Reason for proposal and main contents

The current Act requires auditors to notify the internal audit organization (auditor or audit committee) if they discover a violation of the company's accounting standards, while the internal audit organization is required to immediately submit the results of the investigation and the company's corrective measures to the Securities and Futures Commission (SFC) and the auditor.

However, it has been pointed out that the current law is ineffective because only the internal audit organization is obligated to report to the SFC, as it does not provide penalties if the auditor or internal audit organization fails to notify or report a violation as provided.

In fact, more than 200 cases in which auditors have pointed out violations of the accounting standards by companies have been reported each year; whereas there have been only forty-four cases in which internal audit organizations have submitted to the Securities and Futures Commission the results of their investigations, and in which the companies concerned have taken the due corrective measures, in the last five years.

To respond to this deficiency, the proposed Act provides that auditors should report violations of a company's accounting standards to the SFC as well to the internal audit organization, and that auditors should also report to the SFC if they have do not receive the results of an investigation from the internal audit organization within a given period of time from the date on which it is notified of accounting irregularities. It also provides the basis for imposing sanctions aimed at enhancing the law's effectiveness when an internal audit organization or auditor violates its notification and reporting obligations (Article 22 and Article 47 of the draft).