Subsidiaries of foreign companies in Korea such as foreign luxury brand firms including Louis Vuitton, Gucci, Chanel, and multinationals such as Apple and Microsoft will have to receive external audits beginning next year.
According to the Financial Supervisory Commission (FSC) on October 9, a revision of the "External Audit Law on Corporations" passed the National Assembly, and limited liability companies (LLCs) were included as subjects of external audits. The law will go into effect in October of next year one year after its promulgation in October. Accordingly, LLCs such as Louis Vuitton Korea, Gucci Group Korea and Apple Korea will have to disclose audit reports with balance sheets, income statements and statement of retained earnings beginning their settlement of accounts beginning next year.
The government had regulated the number of investors and a transfer of equities only instead of exempting external audits from the LLCs. In addition, a revision of the Commercial Act in 2011eliminated even such regulations.
Therefore, foreign companies in Korea exploited the change and turned them into LLcs in large numbers. They intended to make full use of loopholes in regulations. Apple Korea changed its form to an LLC from a joint stock company in 2009, Louis Vuitton Korea in 2012, and Gucci Group Korea in 2014. Many people pointed out that such foreign companies decided to hide their management information by switching to LLCs when they were run down for sending most of money they earned in Korea to parent companies abroad as dividends or loyalties and parsimonious about investment and social contribution in Korea.
According to financial authorities, the number of registered LLCs in Korea hit 20,658 as of the end of 2015. The number more than doubled from 2005 (10,201) which is 12 years ago from now. A large number of major foreign companies in Korea including Coca-Cola Korea, Microsoft Korea, Google Korea, Facebook Korea, HP Korea, Nike Korea, Hermes Korea and Prada Korea are LLCs.
The Financial Supervisory Commission is planning to determine the scope of LLCs that will be subject to external audits through an amendment to an enforcement ordinance before the enactment of the law. "We will set targets by taking into consideration the amount of assets, the number of employees, and the number of years that have passed since they were converted into limited companies," said an official of the Financial Supervisory Commission
Currently audit targets are the listed companies, the stock corporatins with assets of more than 12 billion won (US$10.8 million), stock corporations with total liabilities of 7 billion won (US$6.3 million) or more and total assets of 7 billion won (US$6.3 million) or more, stock corporations with more than 300 employees and total assets of 7 billion won (US$6.3 million) or more. Given that about 2,000 of LLCs have more than 12 billion won (US$10.8 million) in assets, the number of LLCs that are subject to external audits is likely to reach that level.