13% Increase in External Audit Targets Last Year... Impact of COVID-19

[Asia Economy Reporter Lee Jung-yoon] The number of companies subject to external audits increased by nearly 13% last year.

On the 31st, the Financial Supervisory Service announced that as of the end of last year, the number of companies subject to external audits reached 37,519, a 12.8% increase compared to the previous year.

Due to the COVID-19 pandemic and other factors last year, business conditions worsened and debt increased, causing a sharp rise in companies meeting the external audit criteria. This resulted in a 12.8% increase, about twice the average growth rate of 5.5% over the past 10 years. External audits are a system mandated by the "Act on External Audit of Stock Companies, etc. (External Audit Act)" to enhance the reliability of accounting information by requiring certain stock companies that meet specific criteria to undergo external audits.

Since the change in external audit target criteria under the new External Audit Act, the number of companies subject to external audits has been steadily rising since 2021. 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 or more of the following criteria: total assets of 12 billion KRW or more, total liabilities of 7 billion KRW or more, sales of 10 billion KRW or more, 100 or more employees at the end of the previous fiscal year, or 50 or more workers at the end of the previous fiscal year. Additionally, publicly listed companies and companies intending to become publicly listed in the current or following fiscal year are also subject to external audits.

Among the companies subject to external audits, there were 2,542 publicly listed companies, an increase of 85 from the previous year, and 34,977 unlisted companies, an increase of 4,184. By total assets, the distribution was as follows: 12,639 companies (33.7%) with assets between 20 billion and 50 billion KRW, 11,286 companies (30.1%) with assets between 10 billion and 20 billion KRW, and 5,385 companies (14.4%) with assets between 50 billion and 100 billion KRW.

Of all companies subject to external audits, 26,096 companies (69.6%) retained their previous year's auditor, 4,152 companies (11.1%) changed their auditor, and 7,271 companies (19.4%) newly appointed an auditor.

Meanwhile, the number of companies with designated auditors last year was 1,976, a 0.4% increase from the previous year. Although the number of designated companies has significantly increased every year since the new External Audit Act, last year saw a slight increase due to a rise in designations related to business deterioration, offset by a decrease in companies scheduled to be listed and the abolition of excessive debt ratio as a designation reason. The auditor designation system means that, to protect investors, the Securities and Futures Commission under the Financial Services Commission appoints auditors for companies requiring fair audits instead of allowing free selection.

The proportion of designated companies among all companies subject to external audits is 5.3%, with 45.3% of listed companies and 2.4% of unlisted companies designated.

Periodic designations included 531 listed companies and 146 unlisted companies, totaling 677 companies, a 0.4% increase from the previous year.

Ex officio designations included 621 listed companies and 678 unlisted companies, totaling 1,299 companies, a 0.3% increase. Among these, companies scheduled to be listed numbered 460, the largest group, followed by 346 companies failing financial criteria such as three consecutive years of operating losses, 130 companies under management status, and 121 companies without appointed auditors.