Following the amendment of the Korean Commercial Code and in response to the strong demands for transparency in companies' financial accountings, the Financial Services Commission ("FSC") is furthering its initiative to wholly amend the Act on External Audit of Joint Stock Companies ("External Audit Act") to (i) expand the subject of the External Audit Act to include limited liability companies (yuhan hoesa), (ii) improve the appointment of the external auditors of companies, and (iii) enhance the independence and responsibility of external auditors.
The bill for the proposed amendment to the External Audit Act ("Proposed Amendment") passed the Cabinet meeting on January 2, 2017, was submitted to the National Assembly on January 12, 2017 and is currently under examination by the competent committee. The major provisions for the Proposed Amendment and its anticipated development are as follows:
1. Major Provisions of the Proposed Amendment
(1) Introduction of External Audit of Limited Liability Companies
The Proposed Amendment intends to make external audit of limited liability companies mandatory and regulate limited liability companies in the same manner as non-listed joint stock companies, with some exceptions where such an external audit is not practicable (to be detailed the enforcement decree of the External Audit Act). In light of the foregoing changes, the name of the External Audit Act will be revised to "the Act on External Audit of Joint Stock Companies, Etc."
It is important to note that the bill for the proposed amendment of the enforcement decree, which would provide more detals regarding the companies subject to the amended External Audit Act, have not yet been formally announced.
(2) Strengthening Regulations Regarding the Accounting of Large Scale Non-listed Companies
Similar to listed companies, large scale non-listed companies (with total assets of more than 500 billion Korean Won and who have many interested parties) will be subject to stronger regulations regarding their accounting. Like listed companies, therefore, only accounting firms may conduct external audit of large scale non-listed companies and further, large scale non-listed companies must retain the same external auditor for 3 consecutive years.
(3) Improvement of Appointment of Procedure of External Auditors
In order to enhance the independence of external auditors, (i) the statutory right to appoint external auditors will be transferred from the company's "board of directors" to "statutory auditors (or audit committee)," and (ii) the time required to appoint external auditors will also be shortened. More specifically, matters such as the audit fee, audit time and personnel input will be determined and documented by the statutory auditor or the audit committee. Further, companies will be required to appoint an external auditor for the year within 45 days following the end of the previous fiscal year (as of currently, companies are required to appoint an external auditor within 4 months following the end of the previous fiscal year).
(4) Introduction of Standard of Turnover for Companies Subject to External Audit
The Proposed Amendment will add turnover as a standard for external audit requirement, in addition to assets, liabilities and the number of employees. Therefore, even if the company is a small-scale company, such company will be subject to external audit under the amended External Audit Act if the company has a high turnover.
(5) Preclusion of Request to the External Auditor to Prepare or Advise on the Company's Financial Statements to the External Auditor
Under the current External Audit Act, an external auditor is prohibited from preparing the company's financial statements on behalf of such company. However, the current External Audit Act does not preclude the company from requesting the external auditor to prepare, or advise on, the company's financial statements. According to the Proposed Amendment, however, the newly amended External Audit Act will prohibit a company from requesting the externak auditor to prepare, or advise on the accounting related to the preparation of, its financial statements, and will also include sanction provisions if the company violates the foregoing.
(6) External Auditor's Obligation to Report to the Securities and Futures Commission ("SFC") for Wrongful Acts of the Company's Director
Under the current External Audit Act, an external auditor must report to the statutory auditor or the audit committee regarding any wrongful acts and/or statutory violations the external auditor finds concerning the director of the company. Under the Proposed Amendment, however, if an external auditor finds such wrongful acts and/or statutory violations concerning the director of the company, the external auditor will also be required to report to the SFC.
(7) Expansion of Eligibility for Reward for Wrongful Act Reporting
Under the current External Audit Act, rewards are granted to any whistleblower who reports on any internal wrongful acts of stock-listed corporations. Under the Proposed Amendment, however, any whistleblower who reports on the internal wrongful acts of any and all companies which are subject to external audit (and not just of stock-listed corporations) will be granted a reward for such report.
(8) Introduction of Penalty Fine for Companies
2. Anticipated Development of the Proposed Amendment
If the Proposed Amendment proceeds in the manner as anticipated, limited liability companies (who are currently exempt from external audit and public disclosure of such audit) will become subject to external audit and public disclosure. Therefore, it is advisable for current limited liability companies, and companies to be established as limited liability companies, to become well-acquainted with the key provisions of the Proposed Amendment and pay close attention to its development.
Due to the current political situation, the National Assembly has yet to vote on the Proposed Amendment. It is worth noting, however, that the FSC is strongly pushing forth with this Proposed Amendment. As such, there is a high possibility that the National Assembly will pas the Proposed Amendment after the National Assembly is back to its normal operation in the near future.