Advisory Case on Reorganizing Risks and Scope of Liability in an External Audit Engagement Contract

1. The Client's Situation

While newly appointing an external auditor as a listed company, the client was presented with an external audit engagement agreement that, although structured similarly to a standard form, contained certain provisions that risked imposing excessive burdens on the company, including audit fee adjustments, obligations to provide materials, and cost responsibility upon termination. In particular, the liability provisions concerning the financial statements and the internal accounting control system were drafted broadly, raising concerns about the potential for disputes during the actual audit process. Accordingly, the client requested advice to examine the legal risks of the agreement in advance and to adjust unreasonable portions.

Your Legal Team analyzed every provision of the agreement and identified risks, focusing on portions where the client's liability could be expanded or interpreted unilaterally in favor of the auditor. In the audit fee adjustment provision (Article 8), the rule allowing "an hourly fee surcharge in the event of additional work or insufficient cooperation" was drafted excessively broadly, so we prepared a revision adding a reasonable consultation procedure. In the obligation to provide materials (Article 10) and the obligations related to component auditors (Article 11), the company's cooperation duties were set broadly, so we clarified limits on submission deadlines, scope, and third-party access. In addition, regarding the termination provision (Article 13), since termination for the company's own reasons would trigger an obligation to pay excessive fees, we proposed a negotiated arrangement allowing adjustment within a foreseeable range.

Through this advice, the client was able to eliminate in advance the excessive liability burdens and risk factors within the external audit engagement agreement, and to rationalize the contract structure so that the company's position would not be unfairly infringed during the audit process. In particular, by clarifying provisions such as audit fee adjustments, the scope of materials and working-paper provision, and termination cost responsibility, the client significantly reduced the likelihood of disputes with the auditor and secured a standard contract review benchmark that can be utilized even if the auditor changes in the future.