “Every hour of study gets tested and accountants can earn one hour credit. KICPA can issue a certificate for each test as these are controlled by our data base.”
South Korea’s road map to IFRS includes a phased transition to consolidation-based disclosure for all listed companies from 2013. However, large listed companies with assets valued above KRW2 trillion ($2.1 billion) will begin disclosure in the starting period of 2011. At present, disclosure in South Korea is based on individual finance statements. There will also be a move towards fair value accounting instead of cost accounting when objective valuation is impractical.
Suh explained that adopting IFRS is not that simple. “The Korea Accounting Institute (KAI), which sets accounting standards, is translating 3,000 pages of basic standards; examples and IFRS appendices also are being translated for reference purposes. They will complete the entire translation by the end of 2008,” he said.