Contrary to widespread belief, accounting is subjective and involves judgments that are sensitive to the context. And excessive interference by financial regulators could lead to unintended side effects, as can be seen in the case involving Samsung BioLogics’ accounting irregularities, according to accounting experts.

Furthermore, to keep a balance between regulatory monitoring and market autonomy, it is crucial that corporate audit committees play an expansive role in the regulator-management-audit trilateral structure.

“Accounting is not an exact science, but rather a part of a complex business procedure, one that requires contextual judgments from various perspectives,” said Olivia Kirtley, former president of the International Federation of Accountants, in a joint interview with The Korea Herald and Herald Business.

“It is thus important for financial regulators to refrain from pushing ahead with their own judgments and estimates to businesses.”

Affiliated with the accounting and auditing sector for several decades, Kirtley served as IFAC’s chair from 2014-2016 and vice chair from 2012-2014. She also served as chair of the American Institute of Certified Public Accountants, taking office as the first female chief in 1998.

Comprising over 175 members and associates in more than 130 countries and jurisdictions around the world, IFAC is a leading organization dedicated to accountancy.

“Our belief is that by enhancing the accounting profession, we may contribute to the development of our members, especially in developing economies, and eventually serve the public interest,” said Joo In-ki, incumbent chairman of IFAC, who joined the interview.

Joo started his two-year term as Kirtley’s successor in November this year, becoming the first South Korean national appointed to the post.

Kirtley’s remarks on financial regulators’ role reflected her view on the ongoing accounting dispute related to Samsung BioLogics, a leading player in South Korea’s biopharmaceutical sector and affiliate of the nation’s largest conglomerate, Samsung Group.

Last month, the Financial Services Commission’s auditing arm concluded that the company had violated accounting rules by deliberately changing the status of its joint venture Samsung Bioepis in order to inflate its corporate value ahead of its market listing in 2016.

Upon the decision, trading of Samsung BioLogics shares has been suspended as the local bourse operator Korea Exchange is currently reviewing whether the company should be delisted.

As the company has denied intentional violation of accounting rules, an administrative lawsuit is in progress to dispute the legitimacy of the regulator’s decision.

Regulatory actions to interpret a company’s past accounting decisions could involve risks, as the assessment of accounting history is often susceptible to change, according to Kirtley.

“When one changes auditors, new accountants may come in and offer a totally different judgment. Or, things may simply be viewed in a new light over time,” she said.

“This is normal, because accounting is never an exact science which leads to a single fixed answer.”

Besides the numbers and facts, there are always judgments to be made according to business environments and the context, she said.

“The role of regulators is thus to make sure that such judgments were made within reasonable range, not to engage in every individual action.

“Also, regulators should at all times take caution in exercising their authority as excessive intervention may undermine the confidence of investors and management.”

Kirtley also urged for regulatory consistence concerning the application of IFRS, or International Financial Reporting Standards, which are basically designed to expand the accounting autonomy of companies.

“Once it has been decided to adopt IFRS, it is crucial that regulators and companies respect (this) for the sake of consistency, or they may undermine the market sentiment,” she said.

As a way to alleviate regulatory intervention, Kirtley suggested a reinforced role for corporate audit committees.

“In the presence of an audit committee with sufficient reputation and experience, regulators may have more confidence in the system, as they would then know it is not just the management and external auditors that are in charge,” she said.

Such is the case in the United States and European countries, where there is a relatively strong level of trust in corporate boards and external auditors.

“This is because of the strong corporate governance structure, the extensive level of corporate information disclosure and well-organized audit committees,” Kirtley explained.

“This leads regulators, as well as the media, to believe that (corporates) did everything they could to get a fair accounting representation.”

Kirtley also expressed concerns about South Korea’s incoming “six plus three” system, which allows a company to freely choose its external auditor for a six-year term, and the regulator to designate another for the next three years. The system was introduced to prevent inappropriate connections between management and auditors.

“To appoint an auditor on a three-year term may be disruptive for the company,” she said.

“It often takes more than a year, even for experienced auditors, to get a grasp of key issues after taking charge of a specific company.”

Citing research results that observed the highest level of corporate risks in the year of changing auditors, Kirtley warned that obligatory short-term changes could cause unintended problems in audit quality.

“One cannot emphasize independence at the expense of qualification and experience (of auditors),” she said.

By Bae Hyun-jung (tellme@heraldcorp.com)