The amendment to the Act on External Audit of Stock Companies (as amended, the Act on External Audit of Stock Companies, etc. and referred to herein as the “Act”), which requires a limited company (yuhan hoesa in Korean) to undergo external audits and publicly disclose audit reports, had become effective on November 1, 2018 and the amendments to its Enforcement Decree (the “Enforcement Decree”) and the Enforcement Rule (the “Enforcement Rule”), setting forth the details of the Act, had been promulgated to take effect on the same day. 

The key proposed amendments are briefly explained below. 

Companies subject to external audits confirmed

There is a new revenue threshold added to the existing criteria based on assets, liabilities, and number of employees to determine the scope of companies subject to external audit requirement.  Furthermore, as the Act is now applicable to certain limited companies, number of members and period since the conversion into a limited company, if converted, have been added to the existing criteria as well (Article 2, Item 1 and Article 4 of the Act). 

In line with such changes, the Enforcement Decree specifies that companies satisfying one of the following criteria, as of the end of immediately preceding fiscal year, to undergo external audits (Article 5 of the Enforcement Decree): 

1) total assets equal to or greater than KRW 50 billion;

2) revenue equal to or greater than KRW 50 billion; or

3) those that do not satisfy at least three of the following criteria:

(i) total assets less than KRW 12 billion; 

(ii) total liabilities less than KRW 7 billion;

(iii) revenue less than KRW 10 billion; and 

(iv) less than 100 employees. 

For limited companies, “less than 50 members” has been added as the fifth criterion under 3) above, where those limited companies that do not satisfy at least three of the criteria (i) through (v) to undergo external audits. 

The external audit requirement for a limited company will apply from the first fiscal year following November 1, 2019, and for those stock companies converting into limited companies after November 1, 2019, the criteria for a stock company will continue to apply for a period of five years from the registration of such conversion.  

Shortened period for appointment of external auditors

Previously, the requisite period for appointment of an external auditor for those companies subject to external audits had been “within four months” from the commencement date of the fiscal year.  The Act now requires an external auditor to be appointed “prior” to the commencement date of the fiscal year for companies that are subject to establishing an audit committee such as listed companies with assets equal to or greater than KRW 2 trillion and financial companies, and “within 45 days” of the commencement date of the fiscal year for all other companies.  Furthermore, companies that are subject to external audit requirements for the first time due to these changes are required to appoint an external auditor “within four months” from the commencement date of the fiscal year (Article 10, Paragraphs 1 and 2 of the Act). 

The shortened period for appointment of external auditors applies to auditors appointed on or after November 1, 2018, and companies are advised to timely appoint external auditors within the required time frame as the Securities and Futures Commission (“SFC”) will designate external auditors on behalf of companies that fail to appoint external auditors within the specified time period (Article 11 of the Act). 

Auditor appointment procedure and strengthened supervision

To ensure transparency in the appointment of external auditors, the following changes were made, which contrast with the previous procedural requirement that the management of a company was to appoint an external auditor with the approval from the statutory auditor or the auditor appointment committee (Article 10, Paragraph 4 of the Act and Article 13 of the Enforcement Decree). 
 

Meanwhile, the auditor appointment committee required to be formed within listed companies, large-sized unlisted companies, and financial companies without an audit committee must consist of at least seven committee members including one chairman. Qualification requirements for the auditor appointment committee members include one statutory auditor, two outside directors, two shareholders (excluding largest shareholder, etc.), two officers of creditor banks, 1 officer/employee of institutional investors (excluding largest shareholders, etc.).  However, under unavoidable circumstances such as where there is no qualified individual, the auditor appointment committee can be formed with those capable of giving fair deliberation independently from the company appointing the auditor and has expertise in management, accounting, law, or external auditing (Article 12 of the Enforcement Decree). 

Furthermore, the statutory auditor or the audit committee will conduct ex-post evaluations of auditors on compensation, audit hours, etc. while the auditor appointment committee will perform this role in the case of listed companies, large-sized unlisted companies, and financial companies (Article 10, Paragraph 6 of the Act). 

The changed external auditor appointment procedures and strengthened supervision will apply to external auditors appointed on or after November 1, 2018. 

Audit report disclosure requirement for limited companies

Under the Act, the SFC and the Korean Institute of Certified Public Accountants shall make available all audit reports submitted by external auditors for public viewing while companies subject to external audits will be required to maintain and publicly disclose their financial statements and independent audit reports (Article 23, Paragraphs 2 and 5 of the Act).  Meanwhile, the Act leaves the scope of limited companies subject to the audit report disclosure requirement to be determined otherwise by the Enforcement Decree based on revenue, scope of stakeholders, or number of members while leaving details relating to the audit report maintenance/disclosure requirement to be determined by the Enforcement Decree as well.  However, as the Enforcement Decree does not make any exceptions for limited companies, all limited companies subject to external audit requirement are also subject to maintenance/disclosure requirement. 

As with the external audit requirement, the audit report disclosure requirement for limited companies will also apply starting from the fiscal year following November 1, 2019.

Introduction of a periodic external auditor designation system

To improve the independence and audit quality of external auditors, the Act introduced a periodic external auditor designation system, providing the SFC with authority to designate external auditors for listed companies and unlisted companies, without separation of ownership and control, which had appointed its external auditor for six consecutive fiscal years (Article 11, Paragraph 2 of the Act).  Unlisted companies subject to such SFC authority without separation of ownership and control shall have (i) total assets from the financial statement equal to or greater than KRW 100 billion, and (ii) controlling shareholder and/or a specially related person holding equal to or more than 50% shares while either the controlling shareholder or a specially related person is serving as the representative director as well (Article 15 of the Enforcement Decree). 

The periodic external designation system will apply starting from the fiscal year following November 1, 2019, while the six consecutive fiscal years will include fiscal years before November 1, 2019. 

Strengthened regulation on internal accounting control

The Act requires listed companies, large-sized unlisted companies, etc. with assets equal to or greater than KRW 100 billion to have an internal accounting control regulation and an organization managing and operating the regulation in place (Article 8, Paragraph 1 of the Act and Article 9, Paragraph 1 of the Enforcement Decree) while requiring the representative director to annually report the operation status of the internal accounting control system before the general meeting of shareholders, the board of directors, and the statutory auditor (Article 8, Paragraph 4 of the Act).  The Act also requires listed companies to undergo an external audit of its internal accounting control operation status (Article 8, Paragraph 6 of the Act). 

The timing of application of the external audit requirement varies for listed companies depending on their total assets while the requirement will apply to all listed companies from audit reports for and after 2023.