Financial Supervisory Service Discloses 15 Audit Findings from Last Year

Avoiding Designation as a Management Item by Inflating Sales Through Overseas Paper Companies

[Asia Economy Reporter Ji Yeon-jin] The Financial Supervisory Service disclosed 15 cases of audit findings last year to prevent accounting errors similar to the application of International Financial Reporting Standards (IFRS) by companies.

The most frequent findings were related to sales and cost of sales, with 4 cases including overstatement of sales and errors in revenue recognition standards, followed by 3 cases of failure to recognize impairment losses on investment stocks in subsidiaries and affiliates, 3 cases of overstatement of assets such as tangible assets, 2 cases of overstatement or understatement of derivative assets and liabilities, and 3 other findings.

In the case of Company A, to avoid being designated as a management item due to continuous operating losses, they recorded false sales and cost of sales by processing long-held inventory as if sold to overseas paper companies in the inventory ledger and preparing false transaction statements. Company B, engaged in outsourced processing transactions where raw materials are supplied by the ordering party and does not bear inventory (raw material) risk, overstated sales and cost of sales by recording amounts related to raw material purchases and finished goods delivery on a gross basis rather than a net basis.

Company C did not recognize impairment losses despite the net assets of its subsidiary decreasing to about one-third of the book value of investment stocks due to operating losses and restructuring, although it had been accounted for using the cost method. Company D, which accounted for investment stocks in affiliates using the equity method, did not verify the reliability of provisional financial statements that did not reflect loss amounts and failed to recognize impairment losses.

Additionally, the CEO (major shareholder) of Company E embezzled company funds by spending money through false construction service contracts with a nominee company, and the company recorded these as tangible assets, Company F separated convertible bonds with warrants into embedded derivatives and host contracts and should have measured the embedded derivatives at fair value, but classified the entire amount as available-for-sale financial assets, measured at acquisition cost, thereby understating derivative assets. Company G was caught for failing to recognize derivative liabilities by granting conditional put options to investors of convertible bonds of its subsidiary.

The Financial Supervisory Service plans to disclose a database of audit findings from 2011 to 2014, the first full year of IFRS implementation, in the second half of this year, and annually announce major recent audit findings on a regular basis.

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