[1] Meaning of Article 20(1)2 of the former Act on External Audit of Stock Companies and method of proving that an external auditor denies the falsity of audit report and intent

[2] In a case where an external auditor knows that the audit result of the audit of financial statements distorted by window dressing accounting, but without taking other measures, stated only the audit report in an audit report, whether it constitutes a “false statement” under Article 20(1)2 of the former Act on External Audit of Stock Companies (affirmative)

[3] Whether criminal liability borne by a corporation extinguished through a merger is succeeded to the surviving company after a merger (negative)

[1] Article 20(1)2 of the former Act on External Audit of Stock Companies (amended by Act No. 6427 of Mar. 28, 2001) refers to the case where an external external auditor, who is an actor, knows that his/her perception and judgment are inconsistent with the contents written in the audit report, while expressing the perception and judgment of the facts that he/she audited in the audit report. However, if an external auditor asserts that his/her perception and judgment written in the audit report are consistent with the truth, and even if not, he/she is unaware of the fact that it is false, he/she is bound to prove it by the method of proving indirect facts having a substantial relation with the nature of the object, and what constitutes an indirect fact should be reasonably determined in a way that reasonably determines the link between the facts through an extensive observation or analysis based on normal empirical rule.

[2] In a case where an external auditor who audits the financial statements of a stock company recognizes that such distortions the balance of the balance sheet in the year concerned due to the window dressing accounting of the previous fiscal year, it is reasonable to view that such distortions should be properly pointed out in the audit report of the year concerned and reflected in the statement of opinion. Thus, without taking such a measure, stating only “personal opinion” in the audit report constitutes “false statement” under Article 20(1)2 of the former Act on External Audit of Stock Companies (amended by Act No. 6427 of Mar. 28, 2001).

[3] In the event of a merger with a company, the rights and obligations of the merged company shall be succeeded to the company surviving the merger regardless of the relation under private law or public law, but the transfer of the company shall be excluded from the object of succession. Thus, the punishment of the corporation under the joint penal provisions differs from the administrative or civil tort liability as a kind of punishment, and the punishment of the corporation differs from the administrative or civil tort liability. Article 328 of the Criminal Procedure Act provides "when a corporate defendant ceases to exist" as the ground of dismissal decision can be seen as the premise that criminal liability is not succeeded to. In light of the above, the criminal liability of the corporation extinguished by the merger is not permitted by the joint penal provisions for the unlawful act of its employees, and it shall not be succeeded to the corporation surviving the merger.

[1] Article 20 (1) 2 of the former Act on External Audit of Stock Companies (amended by Act No. 6427 of March 28, 2001) / [2] Article 20 (1) 2 of the former Act on External Audit of Stock Companies (amended by Act No. 6427 of March 28, 2001) / [3] Article 21 of the former Act on External Audit of Stock Companies (amended by Act No. 6427 of March 28, 2001), Article 328 of the Criminal Procedure Act, Article 37 (1) 3 of the Certified Public Accountant Act

[1] Constitutional Court en banc Order 2002Hun-Ga20, 21 Decided January 29, 2004 (Hun-Gong89, 211) / [3] Supreme Court Decision 2002Du1946 Decided July 8, 2004 (Gong2004Ha, 1342)

Defendant 1 and one other

Defendant 1 and Prosecutor

Law Firm Sejong, Attorneys Kim Yong-ho et al.

Seoul Central District Court Decision 2004No1987 Decided May 25, 2005

All appeals are dismissed.

1. Defendant 1’s grounds of appeal are examined.

A. As to grounds of appeal Nos. 1 and 2

Article 20(1)2 of the former Act on External Audit of Stock Companies (amended by Act No. 6427 of Mar. 28, 2001; hereinafter the same applies) refers to the case where an external auditor, who is an actor, knows that his/her perception is inconsistent with the contents of an audit report while expressing the perception or result of judgment on the facts he/she audited in the audit report (see, e.g., Constitutional Court Order 2002Hun-Ga20, Jan. 29, 2004).

However, in cases where an external auditor asserts that he/she was unaware of the fact that he/she was false even if not, he/she is in conformity with the truth, the falsity of the statement and the intention of the false statement must be proved by the method of proving indirect facts having considerable relevance to the nature of the things given the nature of the things. In such a case, what constitutes an indirect fact having considerable relevance should be determined by the method of reasonably determining the link of facts by using the detailed observation or analysis power based on the normal rule of experience.

According to the reasoning of the judgment below, if the above facts were found to have been stated in the financial statements as stated in its reasoning, and such facts were not recorded in the 198 financial statements as stated above, and as stated in the 198 financial statements or the 198-year financial statements so that the total audit balance of the 198-year financial statements could have been stated in the 198-year financial statements or as stated in the 198-year financial statements, and as stated in the 198-year financial statements or as stated in the 9-year financial statements, it is clear that the 1,796 billion won of the balance of the assets under construction as stated in the 9-year financial statements or as stated in the 9-year financial statements were recorded in the 198-year financial statements or as stated in the 198-year financial statements or as stated in the 9-year financial statements, and that there was an error in the 9-year financial statements or 5.7 billion won amount of the 9-year financial statements.

In light of the above legal principles and records, all of the above judgment of the court below and the selection of evidence that passed the above process are justified, and there is no error of law such as violation of the rules of evidence, incomplete hearing, or misapprehension of legal principles as to false statements in audit report, as alleged in

B. Ground of appeal No. 3

If an external auditor who conducts an accounting audit of the financial statements of a corporation recognizes that such distortions would distort the balance of the balance sheet in the relevant year due to the window dressing accounting of the previous fiscal year, it is reasonable to deem that such distortions should be properly pointed out in the audit report of the relevant year and reflected in the statement of opinion. Therefore, without taking such a measure, stating only “personal opinion” in the audit report constitutes a false statement.

The judgment of the court below to the same purport is just, and contrary to the allegations in the grounds of appeal, there is no error of law by misapprehending the legal principles as to the elements of a crime under Article 20 (1) 2 of the former Act

2. Prosecutor's grounds of appeal are examined.

In the case of a corporate merger, the rights and obligations of the merged company shall be succeeded to all the surviving company due to the merger, regardless of the relation under private law or public law, but the transfer is not permitted due to its nature (see Supreme Court Decision 2002Du1946, Jul. 8, 2004, etc.). The punishment of the merged company under the joint penal provisions differs from the administrative or civil liability, which is a kind of punishment, and it is different from the civil liability. Article 328 of the Criminal Procedure Act provides the "where a corporate defendant does not continue to exist" as the ground for the dismissal decision is based on the premise that criminal liability is not succeeded to. In light of the above, it is reasonable to view that the criminal liability of the extinguished corporation according to the joint penal provisions for the unlawful act of his employees, etc. is not permitted by its nature, and it is not succeeded to the surviving corporation due to the merger.

The court below maintained the first instance judgment which acquitted Defendant 1 on the ground that Defendant 1’s certified public accountants belonging to Nonindicted 1 accounting firm, who conduct an accounting audit on the financial statements of 1998 fiscal year from February 12, 199 to March 2 of the same year, and that Nonindicted 1’s merger with Defendant 2 accounting firm on May 10, 199. The court below affirmed the first instance judgment which acquitted Defendant 1 on the ground that Defendant 1 was not liable for any violation of the former Act on External Audit of Stock Companies, which was committed in the course of the above accounting audit. Such judgment of the court below is just in accordance with the above legal principles, and there is no error of law by misapprehending the legal principles on joint penal provisions and merger of corporations, contrary to what is alleged in the grounds of appeal.

3. Conclusion

Therefore, all of Defendant 1’s appeals and prosecutor’s appeals against Defendant 2 accounting firm are dismissed. It is so decided as per Disposition by the assent of all participating Justices on the bench.

Justices Kim Hwang-sik (Presiding Justice)