As companies grow in scale, their obligations regarding audit mechanisms evolve accordingly.
With the Commercial Code amendments effective December 29, 2020, regulations concerning audit committees were significantly strengthened, and further changes are scheduled following the amendments passed by the National Assembly on July 3, 2025.
This article provides a detailed overview of when companies must establish an audit committee, how to structure it, and recent amendments affecting these requirements.
When Audit Committees Are Required
For General Companies Under Commercial Code
Under the Commercial Code, stock corporations are required in principle to have an auditor, but audit committees are not mandatory.
According to Article 415-2 of the Commercial Code, companies may establish an audit committee by including provisions in their articles of incorporation only when they choose to do so.
General companies under the Commercial Code that wish to establish an audit committee must meet several conditions.
First, they must specify the basis for establishing an audit committee in their articles of incorporation, and the audit committee must consist of at least three directors.
Additionally, persons who may be influenced by major shareholders cannot exceed one-third of the committee members.
Mandatory Requirements for Large Listed Companies
Unlike general Commercial Code companies, listed companies above a certain scale must establish an audit committee.
This applies to publicly traded companies on KOSPI or KOSDAQ whose total assets exceed 2 trillion won at the end of the most recent fiscal year.
This measure reflects efforts to improve corporate governance and enhance transparency, recognizing that larger listed companies require stricter audit mechanisms.
These companies must establish an audit committee without exception and comply with all related requirements.
Companies Required to Have Full-time Auditors
Listed companies with total assets between 100 billion won and 2 trillion won must appoint at least one full-time auditor, though this obligation is waived if they establish a strict audit committee.
The key point here is the term "strict audit committee."
The amended Commercial Code stipulates that only strict audit committees exempt companies from the full-time auditor requirement, preventing listed companies with assets between 100 billion won and 2 trillion won from establishing general audit committees to circumvent the 3% rule.
Cases Where Audit Committee Establishment Is Exempted
Not all listed companies must establish audit committees.
The following companies are exempt from audit committee requirements:
Investment companies under the Indirect Investment Asset Management Act, real estate investment companies under the Real Estate Investment Company Act, and companies subject to the Financial Investment Services and Capital Markets Act are representative examples.
Additionally, specialized companies such as new technology business financiers, small and medium business startups and investment companies, accounting firms, and credit rating agencies are also excluded from audit committee requirements.
Companies applying for initial public listing may receive temporary exemptions if they haven't appointed outside directors before the regular shareholders' meeting, making audit committee establishment difficult.
Special transitional provisions also apply to companies moving from the KONEX market to listing.
Audit Committee Composition Requirements and Qualifications
For General Corporations Under Commercial Code
General corporations subject to the Commercial Code are not required to establish audit committees, so in practice, very few operate them.
If they do establish an audit committee, it must consist of at least three members, and persons who may be influenced by major shareholders cannot exceed one-third of the committee members.
Strict Composition Requirements for Large Listed Companies
Large listed companies with total assets exceeding 2 trillion won must establish audit committees meeting the following requirements.
Most importantly, at least two-thirds of all committee members must be outside directors.
This is a core condition for ensuring independence.
Additionally, at least one member must be an accounting or financial expert as prescribed by presidential decree.
The audit committee chairperson of publicly traded companies on KOSPI or KOSDAQ that are key companies must be an outside director.
These measures aim to ensure both independence and expertise of the audit committee.
Qualification Restrictions for Non-Outside Director Audit Committee Members
Non-outside director audit committee members cannot be:
Minors, persons of unsound mind, or quasi-incompetents are naturally excluded, as are persons declared bankrupt and not rehabilitated, or those who have served imprisonment or higher penalties and less than 2 years have passed since completion.
Particularly important are conflict of interest restrictions.
Major shareholders of the company, company officers or employees, or those who were full-time officers or employees within the last 2 years cannot serve as audit committee members.
These are essential qualification requirements for ensuring independence.
Audit Committee Establishment Procedures and Member Appointment
Audit Committee Establishment Procedures
Large listed companies must establish audit committees according to the Capital Markets Act, while general companies establishing them voluntarily must include provisions in their articles of incorporation and pass a board resolution to establish the audit committee.
The process for abolishing an audit committee is more complex.
First, the articles of incorporation must be amended through a shareholders' meeting resolution, then the board must resolve to abolish the audit committee, followed by the appointment of a new auditor at the shareholders' meeting.
Unique Aspects of Audit Committee Member Appointment
Audit committee members are appointed from among directors. Therefore, the principle is to first elect directors at the shareholders' meeting, then appoint audit committee members from among the elected directors through a board resolution.
However, for listed companies, non-outside director audit committee members must be directly appointed at the shareholders' meeting.
In other words, they are appointed as both directors and audit committee members simultaneously, becoming audit committee members without a separate board resolution.
Importantly, if the total voting shares owned by the largest shareholder and related parties exceed 3% of total issued shares, voting rights cannot be exercised for the excess portion.
Major Changes in Commercial Code Amendments
Expanded Application of the 3% Rule
The Commercial Code amendments passed by the National Assembly on July 3, 2025, expand the rule limiting voting rights of the largest shareholder and related parties to 3% in aggregate to apply to all audit committee member appointments, regardless of whether they are outside directors.
The 3% rule, previously applied only to non-outside director audit committee appointments, will now apply to all audit committee member appointments.
This measure aims to consistently limit the largest shareholder's influence on audit committee composition and enhance committee independence by resolving regulatory complexity.
Strengthened Separate Election Requirements
The amended Commercial Code requires large listed companies with total assets exceeding 2 trillion won and listed companies with assets over 100 billion won that established audit committees instead of full-time auditors to elect at least one director who will serve as an audit committee member separately from other directors.
The new amendments plan to increase separately elected audit committee members from one to two or more while applying the 3% rule to all of them.
This amendment strengthens the influence of minority shareholders.
Introduction of Electronic Shareholders' Meetings
Listed companies can hold electronic shareholders' meetings enabling remote participation alongside physical meetings through board resolution unless prohibited by their articles of incorporation.
When electronic voting is adopted, the requirement for a quorum of one-quarter of total issued voting shares is waived, allowing resolutions with a majority of attending shareholders' voting rights.
Relationship with the Full-time Auditor System
Full-time Auditor Appointment Obligations
Listed companies with total assets of 100 billion won or more must appoint at least one full-time auditor, but this obligation is waived if they establish an audit committee.
Therefore, under current law, audit types are classified as follows:
General companies under the Commercial Code must have an auditor but can choose whether full-time; listed companies with assets between 100 billion won and 2 trillion won can choose between at least one full-time auditor or an audit committee; large listed companies with assets exceeding 2 trillion won must establish an audit committee.
Full-time Auditor Qualification Requirements
Disqualification requirements for full-time auditors are similar to those for audit committee members.
These include minors, persons declared incompetent or quasi-incompetent, persons declared bankrupt and not rehabilitated, and those who have served imprisonment or higher and less than 2 years have passed since completion.
Particularly important is that major shareholders of the company, officers or employees, or those who were full-time officers or employees within the last 2 years cannot serve as full-time auditors.
Additionally, auditors and those related to auditors and company officers face qualification restrictions.
Practical Application Considerations
Volatility of Asset Value Standards
Audit committee or full-time auditor obligations are determined based on total assets at the end of the most recent fiscal year.
Therefore, obligations may change according to company scale changes, requiring verification of applicable standards after each year-end settlement.
When asset values fluctuate around thresholds, changes to audit mechanisms may be necessary, so advance preparation is important.
Particularly when changing from full-time auditor to audit committee or vice versa, articles amendments and shareholders' meeting resolutions are required, necessitating sufficient preparation time.
Complexity of 3% Rule Application
When applying the 3% rule, specially related persons of the largest shareholder include not only the largest shareholder's specially related persons but also those holding shares on behalf of the largest shareholder or their specially related persons and those who have delegated voting rights to the largest shareholder or their specially related persons.
In practice, some companies have experienced auditor or audit committee member appointment proposals being rejected due to insufficient voting quorum, resulting in vacancies or existing auditors or committee members maintaining their positions.
Preparing for Future Changes
The new amendments plan to increase separately elected audit committee members from one to two or more while applying the 3% rule to all of them, with immediate implementation without a grace period.
In preparation for these changes, companies should review their audit committee composition strategies and establish communication channels with minority shareholders and institutional investors.
Particularly with the introduction of separate election methods, at least one director serving as an audit committee member is likely to be elected according to minority shareholders' wishes, requiring appropriate response measures.
Audit committee regulations are core to corporate governance and important institutions for investor protection.
Companies should accurately understand size-based obligations and actively respond to changing laws to establish foundations for transparent and sound management.