The Impact of the New External Audit Act on Korean Companies: A Shift to Limited Liability Companies
**Keywords:** New External Audit Act, Limited Liability Companies, Korean Companies, Financial Transparency, Joint-stock Companies, Organizational Change, External Audits, Accounting Transparency, Financial Supervisory Service, Korean Institute of Certified Public Accountants
**Hashtags:** #NewExternalAuditAct #LimitedLiabilityCompanies #FinancialTransparency #KoreanCompanies #AccountingTransparency
**Article:**
In 2018, Korea's New External Audit Act was fully revised and implemented, expanding its scope to include private companies. However, a recent study reveals that these companies are circumventing external audit obligations by transitioning into limited liability companies.
Notably, major global corporations in Korea have implemented such organizational changes. Brands like Bottega Veneta Korea, Balenciaga Korea, and Kering Watch and Jewelry Korea have switched their corporate structure from joint-stock to limited liability companies.
A paper published by the Korean Institute of Certified Public Accountants highlights a significant increase in the registration of limited liability companies since the introduction of the New External Audit Act. The number of such companies has seen a 15-fold increase from 32 in 2012 to 504 in 2020.
The New External Audit Act mandates external accounting audits for private companies that meet certain criteria. This move was aimed at enhancing stakeholder protection and ensuring fair competition by obligating global companies to disclose financial information at the same level as joint-stock companies.
However, sev
eral corporations like eBay Korea, Adidas Korea, and Walt Disney Company Korea have transitioned from joint-stock to limited liability companies. Despite the stringent requirements for changing articles of incorporation and limitations on issuing bonds, these companies have managed to evade the New External Audit Act's application and the obligation to disclose financial statements.
The loophole allowing this evasion is the inability of private companies to directly convert to limited liability companies under the current Commercial Act. Thus, they first transition to a joint-stock company before becoming a limited liability company.
This legislative gap has led to proposals for systemic alternatives to prevent legislative deficiencies. These include expanding the external audit targets in the New External Audit Act to include limited liability companies or creating a separate item for them in the act, imposing external audit and disclosure obligations while excluding small businesses.
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**FAQs:**
**Q1: What is the New External Audit Act?
A1: The New External Audit Act in Korea was revised and implemented in 2018. It expanded its scope to include private companies and aimed at enhancing stakeholder protection by obligating these companies to undergo external audits.
**Q2: How are companies circumventing the New External Audit Act?
A2: Many private companies are circumventing the obligations of the New External Audit Act by changing their corporate structure to limited liability companies.
**Q3: What has been the trend since the introduction of the New External Audit Act?
A3: Since the introduction of the New External Audit Act, there has been a significant increase in the registration of limited liability companies, with a 15-fold increase from 32 in 2012 to 504 in 2020.
**Q4: What are the proposed systemic alternatives to prevent legislative deficiencies?
A4: The proposed systemic alternatives include expanding the external audit targets in the New External Audit Act to include limited liability companies or creating a separate item for them in the act, imposing external audit and disclosure obligations while excluding small businesses.
