Research Report
E.S.G. Legislative Policy Study(V) : Issues to reform Corporate Governance for E.S.G. - Auditors and Audit Committee -
I. Background and Purpose of Research
▶ Auditors (auditors/audit committees) are an important and core function in corporate governance, and serve as a balance between shareholders and directors through management and accounting audits
○ Despite the importance of the role of auditors, criticism continues regarding the independence and transparency of auditors, and their passive role.
- Nevertheless, auditors play an important role in keeping management in check in management and finance, and are the core of establishing a transparent corporate governance structure.
- Legislative improvements are continuously being made to enhance the independence of auditors and the transparency of audit work.
○ Considering recent E.S.G. disclosure and greenwashing regulations, E.S.G. management, etc., the role of auditors is E.S.G. It is gradually expanding to areas such as assessing the consistency of information for public disclosure and reviewing risk management strategies to achieve corporate management goals.
▶ Need to review the characteristics and improvement directions of the audit/audit committee's corporate governance structure from the perspective of E.S.G.
○ Seeking ways to strengthen the functions of the audit/audit committee to establish a corporate governance structure that is suitable for the era of sustainability and E.S.G.
- The global normative system is structured in the direction of expanding the role and authority of the audit/audit committee in terms of E.S.G. and sustainability.
○ By deriving tasks for improving the corporate governance structure that can include shareholders-directors-auditors in the context of E.S.G. and proposing directions for legal revision, it can also contribute to enhancing corporate value and strengthening investor protection.
Ⅱ. Contents
▶ Analysis of Similarities and Differences in the Purpose, Role, Selection Process, and Status of Audits and Audit Committees
○ Audit: As an essential institution of a joint-stock company, it protects shareholders' interests and increases corporate transparency by auditing the company's operations and accounting independently of shareholders and directors.
○ Audit Committee: As a committee within the board of directors, it performs audit functions on the company's operations and accounting, similar to audits. For certain companies, the establishment of an audit committee is mandatory.
○ In order to guarantee the activities of the audit and audit committee, independence from shareholders and directors must be ensured. Therefore, voting rights are limited to 3% when appointing members of the audit and audit committee.
- The audit committee is separate from the board of directors and is selected by applying the 3% rule, similar to the process for appointing auditors.
▶ Main Contents of the Amendments to the External Audit Law and the Financial Company Governance Structure Law and Their Linkage with the Audit/Audit Committee's Work
○ External Audit Law: Expands the scope of external audits and introduces a stricter regulatory system for the selection of external auditors and contract periods, while strengthening the external auditor's obligation to report audit results and violations.
- Enhances the functions of internal audits and audit committees through external audits.
○ Financial Company Governance Structure Law: Imposes strict responsibilities on the audit committee for financial soundness, risk supervision, and compliance with regulatory standards. It also establishes a responsibility framework for evaluating and reporting on internal control and risk management systems.
- Internal Control Committee: Supervises internal controls to ensure management's compliance with legal and ethical business practices.
▶ Comparative Analysis of Global Normative Systems for Enhancing the Transparency and Independence of Audits and Audit Committees
○ USA
- Reflecting the Enron accounting fraud case, the Sarbanes-Oxley Act was enacted in 2002 to strengthen corporate accounting audits.
- In March 2024, the SEC is set to finalize rules requiring climate-related disclosures in business reports and financial statement notes.
○ UK
- Following accounting fraud cases around 2009, discussions are ongoing to establish a new Audit, Reporting, and Governance Authority (ARGA) to replace the existing Financial Reporting Council (FRC). This aims to improve corporate governance structures and ensure the independence and expertise of corporate audit functions.
○ Japan
- Ensuring the independence and expertise of audits and audit committees, particularly audit committees.
- Strengthening internal control standards and fostering collaboration between audit committees and broader audit functions.
○ OECD
- The 2023 revision of OECD corporate governance principles focuses on improving corporate governance structures and promoting corporate sustainability.
▶ Issues in Improving Corporate Governance Structures to Realize E.S.G.: Audit and Audit Committees
○ Role of Audit and Audit Committees
- Audits and audit committees play a crucial role in enhancing corporate governance by ensuring accountability, transparency, and compliance with regulatory and ethical standards.
- From an E.S.G. perspective, their responsibilities extend beyond traditional business and accounting audits to include sustainability oversight and non-financial information disclosure.
○ Key Responsibilities
- Supervision of E.S.G. Disclosures: Oversee, verify, and evaluate the accuracy of E.S.G.-related disclosures.
- Risk Management: Assess E.S.G.-related risks, such as: Climate change; Supply chain sustainability; Social responsibility.
○ Cooperation with the Board of Directors
- Strengthen expertise and independence through collaboration between outside directors and the audit committee.
- Gradually align internal control and risk management responsibilities of audits/audit committees with the board’s E.S.G. management decisions.
○ Tasks and Reporting
- Conduct audits, request necessary documentation, and report findings to the general meeting of shareholders, ensuring transparency and accountability in governance.
Ⅲ. Expected Effects
▶ Identifying the core issues necessary for improving the corporate governance structure to realize E.S.G., with a focus on the audit/audit committee and directors/shareholders
○ Expanding the role and strengthening the responsibilities of the audit/audit committee regarding information analysis for E.S.G. disclosure, greenwashing regulations, compliance with internal control standards, and risk management inspections, etc.
○ Strengthening the independence and transparency of the audit/audit committee.