Agjin Accounting Corporation (Attorneys Kim Yong-sung et al., Counsel for the plaintiff-appellant)

Financial Services Commission (Government Law Firm Corporation, Attorneys Tae Tae-Gyeong et al., Counsel for defendant-appellant)

September 26, 2019

Seoul Administrative Court Decision 2017Guhap68875 decided November 2, 2018

1. Revocation of the first instance judgment.

2. The instant lawsuit shall be dismissed.

3. All costs of the lawsuit shall be borne by the Plaintiff.

1. Purport of claim

The disposition of business suspension in attached Form 1 that the Defendant rendered to the Plaintiff on April 5, 2017 shall be revoked.

2. Purport of appeal

The judgment of the first instance is revoked. The plaintiff's claim is dismissed.

1. Details of the disposition;

A. The Plaintiff is a corporation established for the purpose of accounting audit, etc., and is an auditor who has conducted an external audit under the former Act on External Audit of Stock Companies (wholly amended by Act No. 15022, Oct. 31, 2017; hereinafter “former External Audit Act”) with respect to the financial statements during the 11th period (2010 Fiscal Year) through the 16th period (2015 Fiscal Year) of the Treatment Shipbuilding Shipping Co., Ltd. (hereinafter “Treatment Shipping Sea”) (hereinafter “the instant audit team”). The audit team consisting of the certified public accountants belonging to the Plaintiff, which performed each of the instant audits (hereinafter “the instant audit team”).

B. The Financial Supervisory Service, based on the suspicion of window dressing accounting in the Daewoo Shipbuilding Sea and the suspicion of false audit by the audit team of this case, etc., was selected as the subject of supervision on December 10, 2015, and commenced supervision on each of the instant audits, etc. Based on such supervision results, the Securities and Futures Commission recommended the Defendant to “suspension of business suspension for 12 months” against the Plaintiff on March 24, 2017 on the ground of “violation of the External Audit Act and the Standards for Accounting Audit during each of the instant audits” pursuant to Article 16(1) of the former External Audit Act, etc. (hereinafter “instant recommendation”).

C. On April 5, 2017, the Defendant issued a disposition imposing a penalty surcharge of KRW 1.6 billion under Articles 429(1) and 119 of the Financial Investment Services and Capital Markets Act on the ground of “an adequate opinion on the financial statements attached to the registration statement of the treatment shipbuilding and ocean.” The Defendant issued a disposition imposing a penalty surcharge of KRW 1.6 billion under [Attachment 1] on the ground that “an audit is gross mistake or omission (the audit is not conducted in accordance with the standards for accounting audit)” (hereinafter “instant disposition”) under Article 39(1)5 of the Certified Public Accountant Act. The specific grounds for the disposition in the “Notice of Disposition of Disposition of this case and Imposition of the said penalty surcharge” are as shown in [Attachment 2] detailed grounds for the “Notice of Disposition of Disposition of this case and Disposition of Imposition of the said penalty surcharge” (attached 2). The basic facts constituting the grounds for the disposition of this case: ① Sales and sales of the Plaintiff, etc.; ② the procedure for audit and inspection of the company’s dependent stocks (the auditor’s dependent stocks)

[Ground of recognition] Facts without dispute, Gap evidence 1, Eul evidence 1, Eul evidence 1, 27 through 29 (if there are serial numbers, including branch numbers; hereinafter the same shall apply) and the purport of the whole pleadings

2. Relevant statutes;

Attached Form 3 is as shown in the relevant statutes.

3. Judgment on the defendant's main defense of safety

A. The parties' assertion

1) The Defendant’s defense to the effect that there is no legal interest in seeking the revocation of the instant disposition, since the Plaintiff’s instant disposition became invalid after the period of suspension of business prescribed in the instant disposition expired.

2) As to this, the Plaintiff asserts that even if the instant disposition became invalid due to the lapse of the period of suspension of business, there are special circumstances to recognize the legal interest in seeking the cancellation of the instant disposition as follows.

A) Considering the size of the Plaintiff’s organization by more than 1,100 certified public accountants affiliated with the Plaintiff and the Defendant, there is a risk of repeating illegal dispositions for the same reason as the instant disposition, and it constitutes a case where it is determined that there is a legal dispute as to whether the statutory standard for issuing a disposition of suspending business to an accounting firm is either Article 39(1)5 of the Certified Public Accountant Act or Article 39(1)5 of the Certified Public Accountant Act or is partially amended on April 1, 2016, hereinafter “instant Enforcement Rule”) [Attachment 2] [Attachment 2] of the Enforcement Rule on External Audit and Accounting, etc. (hereinafter “Enforcement Rule of this case”).

B) According to Article 58(1) of the Regulations on External Audit, Accounting, etc. (amended by the Financial Services Commission Notice No. 2017-33, Sept. 8, 2017) and the guidelines for the determination of supervisory results of the instant Enforcement Rule [Attachment 2], there is a concern that the Plaintiff may be subject to revocation of registration or suspension of business, which is a subsequent disposition, based on the grounds or premise that the instant disposition, which is a prior disposition, is an aggravated disposition

C) If the instant disposition grounds for the intentional involvement of intentional window dressing accounting in the Plaintiff’s corporate level are recognized as they are, the Plaintiff’s reputation and credit, one of the four accounting consulting corporations around the world, is seriously damaged and lost the customer’s trust, and the damage arising therefrom is so extreme that it cannot be converted into money. Therefore, the effect of infringement of honor, credit, etc. exceeds a mere de facto disadvantage and constitutes a serious infringement of legal interests.

B. Determination

1) Expiration of the sanctions period against the instant disposition

A litigation seeking revocation shall continue to have effect of a disposition, etc., in principle, and there is a benefit to seek revocation of such disposition, if the validity of the disposition is specified and the validity of the disposition is not suspended. If there is no legal benefit to be restored due to the cancellation of the disposition, even after the effect of the disposition, etc. is extinguished due to the lapse of the period, execution of the disposition, or other causes, the validity of the disposition shall expire upon the lapse of the period: Provided, That if there is a legal interest to be restored due to the cancellation of the disposition, etc., even after it has been extinguished (see the latter part of Article 12 of the Administrative Litigation

As seen earlier, the partial suspension of business against the Plaintiff, who is the instant disposition, was from April 5, 2017 to April 4, 2018, and there was no decision to suspend the execution of the instant disposition. As such, the instant disposition became invalid after the lapse of the period of suspension of business.

2) Whether a special circumstance exists to recognize a legal interest seeking revocation of the disposition

Comprehensively taking account of the following circumstances acknowledged based on the aforementioned facts and evidence, it is difficult to deem that there exist special circumstances to recognize the legal interest to seek revocation of the instant disposition even though the instant disposition became invalid due to the lapse of the period of suspension of business.

A) A lawsuit seeking the revocation of an administrative disposition is intended to restore the original state to its original state, protect or relieve the rights and interests infringed or interfered with the disposition by excluding the illegal state arising from the disposition. Thus, even if the disposition is revoked, there is no benefit to seek the revocation of the disposition, if the reinstatement is impossible. However, even if it is deemed impossible to restore the original state to the original state, there is no benefit to seek the revocation of the disposition. However, if it is determined that there is a risk that illegal dispositions may be repeated for the same reason as that of the administrative disposition between the parties to the same lawsuit, it is necessary to explain legal issues that are verified or unclear in the course of confirming the illegality of the administrative disposition, etc., such as securing the legality of the administrative disposition, judicial control thereof, and expansion of citizens' rights and interests (see, e.g., Supreme Court en banc Decision 2006Du19297, Jul. 19, 2007;

With respect to the instant case, the Plaintiff filed the instant lawsuit, and the certified public accountants, including the instant audit team, did not properly clarify the window dressing accounting of the Daewoo Shipbuilding, but did not deem that the Plaintiff’s entire certified public accountants, including the Plaintiff management, engaged in the violation of the standards for accounting audit by the relevant certified public accountants, such as implied, aiding, or ordering, etc., and thus, the cause for the instant disposition is not acknowledged. As such, the Plaintiff asserted to the effect that the certified public accountants belonging to the Plaintiff were justifiable in engaging in the violation of the standards for accounting audit, such as bad auditing, etc. regarding the company’s window dressing accounting, and even if the certified public accountants belonging to the Plaintiff did not engage in the violation of the standards for accounting audit, the Plaintiff asserts that the disposition in this case was unlawful, as long as the Plaintiff’s certified public accountants were not involved in the audit, etc., the Plaintiff’s violation of the standards for accounting audit, such as improper auditing, etc., of the company

In addition, the reason for the disposition of this case is "where there is a serious error or omission in audit or certification by an accounting corporation" under Article 39 (1) 5 of the Certified Public Accountant Act, and this constitutes a case where an accounting corporation committed an illegal act by intention or gross negligence, not a simple and minor number of errors or errors, and thus, it is difficult to view that the certified public accountant belonging to the plaintiff has a risk of repeating the disposition of suspension of business to the plaintiff on the ground that it continues to do so in the normal audit process in the future (the ground for disposition of this case is asserted by the plaintiff) (attached Table 2 of the Enforcement Rule of this case [Attachment Table 2] of the Regulation of Execution of this case as the plaintiff's assertion of the ground for disposition of this case 5. 2. Each week 2 of the auditor's each week 2 of the "where an auditor confirms that he participated in the audit, relief, or instruction, etc. of the certified public accountant belonging to the auditor and causes a huge loss to the user of the audit report" or "where there is a serious doubt about the duty eligibility of an auditor by continuous act."

Therefore, even if the size of the Plaintiff’s organization is considered, it cannot be deemed that “the Plaintiff and the Defendant are likely to repeat illegal dispositions due to the same cause as the instant disposition, and thus, it is deemed that there is a need for explanation of legal issues in which illegality is verified or unclear.”

B) Although the effect of a punitive administrative disposition has ceased due to the lapse of the period of sanctions prescribed in the relevant disposition, in cases where the disposition is subject to a punitive administrative disposition (hereinafter “prior disposition”) in the form of the Enforcement Rule or the rules of a local government, which is a Ministerial Ordinance, and the future punitive administrative disposition (hereinafter “prior disposition”) is prescribed as the grounds or premise for the increase and decrease of the disposition as prescribed by the relevant Acts and subordinate statutes, if there is a concern that the subsequent disposition is subject to the aggravated grounds or premise, as prescribed by the relevant Acts and subordinate statutes, the other party subject to the prior disposition shall be deemed to have the need to protect the right to remove the disadvantage through the revocation lawsuit even if the period of sanctions prescribed in the prior disposition has expired, so there is a legal interest in seeking the revocation of the prior disposition (see Supreme Court en banc Decision 2003Du1684, Jun. 22, 2006). However, if there is no possibility that the prior disposition might actually be subject to aggravated sanctions after the lapse of a certain period of suspension, barring any special circumstance (see Supreme Court Decision 2016Du164.

Article 16(1)1 of the former External Audit Act provides that “If an auditor violates the standards for accounting audit (violation of Article 5(1) of the former External Audit Act) during his/her audit process, the Securities and Futures Commission may recommend the Defendant to take measures, such as cancellation of registration or suspension of business against the auditor, or take necessary measures, such as restricting the audit of a specific company, including a stock-listed corporation, on its own.” Article 53(1) of the former Regulations on External Audit and Accounting (amended by Notice No. 2017-33 of the Financial Services Commission; hereinafter “former External Audit Regulations”) specifies the measures of the Securities and Futures Commission prescribed in Article 16(1)1 of the former External Audit Act, and Article 58(1) of the former Regulations on External Audit (amended by Notice No. 1063, Nov. 1, 2018; hereinafter referred to as “former External Audit Regulations”) with the Financial Services Commission’s provision on aggravated external audit [Article 16(2)1 of the former Regulations on External Audit and Accounting Standards].

On the other hand, Article 2 of the Enforcement Rule of this case [Attachment 2] provides that "Where an auditor has a serious doubt as to the performance of duties qualified as an auditor by continuously committing a serious illegal act for a certain period, and it is deemed necessary to cancel the registration or to recommend suspension of duties, an auditor may make a recommendation for cancellation of registration or suspension of duties in addition to the above measures." However, the above provision clearly states that ① regardless of the existence of prior disposition in itself, it is obvious that the purport of the above provision is that a sanction may be taken if there is a serious doubt about the auditor's qualified performance of duties due to continuous illegal act for a certain period, regardless of the existence of prior disposition. ② Even if the judgment becomes final and conclusive as to the existence of the reason for the disposition in this case, res judicata effect of the judgment is limited to the illegality of the disposition in this case, and it does not extend to the determination of the existence of the illegality and reason for the disposition in this case. Where the judgment becomes final and conclusive, the binding effect of the judgment is added to a separate illegal act after the disposition in this case, and it is difficult to deem that the plaintiff's unlawful act in the future.

C) If the effect of the disposition is extinguished upon the expiration of the execution period, even if the infringement of personal interests, such as reputation, credit, etc., is infringed due to such disposition and the situation of infringement remains until the expiration of the execution period, such disadvantage cannot be deemed as a direct effect on such disposition (see Supreme Court Decision 78Nu72, May 23, 1978). Thus, solely on the ground that the Plaintiff asserts, it cannot be deemed that the infringement of the Plaintiff’s reputation, credit, etc., arising from the instant disposition goes beyond de facto disadvantage and constitutes an infringement of legal interest

C. Sub-committee

Therefore, since there is no legal interest in seeking the cancellation of the disposition of this case, the defendant's main defense is justified.

4. Conclusion

Thus, the lawsuit of this case shall be dismissed as it is unlawful. The conclusion of the judgment of the court of first instance, which differs from this, is unfair, and thus, is revoked and dismissed.

(attached Form omitted)

Judges Noh Tae-tae (Presiding Judge)

1) Meanwhile, the instant disposition and the imposition of the said penalty surcharge are all based on the fact that “the failure and failure of each audit of the instant case” is the primary fact, and the said notice also states the specific grounds for each disposition without clearly distinguishing them from each other.