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Amendments on Enforcement Decree of the Act on External Audit of Joint Stock Companies

30 Apr 2018

Introduction

The Act on External Audit of Joint Stock Companies (hereinafter “Current Act on External Audit”) applicable to the companies subject to external audit in Korea has been wholly amended to The Act on External Audit of Joint Stock Companies, etc. (hereinafter “New Act on External Audit”) on October 31, 2017, scheduled to be effective from November 1, 2018. Further, the Amendments on Enforcement Decree of the Current Act on External Audit is anticipated to be introduced in April 2018, expected to be effective from November 1, 2018.

Below is a brief summary of major contents of the Amendments on Enforcement Decree of the New Act on External Audit, which is expected to be effective from the fiscal year commencing on or after 2018.

Major contents

1) Expansion of the companies subject to external audit

While the Current Act on External Audit is limited in that it only applies to Joint Stock Companies, (“Chu-sik hoesa” in Korean), the New Act on External Audit will expand the companies regulated under the Current Act on External Audit to Limited Companies (“yu-han hoesa” in Korean). Moreover, to reflect the companies’ economic substance, sales amount has been added as an additional basis upon which to determine whether a company would be subject to external audit, in addition to total assets and liabilities and the number of employees.

Meanwhile, based on the premise that countries that have adopted IFRS such as EU, Australia, etc. do not necessarily distinguish a limited company from a joint stock company, the New Act on External Audit will not make any distinction between the two types of companies and will therefore apply to both the Limited Company and the Joint Stock Company.

However, certain investment vehicles that are established as limited companies shall not be subject to the New Act on External Audit. Such exclusion has been made on the basis that the Current Act on External Audit excludes investment companies established as joint stock companies regulated under Financial Investment Services and Capital Markets Act, Corporate Restructuring Vehicles regulated under Corporate Restructuring Vehicle Act, etc. from being subject to audit. Similarly, the Amendments on Enforcement Decree of Current Act on External Audit further expands the audit exemptions to investment limited companies or investment purpose companies (Joint Stock or Limited Company) regulated under Financial Investment Services and Capital Markets Act, and Special Purpose Vehicles (Limited Company) regulated under the Asset Backed Securitization Act, on the grounds that each type of companies are regulated under its respective regulations.

2) Appointment of Auditors

Listed companies and large-scale non-listed companies whose total assets exceed KRW 100 billion and whose representative directors own at least 50% of the issued shares shall be free to appoint their auditors for 6 years, and shall appoint an auditor designated by the Securities and Futures Commission for 3 years thereafter.

On the other hand, companies that have not undergone Inspection from the Securities and Futures Commission within the past 6 years shall be considered an exception to being subject to external audit. Also, companies with unqualified opinion on either the Audit or Review of the Internal Accounting Control System for the preceding 3 years that have committed to a change of the auditor after the 6-year grace period may opt to undergo an Inspection of the Securities and Futures Commission. Until the end of such Inspection, the appointment of an auditor may be deferred, and provided that there is no violation of the accounting standards, the company will not be subject to the appointment of an auditor for the next 6 years after the end of the Inspection.

3) Strengthening of the Responsibility borne by the Company for its Accounting Treatments

By minimizing the uncertainties in accounting treatments through applying prescribed procedures and methods, the regulations that govern the internal accounting control system, which secures transparency and consistency of accounting, are expected to be strengthened.

Specifically for listed companies, the certification for the operations of the internal accounting control system required from the external auditors has been raised from a review to an audit. Accordingly, based on its total asset, the listed company shall be subject to audit on its internal accounting control system starting progressively from 2019. If a company is not proactive in its attempt to enhance its internal accounting control system and is uncooperative to auditors in providing requested information, the auditors may terminate their engagement with such company. Moreover, the amendment also requires a listed company to adopt internal accounting control system of its consolidated entities and consequently, the non-listed subsidiaries of a listed company shall also be required to maintain and operate internal accounting control system, starting progressively from 2022.

Furthermore, the person responsible for reporting the internal accounting control system has been changed from the in-charge person to the representative director of the listed company. The internal accounting control system is also required to be reported in the annual general meeting of shareholders.

4) Others

The parent entity who has adopted the Korean Accounting Standards normally excludes its subsidiary who is not subject to external audit in its consolidation, but this is troublesome in that it is difficult to track abnormal intercompany transactions between the parent and the subsidiary. Consequently, the amendments have been made in a way that even if the parent has adopted the Korean Accounting Standards, the parent must consolidate its subsidiary who is not subject to external audit, just as it would under the K-IFRS.

Conclusion

Following the amendments of the Current Act on External Audit and related Enforcement Decree, there will be a number of changes made to the external audit environment. In case of Limited Companies, they should be careful not to be assessed a penalty and be forcefully designated an auditor by not following the amended regulations. Thus, in order to prevent such disadvantages and sanctions resulting from incorrect interpretations of the amended regulations, it is highly recommended to seek an accounting expert’s advice.


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