Korean Corporate Governance Forum’s Opinion
Recognition of Samsung Biologics’ retroactive and fabricated accounting underscores the urgent need for systematic reform and strict law enforcement to enhance accounting transparency.
- Samsung Biologics was found guilty of accounting fraud for retroactively manipulating its 2015 financials to conceal its capital impairment.
- Accounting transparency is the foundation of trust in capital markets and the national economy. Any purpose intended to undermine accounting treatment based on objective facts should not be tolerated.
- The designated audit system introduced in 2018 is the minimum line of defense against such accounting fraud. Any attempt to dismantle this system would be a serious setback. Rather, we should consider a system for greater accounting transparency along with more stringent enforcement of accounting-related laws.
On August 14, the Seoul Administrative Court upheld a fine imposed by the Securities and Futures Commission in 2018 on Samsung Bioepis (hereinafter “Bioepis”), a subsidiary of Samsung Biologics (hereinafter “Biologics”), for accounting irregularities in 2012-2018.
While much of the media focused on the reversal of the fine, the court's explanatory materials state that the key finding was not that Biologic's accounting practices were proper.
The key point is that Biologics' accounting treatment of Bioepis in 2015 constituted accounting fraud.
However, the cancellation of the Securities and Futures Commission's disposition is intended to cancel the entire amount and require a reassessment of the penalty, as other unrelated issues that were determined not to be accounting fraud were included.
The specifics of the court's decision are deeply disturbing.
The court found that Biologics' decision in 2015 to revise its accounting for Bioepis, leading to a substantial valuation gain of W2.7232 trillion and a reversal of its capital impairment, constituted accounting fraud. This was because the company was found to have deliberately manipulated the accounting to achieve a specific, predetermined outcome, rather than to accurately reflect the underlying economic reality.
In short, the company’s accounting was retroactively adjusted to fit a desired outcome.
The year 2015 marked the beginning of substantial improvements in Korea's accounting fraud prevention efforts. The discovery of a W5 trillion accounting fraud at Daewoo Shipbuilding & Marine Engineering in July of that year, followed by the introduction of the designated audit system in 2018, signaled a significant shift in the country's approach to combating accounting irregularities.
It is deeply troubling that they would engage in such blatant manipulation of their financial records at that time.
This judgment serves as a stark reminder that the external audit system in place before 2018 was fundamentally flawed and failed to deter companies from engaging in accounting fraud.
It is perplexing that the board of directors and audit committee of Biologics, entrusted with the fiduciary duty of acting in the best interests of shareholders, would have permitted such aggressive accounting manipulations in the critical pre-IPO period. The absence of any public records demonstrating their oversight raises serious questions about their competence and diligence.
While there have been recent proposals to repeal the designated auditor system citing cost concerns, we strongly believe that this would be a grave mistake. Accounting transparency is the cornerstone of our market economy and capital markets, and its significance cannot be overstated.
The independence of Korean accounting firms, which has been strengthened through the designated auditor system, and the resulting enhancement of the accounting credibility of Korean companies should not be jeopardized. We must continue to pursue a robust regulatory framework to maintain high standards of accounting transparency.
Although the court has linked these incidents to the Samsung C&T merger and financial statement manipulation, it is crucial to recognize that the type of accounting fraud seen in the 2015 Biologics case can happen independently of any succession plans or efforts to inflate merger ratios. Such fraud is often motivated by a simple desire to hide a company's underlying financial problems.
However, accounting issues should be resolved on the basis of objective evidence and by strictly following accounting standards.
Administrative Court’s decision also emphasizes this point.
The primary reason for concluding that accounting fraud occurred is that “Biologics made the decision to apply the loss of control accounting treatment and only subsequently attempted to find facts to support this decision.” This sequence of events is a clear indication of fraudulent intent.
Companies are tempted to commit accounting fraud for a variety of reasons.
A tight system and strict supervision are needed, and further, the independence and responsibility of the Board of Directors should be strengthened.
This is a lesson from the Sarbanes-Oxley Act, which was enacted and implemented rapidly after the Enron accounting scandal in 2001 and greatly increased the accounting transparency of US companies.
Enron, once revered as a symbol of American corporate innovation, met a catastrophic end due to a massive accounting scandal orchestrated by its top executives. The scandal led to the company's bankruptcy and the dissolution of its auditor, Arthur Andersen. Shareholders lost everything, and over 20,000 employees were left jobless and without their pensions, serving as a stark reminder of the devastating consequences of corporate fraud.
2024. 8. 17.
Korean Corporate Governance Forum
Chairman, Namuh Rhee
Vice Chairman, Joonbum Cheon
Korean Corporate Governance Forum’s Opinion
Recognition of Samsung Biologics’ retroactive and fabricated accounting underscores the urgent need for systematic reform and strict law enforcement to enhance accounting transparency.
- Samsung Biologics was found guilty of accounting fraud for retroactively manipulating its 2015 financials to conceal its capital impairment.
- Accounting transparency is the foundation of trust in capital markets and the national economy. Any purpose intended to undermine accounting treatment based on objective facts should not be tolerated.
- The designated audit system introduced in 2018 is the minimum line of defense against such accounting fraud. Any attempt to dismantle this system would be a serious setback. Rather, we should consider a system for greater accounting transparency along with more stringent enforcement of accounting-related laws.
On August 14, the Seoul Administrative Court upheld a fine imposed by the Securities and Futures Commission in 2018 on Samsung Bioepis (hereinafter “Bioepis”), a subsidiary of Samsung Biologics (hereinafter “Biologics”), for accounting irregularities in 2012-2018.
While much of the media focused on the reversal of the fine, the court's explanatory materials state that the key finding was not that Biologic's accounting practices were proper.
The key point is that Biologics' accounting treatment of Bioepis in 2015 constituted accounting fraud.
However, the cancellation of the Securities and Futures Commission's disposition is intended to cancel the entire amount and require a reassessment of the penalty, as other unrelated issues that were determined not to be accounting fraud were included.
The specifics of the court's decision are deeply disturbing.
The court found that Biologics' decision in 2015 to revise its accounting for Bioepis, leading to a substantial valuation gain of W2.7232 trillion and a reversal of its capital impairment, constituted accounting fraud. This was because the company was found to have deliberately manipulated the accounting to achieve a specific, predetermined outcome, rather than to accurately reflect the underlying economic reality.
In short, the company’s accounting was retroactively adjusted to fit a desired outcome.
The year 2015 marked the beginning of substantial improvements in Korea's accounting fraud prevention efforts. The discovery of a W5 trillion accounting fraud at Daewoo Shipbuilding & Marine Engineering in July of that year, followed by the introduction of the designated audit system in 2018, signaled a significant shift in the country's approach to combating accounting irregularities.
It is deeply troubling that they would engage in such blatant manipulation of their financial records at that time.
This judgment serves as a stark reminder that the external audit system in place before 2018 was fundamentally flawed and failed to deter companies from engaging in accounting fraud.
It is perplexing that the board of directors and audit committee of Biologics, entrusted with the fiduciary duty of acting in the best interests of shareholders, would have permitted such aggressive accounting manipulations in the critical pre-IPO period. The absence of any public records demonstrating their oversight raises serious questions about their competence and diligence.
While there have been recent proposals to repeal the designated auditor system citing cost concerns, we strongly believe that this would be a grave mistake. Accounting transparency is the cornerstone of our market economy and capital markets, and its significance cannot be overstated.
The independence of Korean accounting firms, which has been strengthened through the designated auditor system, and the resulting enhancement of the accounting credibility of Korean companies should not be jeopardized. We must continue to pursue a robust regulatory framework to maintain high standards of accounting transparency.
Although the court has linked these incidents to the Samsung C&T merger and financial statement manipulation, it is crucial to recognize that the type of accounting fraud seen in the 2015 Biologics case can happen independently of any succession plans or efforts to inflate merger ratios. Such fraud is often motivated by a simple desire to hide a company's underlying financial problems.
However, accounting issues should be resolved on the basis of objective evidence and by strictly following accounting standards.
Administrative Court’s decision also emphasizes this point.
The primary reason for concluding that accounting fraud occurred is that “Biologics made the decision to apply the loss of control accounting treatment and only subsequently attempted to find facts to support this decision.” This sequence of events is a clear indication of fraudulent intent.
Companies are tempted to commit accounting fraud for a variety of reasons.
A tight system and strict supervision are needed, and further, the independence and responsibility of the Board of Directors should be strengthened.
This is a lesson from the Sarbanes-Oxley Act, which was enacted and implemented rapidly after the Enron accounting scandal in 2001 and greatly increased the accounting transparency of US companies.
Enron, once revered as a symbol of American corporate innovation, met a catastrophic end due to a massive accounting scandal orchestrated by its top executives. The scandal led to the company's bankruptcy and the dissolution of its auditor, Arthur Andersen. Shareholders lost everything, and over 20,000 employees were left jobless and without their pensions, serving as a stark reminder of the devastating consequences of corporate fraud.
2024. 8. 17.
Korean Corporate Governance Forum
Chairman, Namuh Rhee
Vice Chairman, Joonbum Cheon