Exchanges See Most Delistings Due to 'Adverse Audit Opinions' at Settlement...Concerns Over Management Status if Outside Directors Not Met (Comprehensive)

[Asia Economy Reporter Song Hwajeong] The most common reason for delisting related to financial statements was found to be 'adverse audit opinion.'

According to the Korea Exchange on the 6th, an analysis of delisting reasons related to regular financial statements over the past five years showed that 'adverse audit opinion' accounted for the largest proportion at 74.4%. Capital erosion followed at 25.5%. By market, capital erosion (55.5%) was relatively more common in the KOSPI market, while adverse audit opinion (82.3%) accounted for a larger share in the KOSDAQ market.

The number of companies delisted due to financial statement issues has been declining over the past five years. In 2019, only one company was delisted for financial statement reasons, accounting for just 5.5% of all delisted companies. By year, the numbers were 12 companies in 2015, 9 in 2016, 8 in 2017, 13 in 2018, and 1 in 2019. A Korea Exchange official explained, "This is because the delisting system was improved in March last year to decide delisting based on re-audit or the next year's audit opinion in case of an adverse audit opinion." The 3 companies in the KOSPI market and 24 companies in the KOSDAQ market with adverse audit opinions in 2018 are scheduled to have their delisting status determined based on last year's audit opinions. These 27 companies include Shinhan, Sehwa IMC, Woongjin Energy (all in the KOSPI market), Caregen, Lightron, Crova Hightech, Codaco, Poslink, Cancerop, KD, ACT, EMW, HiSonic (formerly G2 HiSonic), Smark, GY Commerce, Biovil, P&TEL, Corentec, Finex, ELK, SFC, YD Online, Hwajin, KJ Pretech, China Great, Hallyu Times, and Bitsrosys (all in the KOSDAQ market).

A Korea Exchange official stated, "We will establish a cooperative system with related organizations and external auditors regarding the most frequent reason for delisting, adverse audit opinion, and prepare a response system so that the Exchange can take timely market measures such as trading suspension." The Exchange plans to provide listed companies with guidelines on major disclosure items during the financial statement period and shareholder meeting procedures, and urge investors to exercise special caution regarding companies at risk of delisting during the financial statement season.

Additionally, the Exchange informed that if a listed company does not meet the ratio of outside directors as stipulated by the Commercial Act, it may be designated as a management item or be subject to delisting.

According to the Commercial Act, listed companies must appoint outside directors accounting for at least one-quarter of the total number of directors. Listed companies with total assets of 2 trillion won or more must appoint outside directors constituting a majority of the total directors and at least three outside directors. Furthermore, listed companies with total assets of 100 billion won or more must have at least one full-time auditor, and those with total assets of 2 trillion won or more must establish an audit committee.

However, if a listed company fails to meet governance requirements due to a lack of quorum at the regular shareholders' meeting but makes efforts to establish the meeting and the Exchange recognizes this, an exception to management item designation may be possible.

Moreover, the Exchange plans to provide incentives such as additional points when selecting excellent disclosure companies and penalty reductions when designating non-compliant disclosure companies to listed companies that cooperate in dispersing shareholder meetings to avoid excessive concentration on the same day.

This content was produced with the assistance of AI translation services.