The Financial Services Commission (FSC) announced on April 8 that an amendment to the Enforcement Decree of the Act on External Audit of Stock Companies will be implemented so that external audits are applied to limited liability companies as well as stock companies.
The amendment will make foreign companies in South Korea such as Google Korea, Apple Korea and Microsoft Korea, subject to external audits starting from 2020, putting an end to tax evasion controversies surrounding them. The new rule becomes effective from the first business year following November 2019 and 2020 for companies with fiscal years ending on December 31.
Under the amendment, a total of 33,100 companies, including 3,500 limited liability companies, are subject to external audits and have to disclose their financial or business data. Exempted are LLC-type investment vehicles and non-listed corporations satisfying three of the followings: less than 10 billion won in asset; less than seven billion won in debt; less than 100 employees; and less than 10 billion won in sales.
At present, listed companies and major non-listed companies in which ownership and management are not separated from each other have to appoint an auditor designated by the Securities and Futures Commission (SFC) for three years after freely designating an auditor for six years in a row.
Under the amendment, this rule is not applied to companies that have been found by the FSC to have committed no accounting fraud during the past six years and promise to replace their current auditors voluntarily.
Companies that want to avoid being forced to appoint an SFC-designated auditor have to apply for FSC audit one year in advance. The SFC can return a company’s application for FSC audit if it finds auditor designation is necessary in light of the applicant’s accounting practices.
In addition, the SFC’s power to designate auditors by authority will be expanded. Specifically, the SFC can do so for companies not submitting financial statements or relevant data to it or investment alert issues in KOSDAQ. The FSC is going to prepare some measures so that the auditor designation by the SFC is not abused.
At the same time, the FSC is going to amend its regulation so that the auditor designation is not concentrated in a certain period. According to its simulation, 630 companies, which is equivalent to 32% of the listed corporations, are estimated to be subject to the designation in 2020, the first year of the auditor designation. The FSC is planning to revise the regulation next month so that the number is reduced to 200 to 250 each year.
The FSC will publish the amendment this month and the revised regulation next month for public comment. Scheduled for the second half of this year are standard audit hour announcement and revision of the standards for auditing financial accounts.