Accounting firms in South Korea are busy strengthening resources
in preparation for the implementation of IFRS. Moses Awe, Ernst
& Young Han Young senior vice chairman of client service and
accounts, tells David Hayes the changes will
deliver significant challenges as well as opportunities.

As IFRS spreads to the Far East, the South Korean profession is
preparing for a challenging period over the next few years. Listed
companies, including financial institutions, will be required to
prepare their financial statements using the international
standards in 2011.

The adoption of IFRS, which is intended to enhance the reliability
of Korean accounting standards, will also serve to reduce
compliance costs for the growing number of multinational
corporations operating in South Korea. Under a road map to IFRS,
which the Financial Supervisory Commission and the Korea Accounting
Standards Board have agreed, all companies in South Korea except
financial institutions will be permitted to adopt IFRS by 2009.
Full adoption of IFRS for listed companies, including financial
institutions, will become mandatory by 2011.

Adoption is expected to provide a major boost to the country’s
capital markets, which have been rebuilding slowly since the Asian
financial crisis in 1997. Adopting IFRS is expected to lead to
greater transparency in Korean companies’ financial reporting as
the country’s accounting standards are regarded by the profession
as different to international standards in global capital
markets.

Additional work

Plans to adopt IFRS are already creating new work for Korean firms
which will need to support clients during the transition period.
Ernst & Young Han Young (E&Y), for example, is undertaking
a large staff expansion programme to support the rapid increase in
workload expected to follow the adoption of IFRS, and to expand the
practice’s tax and transaction advisory service activities.

“The accounting market here is good and challenging. From our
perspective there is a lot of interest by the regulator and a
business focus on internal controls ready for IFRS. The focus is
audit quality,” comments Moses Awe, E&Y senior vice chairman of
client service and accounts. “Korean Sarbanes-Oxley [K-SOX] rules
for internal controls were adopted in 2006. There was a big
explosion among companies in 2006 to see what changes to make. Some
had to change their accounting and controls. K-SOX has been taking
off this past year. We expect it will be similar to the US and take
three to four years to implement.”

In fact, Awe believes implementation could be even quicker as
controls and audit requirements already exist. Accounting firms,
rather than companies, face the burden of the onerous checks
involved in the regulators’ requirements, which include those of
the Ministry of Finance and Economy. “The accounting profession is
struggling as regulators are active here. They require external
audits to heavily test documents instead of auditing internal
standards,” Awe notes. “Here the regulators not only test controls,
there is substantive auditing as well. There is a lot more auditing
here.”

Financial controls and oversight of company audits were tightened
up in the wake of the Asian financial crisis, which exposed
weaknesses in South Korea’s system of internal controls and
financial reporting. One of the government’s early moves was to
establish the Finance Supervisory Commission (FSC) in 1998 to
monitor the finance sector. The FSC also oversees the Financial
Supervisory Service (FSS) set up in 1999, which reviews both
company records and audit firm records to monitor procedures.

Auditing firms were also the focus of a new requirement introduced
in 2006 for mandatory auditor rotation every six years for listed
companies.

While the impact of the 1997 financial crisis continues to
influence economic development, the industrial sector has regained
its dynamism and in 2006 South Korea was ranked as the world’s
11th-largest economy in terms of GDP. The country is a leading
global player in various industrial fields, including information
technology, shipbuilding, steel making, automobile production and
telecommunications technology.

“For E&Y, South Korea is a key practice in the Far East. Hong
Kong is our Far East headquarters, as China is a major practice. We
have ten country practices in the Far East. South Korea is a
separate practice and reports to Hong Kong,” Awe explains.

Second-largest firm

According to E&Y, Big Four firms audit 53 percent of the 1,760
listed companies in South Korea. E&Y claims to be South Korea’s
second largest auditing firm, auditing 13 percent of listed Korean
companies. The firm claims it is behind PricewaterhouseCoopers,
which has a 19.3 percent share, and ahead of Deloitte with 12.7
percent and KPMG with 8 percent. “Our competitors are other Big
Four firms. The mid-tier firms are not competing with us, but 47
percent of South Korean listed companies are not with Big Four
firms,” Awe says.

E&Y’s total revenue rose 7.8 percent to KRW110.7 billion ($117
million) in the 2007 fiscal year. Audit is the firm’s main service
line, generating 80 percent of the practice’s revenue, while tax
work represents 10 percent, and transaction advisory services,
mostly M&A work, contributes the remaining 10 percent. Efforts
are being made to expand the smaller service line activities, which
now offer significant growth potential.

“Our service line revenue has not grown at the same rate in South
Korea as for E&Y Global. Transaction advisory revenues grew 30
percent globally last year but 10 percent in South Korea. Tax
revenue grew over 20 percent globally but remained flat in South
Korea,” Awe reveals. “We are looking to change the nature of the
services offered and the clients served. We want to provide clients
with more support in tax and transaction advisory services.

“Our competitor Big Four firms and local accounting firms have done
well here in tax work and we have not; it’s the nature of our
clients. Now we have 80 percent audit clients and revenue but in
future it will be 50 percent audit clients and 60 percent in audit
revenue. Other service lines will grow faster than audit. The
advisory part of audit has a risk side and management consulting.
Clients are asking for more of this, but they are asking for
independence of external auditors.”

d

Big Four preference

E&Y believes that some Korean companies would be willing to use
a different Big Four company as external auditor rather than for
other services.

“Our goal is to provide companies with a choice for these
services,” Awe says. “We are focusing on listed companies. We are
second here in serving listed companies with about 240 listed
companies as clients. Many are start-up companies and need special
services as they face risks. We support these on internal controls
and reporting when they go public. We also plan to go upper end –
recently SK Energy [South Korea’s largest oil and gas company, a
former division of the SK Group] had to decide on a new independent
auditor and we were selected.”

Korean Air and Hana Financial Group are other new Korean audit
clients, while established clients include electronics manufacturer
LG International, Shilla Hotel, computer hardware manufacturer
Hynix Semiconductors and logistics company Glovis. Foreign inbound
referral clients include IBM, Standard Chartered Bank and Dutch
insurance conglomerate ING.

To support new and existing clients adopting IFRS, E&Y is
providing consulting, training and other IFRS-related services,
including process innovation advisory, tax advisory and business
advisory services. In addition, the practice recently began to
focus on developing specialised services for specific
industries.

Awe notes that E&Y Global has launched an IFRS training system
that is available in South Korea to provide consistency in the
interpretation and application of IFRS-based financial
statements.

E&Y’s programme to increase revenue from non-audit services
coincides with South Korea’s plan to adopt IFRS. As South Korea is
expected to become more open to foreign investment and Korean firms
likely to become more globally active, E&Y is investing heavily
to adopt E&Y Global methodologies, according to Awe.

Structural changes

One of the major structural changes E&Y has undergone over the
past two years is the merger of two accounting firms into one. “Our
focus in South Korea has changed. Two accounting firms came
together to create the foundation. Their operations were not fully
integrated before. We have had 18 months of putting in common
methodologies for people and work. E&Y now is working with the
E&Y Far East office to ensure a common standard of work so our
South Korea people can work anywhere and our E&Y overseas
people can come here,” Awe says.

“Audit methodology, for example, follows a global E&Y framework
but is augmented for local requirements… Our clients are asking for
this. For example, previously E&Y and KPMG shared ING, but last
year ING chose E&Y as its worldwide auditor. South Korea is in
the top five in insurance worldwide. ING has big business here so
we need the right expertise in assurance and banking; also we need
the right global experience. This is an example of how we support
inbound clients.

 “Historically, not many clients are international companies.
But now international companies are coming in. Also, we have South
Korean clients going outbound. South Korea has a big engineering
and construction industry, and there are a lot of Korean companies
in the Middle East such as in Dubai. E&Y has a large Middle
East practice with over 50 percent of the market.”

To support outbound clients, E&Y has set up Korean desks in
E&Y offices in China, Vietnam, India, Malaysia, Australia, New
York and Europe. Awe notes that E&Y Korea also plans to
establish a West Coast US desk this year to serve South Korean
electronics companies. The growing list of inbound referrals has
also resulted in a number of foreign language desks being set up in
E&Y’s Seoul office.

Organic growth

Another area in which the firm plans to invest heavily is staff.
E&Y employs 1,300 staff in South Korea and is aiming to add
another 100 people to lift the total number to 1,400 by the end of
this year. Currently, 80 percent of staff members are certified
public accountants (CPAs), including the 90 partners.

There are plans for another 15 partners to be appointed to the
South Korea practice during 2008. “There is tremendous growth in
our staff in South Korea and in service lines. We want to reach
over 100 partners in South Korea by July 2008 and over 130 partners
by 2010. This includes replacements for retiring partners,” Awe
notes. “The government controls CPA licences which are issued each
year. About 20,000 trainees sat the exam last year but only about
800 got licences; this does not mean that all the others failed. We
are concerned, as we need to add staff numbers. We are targeting
top graduates from university and bringing in key resources from
around the world to E&Y Korea.

“You must be a licensed CPA to do an audit in South Korea. In other
countries an audit is just supervised by a CPA, but in South Korea
the auditor must be certified to start. This ensures top quality
but restricts staff resources. Audit will be 60 percent of our
business in future and non-audit 40 percent, which means we can
resource experts for clients using non-Korean CPAs.”

Awe says staff recruitment will remain an issue for E&Y and
other accounting firms unless the number of new CPAs grows rapidly
in the future.