On December 19, 2013, the National Assembly passed a new amendment to the Act on External Audit of Joint Stock Companies (the “External Audit Act”)1, and the major provisions of the amendment are (1) strengthened requirements on the preparation and submission of financial statements, (2) an expansion of the scope of persons who may be held responsible for accounting fraud and the authority of the Securities and Futures Commission to take countermeasures, and (3) limitations on the liability of outside auditors. Further, following such amendment of the External Audit Act, the provisions of the Financial Investment Services and Capital Markets Act (the “FISCMA”) relating to the liability of outside auditors were also amended to the same effect as the amended provisions of the External Audit Act (amendment of the FISCMA passed by the National Assembly on December 31, 2013)2.
- Strengthened requirements on the preparation and submission of financial statements
Under the pre-amendment External Audit Act, the person responsible for preparation of financial statements was uncertain, and the above amendment resolves this uncertainty by expressly providing that the company’s representative director and the director in charge of accounting (or employee in charge of accounting) are the persons responsible (Article 7(1) of the External Audit Act). The above amendment also requires financial statements to be submitted to the Securities and Futures Commission (which has delegated the task of processing such financial statements to the Korea Exchange) simultaneously with their submission to an outside auditor at least 6 weeks prior to the company’s annual general shareholders meeting (Article 7(2) of the External Audit Act). Since the above amendment to the External Audit Act becomes effective from July 1, 2014, it applies beginning from the financial statements for the fiscal year 2014.
- Expansion of the scope of persons who may be held responsible for accounting fraud and the authority of the Securities and Futures Commission to take countermeasures
The recent amendment to the External Audit Act adds “persons instructing the performance of work duties”3 under the Commercial Code to the scope of persons who may be subject to recommendation of dismissal or other measures by the Securities and Futures Commission for accounting fraud or criminal sanctions for violation of the External Audit Act (imprisonment of up to 7 years or a criminal fine of up to KRW70 million) (Articles 16(2) and 20(1) of the External Audit Act). Further, the amendment grants the Securities and Futures Commission authority to require correction of violations of accounting standards (Article 16(2) of the External Audit Act).
- Adoption of system of proportional liability for damages
An outside auditor’s liability from negligently performing an audit, but without intentional misconduct, was reduced to the extent of the ratio of liability determined by a court according to the degree of such outside auditor’s fault (Article 17(4) of the External Audit Act). However, toward destitute injured parties with an income level of a certain amount or less, such outside auditors may be held fully liable for damages jointly and severally with other parties responsible (Article 17(5) of the External Audit Act), and if some of the other parties responsible are unable to pay compensation, such outside auditor may be held liable for additional damages of up to the amount equivalent to 50% of the damages amount portion for which the outside auditor is held liable by the court (Article 17(6) of the External Audit Act). The amended provisions of the External Audit Act relating to the limitations on liability of outside auditors apply to financial statements and audit reports on the first fiscal year starting after the effective date of the amendment, December 30, 2013.