Tighter Audit System Needed
The South Korean government has revised an external audit law on subsidiaries of foreign companies, such as Google, Apple and Chanel, to force them to disclose their accurate accounting information. However, there are still legal loopholes that allow them to evade regulations.
According to financial authorities on Feb. 12, the new external audit law on corporations requires limited liability companies (LLCs) to receive external audits from November next year. According to the law which was revised last year, LLCs are included as subjects of external audits. There were criticisms that a considerable number of multinational companies changed their forms to an LLC in South Korea so that they don’t need to disclose their business figures and management information while sending most of money they earned in Korea to parent companies abroad. Accordingly, the related law was revised in the end. However, it is too early to say that all the blind spots have been removed. There is still a loophole in the system.
As both the government and firms need a preparatory period, the new law will go into effect in November of next year with one year of grace period. The task force at the Financial Services Commission (FSC) now discusses ways to exclude small-sized companies from external audits through the revision. Firms that has less than 12 billion won (US$11.06 million) of assets and less than 300 employees are highly likely to be excluded as subjects of external audits.
In this case, however, only 2,500 out of 27,860 LLCs, or 9 percent, will be newly included as subjects of external audits based on the data as of 2016. It is not enough to say the surveillance system is dense. At the National Assembly debate over the inclusion of LLCs in external audits on the 8th, Bang Hyo-chang, chairman of the Citizens’Coalition for Economic Justice, said, “(Multinational companies) can evade the law by reducing their assets or number of employees.” Advanced countries like the United Kingdom and Germany have standards for assets and number of employees but they are stricter than South Korean ones. The U.K. excludes firms with less than 4.6 billion won (US$4.25 million) of assets and 50 employees from external audits, while Germany exclude ones with 7.4 billion won (US$6.84 million) of assets or 50 employees.
Other countries basically require all the firms regardless of forms, like corporation and LLC, to receive external audits. The United States include all the companies as subjects of external audits according to the Securities and Exchange Act, the U.K. and Singapore the corporation law and Germany and Japan the commercial law. However, the revised external audit law in South Korea excludes LLCs and joint ventures from subjects of external audits according to the commercial law. An official from the accounting industry said, “Multinational firms can evade the law by changing their forms.”