On April 19, 2018, the Financial Services Commission ("FSC") proposed an amendment of the Act on External Audit of Stock Companies (the “Act”) and its Enforcement Decree.
The following takeaways are noteworthy:
1. More companies subject to external audits
Under the current Act and its Enforcement Decree, external audit requirements only apply to stock companies, and the criteria for whether a company is subject to an external audit are the company’s assets, liabilities and number of employees (but not revenue). Thus, sizable limited liability companies (“LLCs”) and stock companies with market influence but low revenue are left out of sight.
The amended Act brings LLCs within the scope of external audits and adds a revenue threshold to the existing criteria. Further, the amended Enforcement Decree specifies that in addition to listed companies and prospective listed companies (by merger or backdoor listing), other companies are subject to external audit unless they are small-sized companies. A company is a small-sized company (and thus exempt from external audits) if it satisfies any three of the following four standards (as of the end of the preceding business year): (i) total assets are less than KRW 10 billion; (ii) total liabilities are less than KRW 7 billion; (iii) revenue is less than KRW 10 billion; and (iv) the number of employees is less than 100.
Thus, an LLC will be subject to external audit unless it is a small-sized company, and companies whose total assets, total liabilities or number of employees that do not meet the threshold will nevertheless be subject to external audit if they are not small-sized companies.
2. Rotation of external auditors
The amended Act will adopt a so-called “periodic external auditor designation system” for listed companies and certain owner-managed companies to warrant auditor independence and audit quality.
Specifically, a company that has appointed its auditor for six consecutive years is required to appoint a Securities and Futures Commission-designated auditor if:
(i) its stock is listed on KOSPI or KOSDAQ; or
(ii) if unlisted: (a) its total assets are at least KRW 100 billion (as of the end of the preceding business year); and (b) its large shareholder or related party holds at least 50% of its shares of stock in aggregate and is a representative director.
However, this requirement does not apply, if the company has not engaged in accounting fraud, or its accounting practice is otherwise deemed reliable based on the external audits in the preceding six years (per the Presidential Decree).
3. External audit of internal accounting management system
The amended Act brings the internal accounting management system of listed companies under the scope of external audits. Thus, the representative of a company must report on the state of its internal accounting management system annually at the general meeting of shareholders. The external auditor is required to audit the target company’s compliance with its internal accounting management system and report its findings in the audit report.
The amended Act becomes effective on November 1, 2018 (provisions on LLCs will apply from the business year commencing after November 1, 2019). Companies are advised to review the amended Act and its Enforcement Decree, and if applicable, take necessary measures to remain compliant.