As a result of an amendment to the Act on External Audit of Stock Companies, Etc., the Securities and Futures Commission (SFC) may designate an auditor.
The regulatory authority can designate an auditor on a periodic basis. In this regard, the authority can designate an auditor for a listed company (except for those listed on the KONEX) or a large private company owned and controlled by a majority shareholder as defined under Article 43(8) of the Enforcement Decree of the Corporate Tax Act (*) for a period of three consecutive financial years (i.e. the designated audit period) after the lapse of a period of six consecutive financial years, for which a company can freely appoint an auditor.
Further, the authority can exercise its power to designate an auditor under certain circumstances, including, but not limited to:
A company seeking IPO in the current or the following year.
A company's failure to appoint an auditor within the prescribed time frame.
A company requesting an auditor to provide bookkeeping or to advise on accounting matters.
Operating loss, negative cash flow from operation, or less than 1 of interest coverage ratio (**) for 3 consecutive years
Request made by an institutional investor who owns shares in the company
Despite the authority's designation of an auditor, a company may request the authority to re-designate an auditor. Such circumstances include, but are not limited to:
A foreign parent company of a registered foreign-invested company has a mandate for an auditor in its investment agreement.
The designated auditor seeks to receive an unreasonably excessive fee from a company, and the auditor has been disciplined by KICPA due to the reason, assuming the company had not engaged the auditor within 2 weeks after the notice was served.
An issue of auditor's license or auditor independence occurs.
Parent and subsidiary companies, for which the authority has designated an auditor, seek audit from the same auditor.
A company that undergoes business recovery under the Debtor Rehabilitation and Bankruptcy Act seeks an audit from the audit firm appointed by the relevant court.
(*) A company whose total assets are at least KRW 100 billion and at least 50% of the total number of issued and outstanding shares (excluding non-voting shares) are held by a large shareholder and his/her specially-related persons under Article 43 (8) of the Enforcement Decree of the Corporate Tax Act, and whose representative director is the large shareholder or his/her specially-related person.
(**) Interest coverage ratio = EBIT / interest expense
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