Slight Increase in External Audits Last Year... Surge in Auditor Designations Ahead of IPOs

[Asia Economy Reporter Ji Yeon-jin] The number of companies subject to external audits increased again last year.

According to the Financial Supervisory Service, as of the end of last year, the number of companies subject to external audits was 33,250, an increase of 4.7% (1,506 companies) compared to the previous year, the agency announced on the 27th. External audits are a system that mandates certain companies, such as joint-stock companies that meet specific criteria, to undergo external audits to enhance the reliability of accounting information, in accordance with the "Act on External Audit of Stock Companies, etc." (External Audit Act).

According to Article 4 of the External Audit Act, companies subject to external audits include those with total assets or sales of 50 billion KRW or more at the end of the previous fiscal year, as well as companies meeting two of the following criteria: ▲ total assets of 12 billion KRW or more at the end of the previous fiscal year ▲ total liabilities of 7 billion KRW or more at the end of the previous fiscal year ▲ sales of 10 billion KRW or more in the previous fiscal year ▲ 100 or more employees at the end of the previous fiscal year ▲ 50 or more shareholders at the end of the previous fiscal year. Additionally, publicly listed companies and companies that intend to become publicly listed in the current or following fiscal year are also subject to external audits.

As of the end of last year, among companies subject to external audits, there were 2,457 publicly listed companies, an increase of 75 from the previous year, and 30,793 unlisted companies, which surged by 1,431. By total assets, companies with assets between 10 billion KRW and less than 50 billion KRW numbered 21,161 (63.6%), those with 50 billion KRW to less than 100 billion KRW were 4,720 (14.2%), and those with 100 billion KRW to less than 500 billion KRW were 3,893.

Among all companies subject to external audits, 25,412 (76.4%) retained the same auditor as the previous year. 2,869 (8.6%) changed their auditor, and 4,969 (14.9%) newly appointed an auditor.

Meanwhile, the number of companies with designated auditors last year was 1,969, an increase of 448 from 1,521 in 2020. The auditor designation system is where the Securities and Futures Commission appoints auditors for companies requiring fair audits to protect investors.

The increase in auditor designations last year was due to a rise of 212 in periodic designations and an increase of 119 in designation applications from companies planning to be listed.

The proportion of companies subject to external audits that have designated auditors is 5.9%, with the designation rate for listed companies at 51.1% and for unlisted companies at 2.3%.

The largest number of auditor designations were for companies planning to be listed, totaling 481, followed by 266 companies failing financial criteria such as operating losses for three consecutive years, 164 companies under management status, and 89 companies without appointed auditors.