An amendment to the Act on External Audit of Stock Companies (the “Proposed Amendment”) has been proposed and is currently being reviewed by the National Policy Committee of the Korean National Assembly. It is noteworthy in that the Proposed Amendment would newly require “limited liability companies (yuhan chaegim hoesa in Korean)” to undergo external audits (the “Proposed Amendment”).
Under the external audit system, an external auditor who is independent from a certain company is required to provide his or her opinion as to whether the company’s financial statements have been prepared in accordance with the accounting principles. A company subject to external audits has the duty to appoint an auditor and audit reports prepared by said auditor should be published online for public access. Failure to appoint an auditor may result in administrative and criminal penalties, including the removal/dismissal of an officer of the company and a demand for correction by the Securities and Futures Commission.
The Act on External Audit of Stock Companies, which took effect on November 1, 2018 (the “Current External Audit Act”), included limited companies (yuhan hoesa in Korean) meeting certain requirements, as well as stock companies (jusik hoesa in Korean) as companies required to undergo external audits in order to promote fairness in regulations on accounting supervision. However, as some limited companies reorganized themselves into limited liability companies with no duty to conduct external audits, the Proposed Amendment has been designed to further subject “limited liability companies” to external audits.
The Proposed Amendment is scheduled to take effect six months after its promulgation but stipulates that the provisions on limited liability companies will apply starting from the fiscal year following the fiscal year in which the first anniversary of the effective date of the Proposed Amendment falls – e.g., if the Proposed Amendment is passed by the National Assembly and is promulgated in the second half of this year, limited liability companies that are affected by the Proposed Amendment will have to appoint an auditor from fiscal year 2026 at the earliest.
The National Policy Committee referred the Proposed Amendment to its legislation review sub-committee on May 11. While the timing of the National Policy Committee’s review has not yet been confirmed, we believe it is highly likely that the Proposed Amendment will pass such review. In this respect, it is advisable for relevant parties to closely monitor the developments related to the Proposed Amendment.