South Korea’s journey towards adopting international accounting
and auditing standards could evolve the structure of its
professional services market, according to an industry

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

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

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

“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

David Hayes