On October 10, 2024, comments made by the Chairman of the Financial Services Commission (the “FSC”) during the National Policy Committee audit of the Korean National Assembly raised the possibility that the Act on External Audit of Stock Companies (the “External Audit Act”) might be amended to also apply to limited liability companies (i.e., yuhan chaegim hoesa in Korean), including the mandatory external audit requirements therein.
According to media reports, Sang-Hoon Kim, a member of the National Policy Committee, stated during the National Assembly audit that “notably, overseas companies are now shifting their Korean local entities into limited liability companies,” and “major countries are moving to a system where companies are subject to mandatory external audits based on whether their assets or sales exceed a certain level, a necessary institutional improvement (in Korea, as well) that disregards the form of the company.” Byoung-Hwan Kim, Chairman of the FSC, responded that “the recent increase in the number of companies shifting to a limited liability company form seems to suggest an intention to circumvent application of the External Audit Act,” and added further that the FSC “will devise measures to ensure that companies undergo external audits regardless of their corporate form.”
The External Audit Act currently applies only to stock companies (i.e., jusik hoesa in Korean) and limited companies (i.e., yuhan hoesa in Korean). A partial amendment to the External Audit Act to include limited liability companies in the scope of the external audit requirement was proposed in the 21st National Assembly, but the proposal was automatically dropped at the end of the term of the 21st National Assembly (Bill No. 2119883). At the time such partial amendment was proposed, the National Policy Committee’s review report explained the purpose of the amendment as follows: “As limited companies and limited liability companies differ in form but have the same economic substance, there are insufficient reasonable grounds for differentiating between them (in the context of application of the External Audit Act). There is a need to prevent companies from shifting into limited liability companies to circumvent external audits, thereby enhancing fairness of external audits and ultimately ensuring transparency in accounting.” A similar concern was cited when the External Audit Act was previously amended to extend its application from stock companies to limited companies, as well.
If application of the External Audit Act extends to limited liability companies, external audits will become mandatory for limited liability companies of a certain size or larger, and various kinds of information contained in these companies’ financial statements and the notes thereto, among other things, may be disclosed through the public disclosure of the audit reports.
Currently, a significant number of private companies, including many joint ventures and overseas companies, are in the form of a limited liability company. It is therefore advisable to closely monitor developments related to the possible future amendment to the External Audit Act.
