A Plan for Efficient Operation of Internal Control System in Korean Financial Institutions: Focus on Compliance Officer System

A compliance officer was introduced as a standing position of financial institutions after the Asian Financial Crisis to improve corporate governance and transparency of business management. As the Banking Act was amended on January 21, 2000, an article on internal controls, etc. was newly established and it mandated banks to assign compliance officers. A compliance officer is in charge of establishing a compliance system that ensures employees of financial institutions abide by relevant laws and regulations in performing their duties and operating/monitoring the system. As such, a compliance officer should monitor whether the internal control standards are observed and investigate and report any violation of the internal control standards to the standing auditors and the Audit Committee, etc. For efficient operation of the compliance officer system of the financial institutions in Korea, the following measures should be sought. First, compliance culture needs to be established where employees have strong awareness of the importance of internal control and strictly comply with it. Secondly, responsibility of the top management for supervising internal control problems, if any, shall be strengthened. Thirdly, the financial authorities should set an example for strong compliance. Next, clear distinction between internal control and compliance should be made. Then the role and business scope of compliance officers should be adjusted. The sixth is to improve awareness of the top management, and the seventh is enhancement of the status of compliance officers. The eighth is granting appropriate position and authority to compliance officers. Finally, the ninth is to redefining the role of compliance officer and the Audit Committee (auditors). This study has two main implications. Firstly, the efficient operational plan for compliance officer system in financial institutions suggested in the paper would be used as a valuable policy material to strengthen and solidify the internal control systems in Korea. Secondly, establishment of compliance culture, one of factors for efficient operation of compliance officer system, will contribute to building an organizational culture of compliance that makes compliance ethics and compliance culture fully settled in terms of practical aspects of the compliance officer system in financial institutions. This study will limit its research scope to suggestion of measures for efficient operation of the compliance officer systems of the financial institutions in Korea. Therefore, a following empirical study shall be conducted on the effectiveness of the compliance officer system in Korean financial institutions.