Does Your Korean Subsidiary Need an External Audit? It Is a Two-of-Four Test

The four numbers that decide it

Your Korean subsidiary needs a statutory external audit if, at the end of last business year, it met any two of four tests: total assets of KRW 12 billion or more, total liabilities of KRW 7 billion or more, sales of KRW 10 billion or more, or 100 or more employees. Two is the whole rule. One is not enough, and three changes nothing.

That structure is what makes the threshold easy to cross without noticing. A subsidiary that has been comfortably under it for years takes a won-denominated intercompany loan to fund a fit-out, which pushes total liabilities past KRW 7 billion, in a year when sales happened to reach KRW 10.4 billion. Neither number felt like a threshold at the time. Together they are one.

Above that there are two single-factor tests, and either is decisive on its own. Total assets of KRW 50 billion or more at the previous year end brings a company into audit. So do sales of KRW 50 billion or more in that year. There is no second condition and no discretion.

Two details in the counting are worth knowing before you conclude you are outside. Where the preceding business year ran for less than twelve months — the position of every entity in its first partial year — sales are annualised to a twelve-month figure, and a part month counts as a full one. And the headcount test counts workers as defined by the Labor Standards Act, excluding dispatched agency workers and certain categories under the Enforcement Decree of the Income Tax Act. A company staffed largely through a dispatch agency is not counting those people.

Listed companies, and companies that intend to list in the current or the following business year, are in scope whatever their size. That is not usually the question a foreign-owned subsidiary is asking.

The 유한회사 route closed in 2018

For years, the standard advice to a foreign parent that did not want its Korean numbers on a public database was to incorporate as, or convert into, a 유한회사 — a private limited company. Limited companies sat outside the external audit regime entirely, and a very large number of foreign-invested entities in Korea are that form for exactly this reason.

That ended with the rewrite of the Act, in force from November 2018. Limited companies are now inside it. The test is slightly looser: a limited company is caught if it meets three or more of five criteria — the same four, plus having 50 or more members.

The important part is the anti-avoidance rule attached to it. A company that converted from a stock company to a limited company after 1 November 2019 is measured on the stock company test — two of four — for five years from the date of the conversion registration. Converting to get out is not a strategy that works, and for a conversion in, say, 2023, the stricter test is still running.

The 45-day clock, and why first-timers get four months

Once you are in scope, the first obligation is not the audit. It is the appointment. Article 10 of the Act requires a company to appoint its auditor for the relevant business year within 45 days of the start of that business year. For a December year end that lands in mid-February, and it falls due before most head offices have finished last year’s close.

There are two variations that matter to a foreign-owned entity.

A company required to establish an audit committee must appoint before the business year starts — so for a 2027 calendar year, by the end of 2026. Most small subsidiaries are not in that category, but a company that has grown into it should not discover the change in February.

And a company that was not subject to external audit in the immediately preceding business year gets four months from the start of the business year rather than 45 days. This is the provision that catches every entity crossing the threshold for the first time, and it is a genuine concession: a company that only realises in March that last year’s balance sheet put it in scope still has until the end of April to appoint.

There is a reporting step behind the appointment that is easy to miss. The Financial Supervisory Service’s guidance for the 2026 appointment round is explicit that the engagement must be reported to the FSS within two weeks of signing the audit contract, and that where the appointment was approved by an audit committee or an auditor selection committee, the report is required every time — not only when the auditor changes.

Missing the appointment window is not a paperwork failure. Article 42 of the Act makes it punishable by imprisonment for up to three years or a fine of up to KRW 30 million, and the more common practical consequence is that the Securities and Futures Commission designates an auditor for you. A designated auditor is not one you negotiated scope, timing or fee with.

What the first audit year actually looks like

The statutory calendar is built backwards from the annual general meeting, which for a December year-end Korean company is normally held by the end of March.

The six-week rule is the one that reshapes a finance team’s year, and it is worth reading slowly. The company must hand the auditor a complete set of financial statements six weeks before the AGM. For a 31 March meeting that is around mid-February — the same fortnight as the auditor appointment deadline. A Korean subsidiary that has been closing its books in the leisurely way a small entity can afford has roughly six weeks from year end to produce a full, auditable set of statements, in Korean, on Korean accounting standards.

That is the point at which an outsourced bookkeeping and month-end close arrangement earns its fee, because the constraint is not accounting judgement. It is that the January and February close have to be finished on a fixed date rather than when the team gets to them.

The Act also forbids something that surprises groups used to other jurisdictions: the auditor may not prepare the company’s financial statements, and may not advise on their preparation. The representative director and the accounting officer are responsible for the statements, and the company may not ask the auditor to do it. Whoever has been drafting your Korean statutory accounts, it cannot be the firm that signs the audit opinion.

The obligation that arrives with size, not with the audit

Being subject to external audit does not automatically mean operating a formal internal accounting control system — 내부회계관리제도. That obligation has its own carve-out, and most foreign-owned Korean subsidiaries sit inside it.

Under Article 9 of the Enforcement Decree, companies excluded from the internal accounting control system requirement include limited companies and companies whose total assets at the previous year end were less than KRW 500 billion. The exclusion for the KRW 500 billion test does not apply to listed companies, members of a disclosure-designated business group, corporations that file business reports, or financial companies.

So a KRW 30 billion Korean subsidiary of an overseas group is audited but is not running a statutory internal control system. That gap is worth naming to a head office, which will often assume the two arrive together, and will sometimes assume Korea has something equivalent to a SOX 404 attestation at a size where it does not.

Where the obligation does apply, failing to establish the system or to designate an internal accounting manager carries an administrative fine of up to KRW 30 million.

Branches and liaison offices are outside this entirely

A foreign company’s Korean branch does not appoint a statutory auditor. Article 2 of the Act defines a “company” as a stock company or a private limited company subject to external audit under Article 4, and a branch is neither — it is a registered place of business of the overseas entity, not a Korean company.

This is a real difference between the two forms and it belongs in the entity decision, alongside the tax and foreign-invested company status questions that usually dominate it. A branch keeps Korean books, files Korean corporate income tax, files VAT four times a year and withholds on Korean payroll. What it does not do is produce an audited Korean statutory account set and put it on a public filing system.

Whether that is an advantage depends on the group. If the branch’s numbers are audited at the parent level anyway, the Korean audit is duplicated cost. If the Korean operation needs to show a Korean bank, a Korean customer or a Korean regulator an audited local balance sheet, the branch cannot.

What to check before December

The test looks at the year that is about to end, and the appointment deadline arrives six weeks after it does. Two months of lead time is the difference between choosing an auditor and being assigned one.

Crossing the threshold is not a problem. Crossing it without knowing is, because the consequences are sequenced: you miss the appointment window, the Securities and Futures Commission designates a firm, and the first audit you have ever had is run by an auditor you did not choose, on a timetable you did not set, against books that were closed for management purposes rather than statutory ones.

If you are not sure which side of the line last year’s balance sheet put you on, that is a twenty-minute question against four numbers, and it is the sort of thing our Korean accounting and bookkeeping service checks as a matter of course rather than as a project.

Figures current as at 22 August 2026, from the Act on External Audit of Stock Companies and its Enforcement Decree, and from the Financial Supervisory Service’s guidance of 26 November 2025 on auditor appointments for 2026. Thresholds in the Enforcement Decree are set in won and are revised by amendment, not by indexation — check the current text before relying on a figure in a later year. This is general information about how the Korean external audit regime works and is not advice on any particular company’s position.