"Audit Committees at Listed Companies Remain at Statutory Minimum; Urgent Need for Qualitative Improvement"

Samil PwC Releases Audit Committee Analysis Report Covering 334 Companies
"Only 36% Have at Least Two Accounting or Finance Experts"

Although expectations are rising for the independence and expertise of audit committees following amendments to the Commercial Act and the Capital Markets Act, the composition of audit committees at domestic listed companies still remains at the statutory minimum requirements. Experts point out that for audit committees to perform a real supervisory function, a strategic approach linked to corporate value is needed, rather than merely a compliance-based approach.

On October 29, the Samil PwC Governance Center announced the publication of "Governance Focus No. 31," which analyzes the current composition and operation of audit committees at domestic listed companies. The report covers 334 KOSPI-listed companies with consolidated assets of at least 500 billion won that have established audit committees, analyzing their composition, independence, expertise, activity, and operations.

According to the report, 78% of all companies have set up audit committees with three members, the statutory minimum. Only 36% of companies have at least two accounting or finance experts on their audit committees, and the proportion of separately elected audit committee members also remained at the legal minimum of 30%.

In addition, only 18% of organizations supporting audit committees have an executive-level head. Only 49% of supporting organizations have secured independence, such as personnel authority, falling short of half, indicating an urgent need to strengthen the status and independence of these support organizations. Communication with external auditors averaged 4.2 times per year, or about once per quarter, but most interactions were still conducted in writing, leading to criticism that substantive discussions are lacking.

With this year's amendment to the Commercial Act, the 3% rule now applies to the election of outside directors serving as audit committee members, by aggregating the shares of the largest shareholder and related parties, further emphasizing the role of independent internal audit bodies. The second amendment to the Commercial Act includes the expansion of separate elections for audit committee members and the mandatory cumulative voting system for large listed companies, which is expected to bring significant changes to the composition and operation of audit committees in the future. The report stated, "For audit committees to perform a substantive supervisory role, their composition and operation must go beyond mere legal compliance and be linked to corporate strategy," adding, "In particular, it is essential to enhance the expertise of audit committee members and the independence of supporting organizations to respond to the evolving risk environment."

The report also included recommendations on the new roles of audit committees in the era of artificial intelligence (AI). As AI is increasingly used in areas such as financial reporting, internal audit, and risk management, the need for audit committees to balance oversight of AI-related risks and opportunities is growing. The report advised, "To ensure the responsible use of AI, audit committees must strengthen communication with management and develop the expertise to ask strategic questions."

Heo Jeheon, Partner at the Samil PwC Governance Center, commented, "The results of this analysis show that qualitative improvements in the composition and operation of audit committees are urgently needed," and added, "Given the rapidly changing business environment, including amendments to the Commercial Act and the rise of AI, companies should recognize audit committees as a core governance body for enhancing corporate value and invest accordingly."