New Legislation: Amendment to the Enforcement Decree of the Act on External Audit of Stock Companies

The amendment to the Act on External Audit of Stock Companies (the “Act”) and the enforcement decree thereof (the “Enforcement Decree”), whose key feature pertains to the external audit and disclosure requirements for limited liability companies, became effective as of November 1, 2018. Certain provisions relating to the category of targets of external audits will become effective with respect to the fiscal years that commence on or after November 1, 2019. Therefore, for the majority of companies whose fiscal years begin on January 1 and ends on December 31 of each year, the revised category will become effective with respect to the fiscal year that begins on January 1, 2020.

The Act (as amended) and the Enforcement Decree include the following changes:

1. Requirement for External Audit – Revised Category of Targets

The Act (as amended) and the Enforcement Decree set forth a revised category of targets of external audits, which now includes limited liability companies. The revised category also stipulates updated thresholds (assets, liabilities, sales and/or number of employees) for unlisted companies to become targets of external audits. A summary of the key revisions is as follows (Article 5 of the Enforcement Decree):

Before Amendment
Generally, a stock company will be a target of external audit. More specifically, each of the following will be a target of external audit.

1. Listed stock company

2. Stock company to be listed during the current or the immediately following fiscal year

3. Stock company to be listed by way of back-door listing or by a merger with SPAC (special purpose acquisition company)

4. Stock company with total assets of KRW 12 billion or more (as of the end of the preceding fiscal year)

5. Stock company with total assets and total liabilities of KRW 7 billion or more each (as of the end of the preceding fiscal year)

6. Stock company with 300 or more employees and total assets of KRW 7 billion or more (as of the end of the preceding fiscal year)

 Generally, a stock company and limited liability company will be a target of external audit. More specifically, each of the following will be a target of external audit

1. Listed stock & limited liability company

2. Stock & limited liability company to be listed during the current or the immediately following fiscal year

3. Stock & limited liability company pursuing for back-door listing or listing by a merger with SPAC

4. All other categories of stock & limited liability company, provided, however, that a company will not be a target of external audit in any given year if it (i) was established in the relevant year or (ii) satisfies three (3) or more of the conditions below (in the case of limited liability company, a company with less than 50 unitholders as of the end of the preceding fiscal year satisfying three (3) or more of the conditions below).

– Company has total assets of less than KRW 12 billion (as of the end of the preceding fiscal year)

– Company has total liabilities of less than KRW 7 billion (as of the end of the preceding fiscal year)

– Company has total sales of less than KRW 10 billion (as of the end of the preceding fiscal year)

– Company has less than 100 employees (not counting dispatched workers)

2. Requirement to File Financial Statements – Revised Category of Companies

The Act (as amended) and the Enforcement Decree also set forth a revised category of companies that are required under the Act to file financial statements with the Securities and Futures Commission.

The category now includes (i) listed stock & limited liability companies, (ii) unlisted stock & limited liability companies with total assets of KRW 100 billion or more (as of the end of the preceding fiscal year) and (iii) financial institutions as defined under the Act on the Structural Improvement of the Financial Industry are subject to the requirement (Article 6(4) of the Act; Article 8(3) of the Enforcement Decree).

3. Stronger Accounting Regulations on Large-sized Unlisted Companies and Financial Companies

Large unlisted companies and financial companies will be subject to stronger accounting regulations, which are currently applicable only to those listed companies satisfying certain size qualifications, including with respect to qualification, appointment process and internal compliance requirements for external auditor(s).

4. Greater Regulatory Power of Securities and Futures Commission

Securities and Futures Commission will now have the authority to designate external auditor(s) for a company, (i) if the company undergoes frequent changes of its largest shareholder and/or representative director, (ii) upon request by the shareholders of the company, subject to certain conditions to be promulgated as a Presidential Decree, (iii) if the company has its shareholders as its management or (iv) if the company is a listed company and consecutively designates and appoints auditor(s) at its own discretion for six or more fiscal years.

5. Tougher Sanctions for Improper and Fraudulent Accounting

In the event any improper accounting is discovered by an external auditor, the external auditor shall report to the statutory auditor or the audit committee of the company, who will have a duty to appoint an outside expert to investigate and resolve the issue and submit a report thereof to Securities and Futures Commission and its external auditor(s) (Articles 22 and 47 of the Act). Furthermore, in the event any fraudulent accounting occurs, the company, in addition to the accounting personnel and auditor(s), will be subject to a penalty (less than or equal to 20% of the amount subject to such fraudulent accounting) (Article 35 of the Act). The Amendment also provides for tougher criminal sanctions for any officer(s) responsible for fraudulent accounting.

6. Miscellaneous

In addition to the foregoing, the Enforcement Decree stipulates the following changes: (i) companies will be required to include in their internal accounting regulations the criteria and procedures for evaluation of the internal accounting protocols by the audit committee (Article 9(2)); (ii) the Securities and Futures Commission will have the power and authority to designate an external auditor on behalf of a KOSDAQ-listed company in the event the company is designated as “KOSDAQ Investment Precaution Issue”, etc. (Article 14(1), (3) and (5)); and (iii) an auditor will be entitled to terminate an audit agreement with a company if the company fails to cooperate with the auditor and fails to provide the relevant documents/information (Article 21(1) and (3)).

If you have any questions regarding this article, please contact below:

Ho Joon Moon (hojoon.moon@leeko.com)

Bryan Shin (bryan.shin@leeko.com)

Hyungmin Joo (Hyungmin.joo@leeko.com)

For more information, please visit our website: www.leeko.com

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