New Legislation: Amendment to the Act on External Audit of Stock Companies
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| On September 28, 2017, the National Assembly passed an amendment to the Act on External Audit of Stock Companies (the “Act”) (the “Amendment”).
The Amendment will become effective as of the 1st anniversary of the date of its promulgation, which promulgation is expected to be made within this year. However, certain provisions that pertain to external audit and disclosure requirements of limited liability companies (yuhan hoesa in Korean), as set forth in Section 1 below, will become effective after one year of grace period (i.e., from the fiscal year that begins one year after the Amendment becomes effective). |
1. Broader Regulatory Scope
| A broader scope of companies will now be subject to external audit requirements. Most notably, the Amendment will require limited liability companies to undergo external audit and make certain disclosures, subject to satisfaction of certain criteria to be promulgated as a Presidential Decree.
Furthermore, the Amendment provides for a revenue-based criterion to determine applicability of the external audit requirements applicable to unlisted companies, in addition to the existing criteria based on assets, liabilities and/or number of employees. The specifics thereof will be promulgated as a Presidential Decree.
For your information, the followings are criteria under the current ACT to determine the scope of companies subject to the external audit requirement:
(i) has assets of KRW 12 billion or more as at the most recent fiscal year end;
(ii) has both assets and liabilities of KRW 7 billion or more as at the most recent fiscal year end; or
(iii) has 300 or more employees and KRW 7 billion or more assets as at the most recent fiscal year end.
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2. Stronger Accounting Regulations on Large-sized Unlisted Companies and Financial Companies
| | Large unlisted companies and financial companies will be subject to the same stricter regulations on external auditor, which are currently applicable only to listed companies, including with respect to (i) qualification, (ii) appointment process and (iii) internal compliance requirements for external auditor(s). |
3. Greater Regulatory Power of Securities and Futures Commission
| (a) The Securities and Futures Commission will have the authority to designate an external auditor for a company, (i) if the company violates a requirement concerning preparation of financial statements, (ii) in the event the company undergoes frequent changes in its largest shareholder and/or representative director, or (iii) upon request by the company’s main creditor bank or shareholders, subject to certain conditions to be promulgated in the Presidential Decree.
(b) The Securities and Futures Commission will also have the authority to designate an external auditor for a company, if the company (i) is either managed by its shareholders or is a listed company, and (ii) has appointed an external auditor at its own discretion for six or more consecutive fiscal years.
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4. Tougher Sanctions for Improper and Fraudulent Accounting
| | In the event an external auditor discovers any improper accounting, it is required to report such findings to the statutory auditor or the audit committee of the company, who will then have the duty to appoint an outside expert to investigate and remedy the issue, and to submit a report thereof to the Securities and Futures Commission and the external auditor (Articles 22 and 47 of the Act). Furthermore, in the event any fraudulent accounting occurs, the company, in addition to sanctions applicable to the company’s accounting personnel in charge and the external auditor, will also be subject to an administrative surcharge of up to 20% of the amount of such fraudulent accounting (Article 35 of the Act). The Amendment also provides for tougher criminal sanctions for officer(s) responsible for fraudulent accounting. |
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