[2] The duty of care to be borne by an auditor under the Act on External Audit of Stock Companies / Whether the standards for accounting audit set by the Korean Institute of Certified Public Accountants pursuant to Article 5(2) of the Act on External Audit of Stock Companies are the main basis for determining whether an auditor’s breach of such duty

[2] Under the Act on External Audit of Stock Companies (hereinafter “Act”), an auditor shall conduct an audit in accordance with the standards for accounting audit generally accepted as fair and reasonable in performing an audit for a stock company, and has a duty of care to prevent interested parties from suffering from being unable to express their opinions on the financial statements of the company subject to audit (Articles 1 and 5(1) of the Act on External Audit of Stock Companies (hereinafter “Act”).

Meanwhile, according to Article 5(2) of the External Audit Act, the Korean Institute of Certified Public Accountants shall determine the standards for accounting audit, and the standards for accounting audit prepared accordingly are generally accepted as fair and reasonable, barring any special circumstance, and thus, the main criteria for determining the auditor’s breach of such duty of care as above.

1. Article 48(1)2 of the Certified Public Accountant Act provides that the Financial Services Commission may take disciplinary action against a certified public accountant pursuant to the resolution of the Certified Public Accountant Disciplinary Committee in cases where the certified public accountant falls under the "where the certified public accountant has made gross mistakes or omissions in audit or certification". "where the certified public accountant has made gross mistakes or omissions in audit or certification" refers to cases where the certified public accountant neglects the audit procedure and thus has a substantial difference with the actual contents of audit report or omission of important matters, and where the contents of audit or certification coincide with the actual contents or has not neglected the audit procedure, it does not constitute grounds for disciplinary

2. The lower court determined that: (a) although the Plaintiff did not have entered into a conditional transfer agreement with the Plaintiff (hereinafter “Es”) with the law firm, it made a false statement of KRW 1 billion (hereinafter “instant advance payment”) on the financial statements from 2009 to the overall fiscal year 2011 as if it had existed; (b) the Plaintiffs, who were certified public accountants of Als-based accounting firm designated as an auditor, did not have any significant reason for indicating that the instant advance payment was valid under Article 44 (from January 1, 2010 to December 31, 2010) of Es-ray’s 44 (from January 1, 2010 to December 31, 2010), the lower court: (c) determined that the instant advance payment was not made for the purpose of ascertaining the validity of the instant contract with the Plaintiff; (d) on the ground that there was no significant omission in the Plaintiff’s audit or inspection procedure on the grounds that the Plaintiffs did not have been negligent in performing their duties as to verify or inspection procedures.

3. However, we cannot accept the above judgment of the court below as it is.

A. As to the existence of the advance payment of this case

1) According to the standards for accounting audit (amended by Act No. 12, Dec. 12, 2012; hereinafter the same) the term “actual restructuring of assets” means that assets exist as of a given date, such as the balance sheet, and the corporate accounting standards require that they be reflected in the financial statements after evaluating the substance and economic facts of transactions. Thus, in order to deem that the instant advance payment is actually existing, the relevant advance payment at the time of the audit date should be deemed to exist in terms of the substance and economic aspects of transactions.

2) On December 18, 2009, the lower court determined that the instant advance payment was in existence on the ground that Nonparty 1’s attorney-at-law posted his seal on the legal entity’s date and facsimileed the ecro contract signed and sealed the corporate seal impression to Nonparty 1 on the same day, and thus, the ecro contract, which served as the basis for the instant advance payment, was valid, and that the ecro contract was deposited in the account designated as the storage account in the ecro contract, and that one billion won was deposited in the designated account.

3) However, the circumstances indicated by the lower court are merely at the time of entering into the instant contract, and it does not support the existence of the instant advance payment in the substance and economic aspect as of December 31, 2010, which is the date of audit, and such circumstance alone does not necessarily lead to the existence of the existence of the instant advance payment, and there is no other evidence to support the existence of the instant advance payment as at the audit date. Rather, according to the records, it can be seen that the Seoul Administrative Court, which sought revocation of the imposition of a penalty surcharge of KRW 1 billion against the Securities and Futures Commission on the ground that the instant advance payment was not excessively appropriated against the Securities and Futures Commission, was finalized after it was sentenced that there was no penalty surcharge of KRW 1 billion in advance in the case of 2012-Gu 18981.

B. As to whether the audit procedure was neglected

1) Under the Act on External Audit of Stock Companies (hereinafter “Act”), an auditor has a duty of care to prevent interested parties from suffering from being unable to express appropriate opinions on the financial statements of the company subject to audit by conducting an audit in accordance with the standards for accounting audit generally accepted as fair and reasonable (see Articles 1 and 5(1)).

Meanwhile, according to Article 5(2) of the External Audit Act, the Korean Institute of Certified Public Accountants shall determine the standards for accounting audit, and the standards for accounting audit prepared accordingly are generally accepted as fair and reasonable, barring any special circumstance, and thus, the auditor’s major criteria for determination as to whether the auditor breached his/her duty of care as above.

According to the standards for accounting audit at the time of the Plaintiffs’ audit of ASEAN, the core of the duty of care borne by an auditor who audits the financial statements is “an expert doubt” that an important part of the financial statements may be distorted (see Article 200-2.3 of the Standards for Accounting Audit). In a case where the financial statements faces a situation where there is a possibility that an important distorted indication due to an malpractice or error, an auditor shall conduct an audit procedure appropriate for determining whether the financial statements are actually distorted (see Article 240-3 of the Standards for Accounting Audit). Furthermore, the auditor shall obtain adequate and adequate evidence to derive reasonable resolution that serves as the basis for the formation of an audit opinion (see Article 500-1.2 of the Standards for Accounting Audit). The standards for accounting audit shall be determined by taking into account the importance, inherent risks, and control risks (see Article 505-1.2), preparation of inquiry reports, the procedure for collecting inquiry reports, and the process of making inquiries into an inquiry (see Article 505-4).

2) Review of the reasoning of the lower judgment and the evidence duly admitted by the lower court reveals the following facts.

① Around April 5, 2010, on the grounds of suspicion that the former management Nonparty 2 embezzled the company’s funds, etc., he/she submitted a written petition to the prosecutor’s office to request the investigation. As a result of the investigation, Nonparty 2 was indicted on July 1, 2010 on the charge of embezzlement of KRW 8.7 billion of the company’s funds.

② At the time of the audit, Plaintiff 2 was aware that the instant advance payment was related to Nonparty 2, etc.’s embezzlement of ASEAN’s funds through window dressing accounts during the fiscal year 2010, and thus, it was highly likely to distort the financial statements.

③ Nonparty 3, a certified public accountant who participated in the instant audit, was Nonparty 3, not Nonparty 1 or law firm whose custody account was kept, but Nonparty 4, a third party’s account, and the contract was merely a draft received by facsimile with Nonparty 1’s seal affixed, etc.

④ However, there is a defect that Aarman’s person in charge continued to contact Nonparty 1 without having a telephone, and the Plaintiffs did not follow the wire verification or inquiry procedure with respect to the validity and existence of the contract to Nonparty 1, and did not perform the alternative audit procedure or additional audit procedure.

⑤ On January 2, 2010, the Plaintiffs heard the statements from the ASEAN-related parties that KRW 1 billion out of KRW 1.1 billion deposited in the ASEAN-based account constituted the amount to be recovered of the instant advance payment. On the contrary, the Plaintiffs deemed that the said KRW 1.1 billion was related to the instant advance payment, and acknowledged the existence of the instant advance payment.

(6) However, on the ground that the above amount of the advance payment (1.1 billion won) is different from the amount of the advance payment of this case (1 billion won) and the depositor’s identity is unknown, the advance payment of this case cannot be deemed to have been returned, and thus, it cannot be managed as a separate advance account. The Plaintiffs also did not have conviction in the relationship between the above KRW 1.1 billion and the advance payment of this case at the time of the audit.

3) Considering the following circumstances revealed through the factual basis and the record, the Plaintiffs neglected the procedures for collecting sufficient and adequate evidence regarding the existence of the instant advance payment, thereby failing to appropriately reflect in the audit opinion the distorted indication of the instant advance payment.

① The advance payment account of this case exceeded KRW 1,000,000,000, which is the important standard established at the time of audit and inspection by the Plaintiffs. In addition, there were many doubts as to the existence of the advance payment of this case, and thus, the Plaintiffs, who are external auditors, had a duty of care to confirm whether the Plaintiffs were justifiable and appropriate evidence to verify the existence of the advance payment of this case with professional doubt and to obtain the procedure of confirming the legitimacy of the management’s statement.

However, the Plaintiffs heard that they did not contact Nonparty 1 after allowing Aman’s person in charge to confirm the validity and existence of the instant advance payment to Nonparty 1, and did not undergo an inquiry by directly verifying wire or making a written inquiry to Nonparty 1.

Although Nonparty 1 testified at the lower court to the effect that “I would like to have avoided the contact by asking questions as to whether I or other persons on the part of I or other persons on the part of I or others on the deposit of KRW 1 billion under the contract,” it is difficult to readily conclude that I refused to respond to the inquiry by an external auditor.

② In the event that the Plaintiffs were unable to sufficiently carry out the necessary audit procedures due to Nonparty 1’s refusal to answer, etc., they should obtain evidence by carrying out the alternative or additional audit procedures, and as a result of conducting external inquiries and other audit procedures, it should evaluate whether sufficient and adequate evidence for the management’s assertion of financial statements has been obtained (Article 505-4.5 of the Standards for Accounting Audit). If sufficient and adequate evidence for the management’s assertion is not collected even though such procedures were followed, they should either express a limited opinion or refuse to present an opinion (Article 500-2.3).

However, the plaintiffs acknowledged the existence of the advance payment of this case based on the statement of A.S. person in charge that KRW 1 billion out of KRW 1.1 billion is the amount recovered of the advance payment of this case without conducting alternative audit procedures or additional audit procedures.

C. If so, although the advance payment of this case did not take place, since the plaintiffs neglected the audit procedure and expressed an adequate opinion on the financial statements, it can be viewed that there was a serious error in the plaintiffs' audit or certification. However, the court below erred by misapprehending the legal principles on disciplinary requirements under Article 48(1)2 of the Certified Public Accountant Act, and the auditor's duty of care.

4. Conclusion

The lower judgment is reversed, and the case is remanded to the lower court for further proceedings consistent with this Opinion. It is so decided as per Disposition by the assent of all participating Justices on the bench.

Justices Kim Yong-deok (Presiding Justice)