Accounting firms face expensive lawsuits

This is the sixth in a series highlighting industry leaders who struggle to deal with their flaws or mistakes. ― ED.

Deloitte Anjin, Samjong KPMG may suffer big losses

By Kim Tae-gyu

Until now, Korean corporations have been able to sign a contract with any accounting firm available for their audits but soon that might not be possible.

Early this month, the Korean Institute of Certified Public Accountants (KICPA) held a meeting with journalists to discuss how to grapple with the continued concerns of accounting fraud.

KICPA Chairman Choi Joong-kyung led the talks on introducing a new system of designating a certain accounting outfit for listed companies to prevent them from rigging the books.

“Our companies have yet to benchmark U.S. accounting firms, which are advanced and highly specialized. In this climate, there seems to lurk a conflict of interest in our policy of letting corporations select whatever accounting firms they want,” said Choi, a former industrial minister.

“Financial regulators, the accounting profession and the academy have formed a task force to delve into the problem. We will come up with a revision of related laws later this year with the aim of changing accounting rules next year.”

Many alternative approaches were raised such as designating a certain accounting firm for listed enterprises once every five or six years or having them audited by multiple accounting firms and agencies.

“Our accounting transparency seems to be very bad by global standards, which is attributable to the system of allowing our companies to ink contracts with whatever accounting firms they want,” he said.

“That is why the government is missing this golden time to reconstruct problematic companies and fails to provide financial support to promising ones.”

According to a recent survey of the IMD business school located in Switzerland, Korea ranked 60 out of 61 countries in terms of accounting transparency.

The Chairman of the Korean Accounting Association, Sohn Sung-kyu, also a professor at Yonsei University, concurred.

“The financial audit can be regarded as kind of a public good, which is necessary for many unspecified people. There are conflicts of interests when a company chooses an accounting firm for itself while the results are for various stakeholders,” he said.

Recent accounting fraud

They did not specify why they talked about such a new format but participants knew what enterprises they had in mind ― Daewoo Shipbuilding and Marine Engineering (DSME) and STX Offshore and Shipbuilding.

Deloitte Anjin created a controversy over its alleged incompetent audit of DSME ― the shipbuilder has been blamed for doctoring the books to make immense losses in recent years look smaller.

Deloitte Anjin has been accused of having turned a blind eye to rigging the accounting of DSME ― the total amount is estimated to be more than 5 trillion won between 2012 and 2014.

Watchers point out that the firm, which has been responsible for auditing DSME’s financial statements since 2010, partially admitted its mishaps of late by confessing that up to 2 trillion won among DSME’s 5.5 trillion won in operating losses in 2015 should have been recognized in 2013 and 2014.

DSME announced that it chalked up 424.2 billion won in operating income in 2013 and 454.3 billion won the following year while its competitors were stuck in the red at the time due to the lingering slump of the industry.

If the 2 trillion won loss at issue had been reflected for the two years, the shipbuilder would have recorded big losses of more than 700 billion won during those respective years.

The Financial Supervisory Service is now investigating the case to check whether Deloitte Anjin accountants teamed up with DSME financial officials to mislead investors.

Regardless of the probes, investors already took DSME and Deloitte Anjin to court.

The National Pension Service said this July that it had filed a 48.9 billion won suit for damage against the two outfits and a few groups of individual investors also lodged similar suits against them.

As the combined amount of damage suits is estimated to be higher than 100 billion won, some doubt whether DSME and Deloitte Anjin have the financial leeway to pay back the money in case they lose.

STX Offshore, once the world’s fourth-largest shipbuilder, is no better as it has been suspected of concealing 2 trillion won in losses through inflating its revenues and profits between 2007 and 2014.

Samjong KPMG was in charge of reviewing the STX books but failed to find the irregularities, which also prompted shareholders to make complaints to the court.

The two cases angered not only investors but also ordinary people because a lot of taxpayer money was funneled to revive them ― 4.2 trillion won to DSME and 6 trillion won to STX Offshore.

Despite such efforts, STX Offshore eventually filed for bankruptcy this year and DSME struggled to find its feet.

“Deloitte Anjin and Samjong KPMG are supposed to be watchdogs, which requires them to keep an eye on companies to monitor if they make any wrongdoing in their financial statements,” said an accountant in Seoul.

“However, the watchdogs did not bark when they should have possibly because they got so much money for their services. That is why people are so angry.”

How to prevent recurrence

Experts present different opinions on how to prevent the recurrence of similar misconduct.

“Accountants review whatever a specific company provides. Even if we ask for back-up data, we cannot pinpoint frauds should the company manipulate the source data,” said a senior accountant in one of the major domestic accounting agencies. “Accordingly, the company should change first, not the accounting firm.”

By contrast, a professor at a university in Seoul was critical that the government only gives a slap on the wrist to those who cook the books.

“In foreign countries, accounting fraud is regarded as a serious crime. That’s why those who are responsible for the Enron debacle are still behind bars. But we are so lenient with it here. Without changing, foul play will continue,” he said.

“In addition, companies are permitted to select accounting firms with few limits and I believe this leads to cozy relations between companies and accounting firms. The system should be overhauled immediately.”