On September 28th, the National Assembly of Korea passed a revision of the Act on External Audit of Joint Stock Companies. According to the amendment, limited liability companies (Yuhan-Hoesa) will be included as targets of external audits. In contrast to a joint stock company (Jusik-Hoesa), a limited liability company had not been subject to external audits and had no external disclosure obligations under the Commercial Act. Criticism of these exemptions stemmed from instances of foreign companies withdrawing profits earned from their domestic operations to foreign headquarters in the name of dividends and royalties. The specific scope of auditing and the scope of disclosure will be determined by Presidential Decree, and the government plans to cooperate with the Korea Chamber of Commerce and Industry (KCCI) to listen to and comment on the opinions of related organizations, such as Korea Listed Companies Association, Korea Institute of Certified Public Accountants, and private experts. The key points of the amendment are outlined below:
Limited liability companies are included as targets of external audits
• Currently, audit targets are (i) listed companies or a joint stock company that intends to become a stock-listed company during the relevant business year or the following business year; (ii) joint stock companies with total assets of at least 12 billion won; (iii) joint stock companies with total liabilities of 7 billion won or more and total assets of 7 billion won or more; or (iv) joint stock companies with at least 300 employees and total assets of 7 billion won or more.
• Pursuant to the amendment, limited liability companies that fall into any of the above categories will also be subject to external audits. However, the new targets will be limited to those that meet certain criteria, as prescribed by Presidential Decree, taking into account the number of employees and the period of time after changing its corporate form to a limited liability company.
Audit reports of limited liability companies that are subject to external audits are included as objects of disclosure.
• The audit reports will be available for public inspection on the Financial Supervisory Service homepage.
• Prior to the enactment of the law, the specific scope of disclosure will be determined by Presidential Decree, taking into account such factors as revenue, number of interested persons, and number of employees.
• There were diverse opinions on this subject, and this approach seems to be a middle ground. Some of the opinions were:
- Amend the Commercial Law to require all limited liability companies to disclose financial statements;
- Only require disclosure of audit reports of limited liability companies that are subject to external audits;
- Require external audits but do not require disclosure.
The results of the discussions with KCCI and related organizations will be announced sequentially by mid-December, and the government plans to enact Presidential Decree and revise relevant regulations next February. The government plans to promulgate the law in late October and the law will go into effect one year after its promulgation. However, the sections on limited liability companies will go into effect on the first fiscal year following one year after the enforcement date.