The proposed amendment (the “Amendment”) to the Enforcement Decree of the Act on External Audit of Stock Companies (the “External Audit Act”) was resolved and promulgated at a Cabinet meeting that took place on April 24 and takes effect on May 2, 2023. According to the Financial Services Commission (the “FSC”), this amendment to the Enforcement Decree and its subordinate regulations is aimed at (i) promoting legislation designed to support the government’s policy tasks under the “Plan to Reduce Accounting Burden on SMEs” announced by the FSC in October 2022 and (ii) encouraging people to report accounting frauds. The Amendment can be summarized as follows:
1. Reduction of the Scope of Large Unlisted Companies, etc. and the Scope of Businesses Required to Operate an Internal Accounting Control System
Under the existing External Audit Act, large unlisted companies are subject to accounting regulations similar to those applicable to listed companies, and in particular, companies that have appointed the same auditor for six fiscal years are required to appoint (on a regular basis) an auditor designated by the Securities and Futures Commission (the “SFC”). Under the Amendment, the minimum amount of total assets of large unlisted companies subject to the above requirements will increase from KRW 100 billion to KRW 500 billion. However, for corporations required to submit business reports and companies belonging to business groups subject to disclosure, the current criteria (total assets of KRW 100 billion or more) will remain unchanged.
In addition, the maximum amount of total assets of companies that are not required to maintain an internal accounting management system will increase from less than KRW 100 billion to less than KRW 500 billion. However, the standard under the existing Enforcement Decree (total assets less than KRW 100 billion) will still be applied to stock-listed corporations, domestic companies belonging to corporate groups subject to disclosure, corporations required to submit business reports, and financial companies.
The Amendment will apply from the fiscal year beginning on or after January 1, 2023. However, those companies that were required to appoint an auditor designated by the SFC before the Amendment takes effect will need to comply with the existing regulations until the end of the fiscal year to which the above enforcement date belongs.
2. Strengthening of Protection Measures for Those Who Report Misconduct Related to Accounting Information
Under the existing Enforcement Decree, the SFC may exempt from sanctions a person who reports misconduct only when he/she meets all of the following: (i) he/she has neither played a leading role in relation to the reported misconduct nor forced other related persons to engage in the misconduct; (ii) the SFC, etc. was not already aware of the misconduct that he/she reported; and (iii) he/she has cooperated until investigations are completed. However, under the Amendment, those who meet at least one of the requirements (i) to (iii) mentioned above may be eligible for exemption. In addition, the Amendment provides a legal basis for anonymous reporting, allowing people to report misconduct to the SFC without disclosing their personal information.
The Amendment intends to provide a meaningful reduction of the operational burdens of many SMEs with total assets of at least KRW 100 billion and less than KRW 500 billion, via exemption from the requirements to appoint an auditor designated by the SFC starting this fiscal year, and to maintain an internal accounting management system. As such, it would be advisable for relevant parties to pay close attention to related updates.
