Samsung Accused of Big Bath Accounting
By Kim Tae-gyu
Staff Reporter
When a corporation is destined to chalk up a loss, it's tempted to maximize the reported loss in one specific period so that its future years will appear better.
Samsung Electronics is accused of having employed this strategy _ dubbed big bath accounting _ over the fourth quarter of 2008 when it posted a record operating loss of 937 billion won. Back then, the market consensus on the loss was around 400 billion won.
It was the first quarterly operating loss of the world's top memory chipmaker since 2000, and was caused by rising marketing and management costs of 4.4 trillion won, up 1.15 trillion won from the previous quarter.
``Samsung Electronics has spent the most in marketing over the final quarter. But last year, the expenditure was too large compared to prior quarters,'' said a Seoul analyst who covers Samsung Electronics.
``This makes people suspect that Samsung wrote off certain losses aggressively. However, I don't think that the company would have used illegal methods,'' he said.
Samsung Electronics' average fourth-quarter expenditures on marketing and management went up by 442 billion won from the previous quarter, or 24.77 percent, from 2000 through 2007.
For example, the difference was 503 billion won (22.15 percent) in 2005, 477 billion won (20.12 percent) in 2006 and 463 billion won (17.7 percent) in 2007.
In comparison, the amount more than doubled for the October-December period of 2008, rising 35.2 percent from the third quarter.
``Evaluations on Samsung executives finish in late November or early December. Hence, executives don't have any incentive to make the fourth-quarter performance look good,'' a Samsung insider said.
``In my view, the personnel management schedule is one reason Samsung wrote off costs mainly in the final quarter,'' he said.
In this climate, a growing number of domestic brokerages expect Samsung to turn to positive territory in the first quarter, results of which will be released April 24.
HMC Investment Securities took the lead by expecting 25 billion won in operating profit in the first quarter. Daishin Securities projected a 49 billion won profit, while Kyobo Securities predicted Samsung would net 28 billion won.
``The marketing and management costs for Samsung are expected to be around 3.1 trillion won in the first quarter, down 1.3 trillion won from the prior quarter. Thanks to this reduction, the firm is unlikely to rack up big losses,'' HMC analyst Greg Roh said.
However, the market consensus remains in the neighborhood of 350 billion won in losses.
When contacted, Samsung Electronics flatly rebuffed the claims of big bath accounting.
``The fourth-quarter loss was due to the business, not accounting. Our marketing and management costs rose because we carried out more marketing campaigns. That's it,'' a Samsung director at the investor relations team said.
``Analysts tend to take issue with a specific firm's accounting when they fail to predict the final results correctly,'' he said.
Chu Woo-sik, former Samsung Electronics vice president and a head of its IR team, was not available for comment. Chu recently moved to Samsung Securities.
Samsung's auditor, Samil PricewaterhouseCoopers, was on the same page with the Samsung IR team director.
``If you include marketing costs for next year in this year's income statements, it's simply illegal. We don't overlook such factors in auditing. The big-bath accounting claims don't make any sense,'' a Samil executive said.