External Auditor Appointment Violations Surge 177% in One Year... "Beware of Disadvantages in Auditor Designation"

[Asia Economy Reporter Park Jihwan] Although the new External Audit Act has entered its fourth year of enforcement, cases of violations regarding auditor appointment deadlines and selection procedures are rapidly increasing due to a lack of understanding of the auditor appointment system. The Financial Supervisory Service (FSS) has urged special caution to prevent auditors from suffering disadvantages due to violations of appointment deadlines and procedures.

According to the FSS on the 21st, up to November this year, 144 companies were designated auditors due to violations of auditor appointment deadlines and procedures. The number of designated companies surged by 177% compared to 52 companies last year.

The FSS stated, "Since the auditor appointment system differs by company type, companies must verify their applicable type and strictly comply with the auditor appointment regulations such as deadlines and procedures," adding, "Violations may result in the designation of an auditor." The auditor appointment system is divided into four company types based on auditor appointment deadlines, applicable fiscal years, auditor qualification requirements, and selection procedures.

For corporations with December fiscal year-end, including listed companies, large unlisted companies, financial institutions, unlisted companies, and limited companies, an external auditor must be appointed within 45 days from the start of the fiscal year. However, listed companies with assets exceeding 2 trillion KRW must complete the auditor appointment before the start of the fiscal year.

Listed companies, large unlisted companies, and financial institutions must appoint the same auditor for three consecutive fiscal years. Except for exceptional cases such as auditor designation, the auditor cannot be changed during these three fiscal years. Regarding auditor qualifications, only accounting firms registered as auditors can be appointed for listed companies. Large unlisted companies and financial institutions can only appoint accounting firms. Companies with an audit committee must appoint an auditor selected by the audit committee, which is the same for all.

Unlisted companies and limited companies may appoint an auditor for each fiscal year. Auditor qualifications allow appointment of either accounting firms or audit teams.

Regarding major cases of deadline violations, Company A, established in 2019, became subject to external audit as its total assets reached 80 billion KRW at the end of 2019. It signed its initial audit contract for the 2020 fiscal year on April 29, 2020, which complied with the appointment deadline of within four months after the start of the fiscal year for initial audits. However, at the end of last year, Company A’s total assets increased by 105 billion KRW, making it a large unlisted company. The accounting officer was unaware that the deadline for signing a continuing audit contract differs from that of an initial audit and signed the continuing audit contract for the 2021 fiscal year on April 30 this year. This violated the continuing auditor appointment deadline of within 45 days from the start of the fiscal year, which was February 14.

Cases of selection procedure violations were also introduced. Company B, an unlisted company with total assets of 90 billion KRW at the end of 2019, signed an audit contract for the 2020 fiscal year with an accounting firm selected by the auditor. At the end of last year, Company B’s total assets reached 110 billion KRW, making it a large unlisted company under the External Audit Act. However, the accounting officer was unaware that auditor selection procedures differ by company type and signed the 2021 fiscal year audit contract with the same accounting firm selected by the auditor as before. For large unlisted joint-stock companies without an audit committee, the auditor must select the same accounting firm for three consecutive fiscal years with approval from the auditor appointment committee. This violated the auditor selection procedure.

The FSS plans to notify member companies of precautions through related organizations such as the Korea Listed Companies Association, KOSDAQ Association, KONEX Association, Korea Federation of SMEs, and the Korean Institute of Certified Public Accountants. In particular, for companies located in provinces with relatively fewer educational opportunities, the FSS will hold a touring briefing session in January next year and will also provide Q&A and telephone consultations on the FSS website.

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