The development of public enterprises in Korea occurred in two separate periods - from 1884 to 1960, and 1961 to the present. As far back as 1884, during the Chosun Kingdom, Postal Services were established as a departmental undertaking under the Agriculture and Commerce Department. This was the forerunner of various other enterprises dealing with energy, mining, transportation, financing and housing. Public enterprises played a key role during this period, particularly in view of a weak private sector. Most public enterprises in this period were mainly of the departmental undertaking type.
During the second phase from 1961 to the present time, investment priorities focused on the key industries which contributed to economic development and growth. The giant Pohang Iron and Steel Company was established during this period. Some of the enterprises were merged for greater effectiveness, while others - such as the Korea Dredging Company - were privatised.
There are now about 100 public enterprises of various types. These enterprises were established mainly to promote economic growth (e.g. Korea Gas Corporation), provide efficient public services (e.g. the Office of the National Railways and Korea Housing Corporation), prevent monopolistic conditions developing in the private sector, and generally generate state revenue (e.g. the tobacco and red ginseng industries).
In common with public enterprises in many countries, those in Korea take three main forms: departmental undertakings, public corporations and joint stock companies. There are five departmental undertakings which are either public utilities - as in the cases of ports, railways and communications - or monopolies established specifically for revenue-raising purposes, such as the Monopoly Corporation. Unlike some countries where enterprises may be established directly under the supervisory control of a government department or ministry, in Korea they are established as separate departments or divisions within ministries. For example, the Office of the National Railways, which has a separate budget approved by the National Assembly, is an independent office supervised by the Ministry of Transport. All revenues accruing to the Office of the National Railways, are paid to the Treasury and all accounts are maintained on a commercial basis in the Railway Transportation Special Account. The Ministry of Communications, as another example, handles postal services, postal money exchange, postal Giro, savings and insurance services, while the various transactions involved are accounted for through the Communications Special Account. The operations of all such special accounts are prescribed by the relevant provisions of the Government Enterprises Budget and Accounting Act.
Public enterprises are also established as separate departments or divisions within ministries at the provincial level of government. Commercial water supply is an example of such provincial enterprises.
There are 25 public enterprises in the form of public corporations controlled by specific legislation. These corporations are autonomous bodies not subject to the budget and accounting controls applicable to departmental enterprises or other government bodies. They are, however, subject to the Government-Invested Enterprises Management Act of 1984. The term "government-invested enterprises" is used to describe those corporations where more than 50 per cent of the capital is owned by the government. These corporations are engaged in a wide range of activities including construction (e.g. Korea Housing Corporation), energy (e.g. Korea Coal Mining Corporation), financing (e.g. Korea Development Bank), agricultural development (e.g. Agriculture and Fisheries Development Corporation) and trade and tourism (e.g. Korea Trade Promotion Corporation and the Korea National Tourism Corporation). Under the Local Public Enterprises Act 1980, cities and provincial governments may also establish public corporations to manage hospitals, subways and similar institutions.
Public enterprises in company form are established under commercial law. There are about 70 such companies, the majority of which are owned or controlled by public corporations, but others are joint ventures with private enterprise. These types of companies were set up to attract investment capital, or rehabilitate declining private firms. Many of these companies were industrial establishments owned by Japanese interests and nationalised after World War II. Although a number were divested in 1961, some heavy industries and all the banks were retained in the form of joint stock companies, e.g. Korea Electric Power Company, Pohang Iron and Steel Company, and Korea Exchange Bank. These companies function in the same way as companies in the private sector but, where the government owns more than half the share capital, such a company is further subject to the provisions of the Government-Invested Enterprises Management Act mentioned previously.
Departmental undertakings are controlled by a chief executive appointed by the President of Korea, while public corporations are controlled by boards of directors - comprising eminent persons from various disciplines - appointed by the responsible Minister. The Director General of the Ministry concerned and the Secretary General of the Government-Invested Enterprises Performance Evaluation Council sit as ex-officio members on the various boards. The composition of the Board of government companies depends upon the Articles of Incorporation, but usually one or two representatives of the holding company sit on the Board of Directors. Although the boards of public corporations and companies function quite independently of the government, the parent Ministries and Economic Planning Board oversee the various corporations to ensure that business objectives are met and reporting requirements are complied with. Government representatives on the Board also ensure that national policies, such as preferential treatment to small and medium-sized industries, are followed.
Co-ordination of all policies and activities of public enterprises is the responsibility of the Council of Economic Ministers which was established in 1964. This is a cabinet committee and is a decision- making body which reports to the State Council in its role as Cabinet.
Personnel in departmental enterprises are recruited by the Ministry of Government Administration through open competitive examinations, as in the case of all government departments. However, in the higher echelons of the establishment, appointments are by the President on the recommendations of the Minister responsible in consultation with the Minister of Government Administration. Public corporations and companies employ their own staff, although some corporations may obtain staff on secondment from the government.
All staff are given in-service training on appointment. In specialised agencies, such as the Office of the National Railways, a training institution (the Railway College) provides vocational courses of two-years duration.
Public enterprises in Korea fund their operations by generating their own income, borrowing on the domestic and foreign markets, obtaining subsidies from the government, and issuing bonds. Funds are also obtained through joint venture participation with the private sector.
Departmental undertakings secure theirfunding through government appropriations. Although they are not empowered to increase rates, fees or determine product prices - which are the prerogative of the Economic Planning Board -departmental undertakings are generally able to finance their operations internally. This is also the case with public corporations, but some have not been able to cover operating expenses despite greater control over prices and rates.
The government does not provide grants to public enterprises, but subsidies are given for meeting operating expenses and specific programmes. The subsidies are required to be expended for approved purposes and in accordance with the guidelines specified by central agencies. Except for companies, other enterprises enjoy various forms of taxation exemptions.
All enterprises may borrow on domestic and foreign markets but, in the case of departmental undertakings, loan requirements are handled by the Ministry of Finance. Loans given by the government are at market rates, with no preferential treatment given to individual enterprises. The government guarantees all repayments of loans but does not generally extend this practice to companies.
Equity participation by the government in public corporations is prescribed in the relevant legislation but, in the case of government companies, participation is for the purpose of exercising control in matters of national policy. Private participation in companies, on the other hand, is encouraged to supplement capital funds needed. All enterprises are also authorised to issue bonds for raising capital for investments. Operating surpluses, however, are required to be refunded to the Treasury or are paid in the form of dividends.
Departmental enterprises which are unprofitable and are no longer essential may be closed on the authority of the President. Other enterprises are subject to review by the Council of Economic Ministers. The assets and liabilities of such enterprises are managed by the government if fully owned, or shared proportionately in the case of mixed enterprises. Companies, on the other hand, go through the normal processes of receivership and liquidation.
The extent of ministerial control over public enterprises in Korea is stipulated in the Government-Invested Enterprises Management Act. The relevant Minister sits on the Government-Invested Enterprises Performance Evaluation Council, which is responsible for the review of management of government-invested organisations. The Minister concerned also reviews and co-ordinates the business objectives submitted by the chief executive. His control further extends to the appointment and dismissal of members of the Board of Directors - with the exception of ex-officio members - and to recommendations for the appointment of the chairman of the Board and the chief executive. In other matters, the Minister exercises control in his capacity as stockholder.
The Minister's authority over departmental undertakings includes administrative matters, in addition to major decisions. Staff of individual undertakings are accountable through the various levels of the departmental hierarchy to the Minister.
The central personnel administration agency, the Ministry of Government Administration, exercises control over the appointment and conditions of service of staff of departmental undertakings in accordance with the provisions of the National Public Officials Act. There is no central control over the appointment and dismissal of staff below Board level in other types of public enterprises.
In the case of departmental undertakings, the Economic Planning Board (the central agency for budget) is in charge of budgetary matters. This Ministry exercises control over spending to avoid budget overruns and - in some cases to provide financial assistance. Budgets of statutory corporations are prepared by the chief executive and approved by the Board of Directors. However, one representative of the central budgeting agency (Economic Planning Board) and another from the responsible ministry sit on the Board of Directors as ex-officio members. In the case of companies, there is no central agency control, unless government assistance is provided through their budgets.
The day-to-day functioning of departmental undertakings is similar to that of other government departments. Not only is financial control exercised by the government, but all public enterprises are expected to operate profitably and adhere to the principle of self-financing.
The Government-Invested Enterprises Management Act provides forgreater autonomy in the management of other public enterprises. No controls are imposed on statutory corporations in their day-to-day functions, apart from coordination controls by the responsible ministry and those of the Economic Planning Board regarding the setting of business objectives and mandatory reporting of business results. However, government representatives who sit on the respective Boards influence the decision-making process. In addition, these bodies are required to follow government policies, for instance, preferential purchase of production by small and medium-size industries. In contrast, companies exercise their day-to-day functions independently of the government and with complete financial autonomy.
Greater autonomy and flexibility given to government-invested enterprises means greater responsibility with the management of these enterprises to meet the objectives for which they were established. The organisational controls provided for this purpose are described below.
In Korea the chairman of the Board of Directors of statutory bodies is appointed by the President on the recommendation of the responsible Minister. Two members of the Board, one from the responsible ministry and the other from the Economic Planning Board, are ex-officio members. The other members of the Board are appointed by the responsible Minister on the recommendation of the chairman. The remuneration of members of the Board of Directors is fixed on the basis of general guidelines issued by the Economic Planning Board.
The Board of a statutory body is responsible to a particular Minister. In contrast, the Board of a public enterprise incorporated as a joint stock company is responsible to the Board of the holding company. In both cases, each Board exercises its day-to-day functions independently of the government, with the Board approving rules and regulations for the operations of the enterprise concerned.
Public enterprises in Korea have management reporting systems which monitor their performance. In the case of departmental undertakings and statutory bodies, annual reports on business performance, financial statements and supporting documents are made to the responsible Minister, the Minister of Finance and the Minister of the Economic Planning Board. Statutory corporations provide quarterly reports on business progress and the resulting profit and loss. Similar reports for joint stock companies are made to the Board of Directors and to the holding company. The various reports on departmental undertakings and statutory bodies are reviewed by the State Council.
The Economic Planning Board and the Ministry of Finance provide guidelines for public enterprises, inter alia, in the area of accounting. The Minister of Finance is empowered by legislation to approve matters concerning the accounting standards and procedures of government-invested organisations. In the case of statutory bodies, accounting guidelines are published in the Business Performance Evaluation Manual. The Board of Audit and Inspection may also issue guidelines, but this is not mandatory. Public enterprises are free to consult the Board in areas of doubt, such as the interpretation and application of the various provisions.
The Government Enterprises Budget and Accounting Act applies to the financial arrangements for state-run enterprises. The responsible Minister determines the form of financial statements through discussions with the Ministry of Finance and the Board of Audit and Inspection. For other public enterprises, the form of financial statements is as prescribed by the Government-Invested Enterprises Accounting Regulations prepared by the Ministry of Finance.
Financial accounting standards for private business enterprises are usually applied to the accounting of state-run enterprises as well as of government-invested enterprises, where no particular regulations are provided by the government. The state-run enterprises are also subject to the Budget and Accounting Act for government enterprises under which accrual basis accounting principles are adopted, rather than cash basis. Furthermore, cost accounting is enforced to promote business efficiency and provide a basis for management decisions.
The National Assembly secures effective control over public enterprises through the responsible Minister. The Minister is accountable to the President, who appoints him, and to the National Assembly. Members of Parliament may ask the responsible Minister or chief executives of public enterprises questions regarding any aspects of the operations of their respective organisations at the relevant standing committees of the National Assembly. Most of the government-invested enterprises operate under their own Acts. In case any alteration or revision is needed concerning the Acts, the views of the National Assembly are reflected in voting results or through inquiries by relevant sub-committees.
The budgets and statements of accounts of departmental undertakings are approved by the National Assembly while those of the others are sanctioned by the respective Boards of Directors. The legislature also controls borrowings by public enterprises as a state guarantee is involved.
There are no parliamentary committees specifically constituted to examine the various aspects ot public enterprises in Korea. However, when a Standing Committee questions a Ministry undents jurisdiction, it may examine the woMng of public enterprises which come under that Ministry. The Committee may ask for the submission of information and seek the presence of chief executives of public enterprises to assist inquiries.
As a matter of course, parliamentary committees refer to audit reports of public enterprises made by the Board of Audit and Inspection, or request the enterprises to submit information on their operations for consideration by the particular committee. The Board does not help the committees directly in formulating their findings, but its representative is present at the Legislation and Justice Committee and the Special Committee on Budget and Accounts. The Board submits data and reports when requested, and gives other information in response to questions by the committee. Committee proceedings are open to the media.
Headed by the Chairman, the Board of Audit and Inspection is the Supreme Audit Institution (SAI) for the public sector of the Republic of Korea. The SAI is the external auditor of most public enterprises and has discretionary auditing powers over the remainder.
All departmental undertakings are audited by the SAI, with the audit reports being sent to the President and the National Assembly. The SAI has a similar auditing mandate in the case of statutory authorities with one significant difference: although, as with departmental undertakings, audit reports are forwarded to the President, the SAI is not required to report to the National Assembly regarding the results of the particular audit.
The SAI has the statutory power to audit government-owned companies and those in which the government has invested 50 per cent or more of the total capital. In other cases, the SAI may carry out audits where considered necessary by the SAI or as requested by the Prime Minister.
Because of the need for audit independence, the SAI does not act as consultant or adviser to the management of those public enterprises audited. Although the SAI has the statutory power to correct managerial decisions, in practice the enterprises concerned are encouraged to correct their own managerial decisions where necessary in the light of appropriate recommendations by the SAI.
The types of audits undertaken by the SAI are of two basic types: desk audits and field audits. Although the more conventional terms, "regularity audits" and "performance audits", are not mentioned specifically in the Board of Audit and Inspection Act, Article 20 indirectly sanctions such audits ("... shall constantly audit... to improve and promote the operation of public administration").
The general objectives of the audits of public enterprises conducted by the SAI are to ensure the correctness of their accounts, and to improve and promote the operation of public administration. The scope of the underlying audits to achieve these objectives not only encompasses revenues and expenditures -and associated final accounts - but extends to the duties of administrative agencies and public officials.
There is a statutory requirement for all public enterprises in Korea to have an internal audit function. As the quality of this function varies from enterprise to enterprise, some have effective internal audits but others do not.
The role of the SAI in the internal audit function of public enterprises is confined to monitoring, reviewing and training. Although the SAI does not supervise and regulate the conduct of these internal audits, the results are reported quarterly to the SAI for review. The SAI can request individual managements to take remedial action where deemed necessary. The internal audit function of public enterprises is reinforced further through the provision of relevant training courses by the SAI.
Public enterprises in Korea do not have audit committees to advise on internal auditing procedures and generally oversee the auditing function. Further, commercial auditors are not engaged to perform the internal audit function.
The SAI does not have the powerto engage commercial auditors on contract to undertake the audit of public enterprises. Although the existing regulations are silent on this point, the issue is currently under review. As matters stand, public enterprises come under the auditing mandate of the SAI and do not have the powerto appoint a commercial auditor in place of the SAI. The only exception as previously noted is in the case of companies where the government has less than a controlling interest. Although commercial auditors are appointed for such companies under the relevant companies legislation, the SAI may conduct audits where deemed necessary or as requested by the Prime Minister.
The development of audit methods and techniques for public enterprises has been one of the most urgent tasks of the SAI in response to public concern over the performance of public enterprises as their role has expanded in the national economy. Because of differences in size and activities, both systems-based and transactions-based auditing are used for public enterprises.
Computer assisted auditing techniques have been introduced where relevant for some public enterprises. However this development has been limited by the availability of computer literate auditing staff. In Korea, as elsewhere, some auditors do not have the necessary training and experience to audit computer accounting systems and detect computer-related irregularities.
5.7 ORGANISATIONAL MANAGEMENT FOR AUDIT
The SAI does not operate a special staffing group, such as a separate division or branch, for the audit of public enterprises. No distinction is made between the recruitment of staff for the audit of public enterprises and for the audit of departments. Accordingly the divisions of bureaux of the SAI which are responsible for the audit of particular ministries are also responsible for the public enterprises linked to those ministries.
Specific audit guidelines are not issued for the audits of public enterprises. The auditing procedures adopted are the same as those for departments, modified for organisational and operating differences. Although no auditing standards have been formally established, some progress has been made by the SAI in the formulation of such standards.
Most of the auditing staff are vocationally oriented but not professionally qualified. The SAI has only a small number of Certified Public Accountants.
Under Articles 22 and 23 of the Board of Audit and Inspection Act, the audits of the SAI are divided into two categories: obligatory and optional. Entities subject to obligatory audit are audited on an annual basis, including state-run enterprises and those controlled by the government through majority shareholdings. Accordingly most public enterprises are audited every year by the SAI. In special cases, however, the SAI has the power to exempt the enterprise from annual audit while, in others, the SAI may delegate its function to the Ministry concerned or to the pertinent supervisory organisation (e.g. Office of Bank Supervision and Examination) for a proxy audit.
In those cases where the SAI has the responsibility to audit and report on the financial statements annually, the relevant audits are not undertaken throughout the year. The audits are conducted only after the signed statements have been received from the auditees at the end of the year.
In addition to these audits of the financial statements of public enterprises, the SAI has statutory authority under the Board of Audit and Inspection Act to undertake performance audits. In some cases performance audits are carried out in conjunction with the routine financial audit, but the SAI has discretionary power to conduct performance audits separately. Issues raised in performance audit reports are attended to by the enterprise involved through the responsible Ministry.
The SAI is required to report annually on departmental undertakings to the National Assembly by the day preceding the beginning of its regular session. As mentioned earlier, there is no requirement for the SAI to report to National Assembly in the case of other types of public enterprise. All audit reports of the SAI, however, are sent to the President.
A time limit is placed on the submission of the annual reports of individual public enterprises. These reports must be submitted to the National Assembly by the 30th September of the following year.
The SAI requires public enterprises to take appropriate action in regard to audit findings within the period prescribed. If no remedial action is taken or if the action is considered inadequate the SAI may issue a letter of reminder or conduct a field audit. In this regard, the requests of the SAI to auditees for necessary action are legally binding.
Where the auditee considers the request of the SAI to be unjust or illegal, there is in the first instance a right of appeal within a set period to the SAI. If the decision on appeal is again unacceptable to the auditee, there is provision for an independent judicial review of the matter. Due to this complex procedure, the reporting of audit results often takes more than two months, sometimes resulting in the diminution of audit effect from loss of timeliness.
The form of the financial statements of public enterprises is not subject to the approval of the SAI. The overriding authority is the Budget and Accounting Act for Government Enterprises which provides for not only accrual accounting procedures - rather than cash-based accounting practised in government departments - but also for the commercial accounting standards of the private sector.
The responsible Minister decides the form of the financial statements of departmental undertakings after discussions with the Ministry of Finance, and also with the SAI. In the case of statutory authorities and companies, the form of financial statements is presented in accordance with the provisions of the Government-Invested Enterprises Accounting Regulations prepared by the Minister of Finance.
The SAI does not participate in the preparation of the financial statements of public enterprises. This is the sole responsibility of the management of the individual enterprise.