Subsidiary Caught Lending Concealed Funds... Financial Supervisory Service Discloses 27 Accounting Audit Findings

[Asia Economy Reporter Ji Yeon-jin] #Company A, which develops and supplies system software, concealed the fact of fictitious payment (paid-in capital increase) by loan sharks by fabricating false documents such as loan agreements to make it appear as if funds were being lent to affiliates, thereby repaying private loans and falsely recording them as loans receivable.

#Company B, a chemical product wholesaler, did not recognize unpaid corporate tax liabilities despite receiving a tax assessment notice for past unpaid corporate taxes following a National Tax Service audit, because the recognition criteria for liabilities were not met. They did not recognize the unpaid corporate tax until the related corporate tax reassessment amount was paid, citing ongoing objection procedures.

On the 29th, the Financial Supervisory Service (FSS) disclosed that among 27 cases of accounting supervision issues from 2011 to 2014, other assets and liabilities accounted for the largest number with 8 cases. There were also 4 cases related to revenue recognition such as sales and cost of sales, 4 cases involving equity and financial instruments such as affiliates and derivatives, 4 cases of omitted notes, and 7 other cases.

The FSS is building and disclosing a database of supervisory issue cases to prevent similar accounting errors as companies apply principle-based International Financial Reporting Standards (IFRS). Including the 81 cases previously disclosed, a total of 108 cases have been made public over the 10 years since IFRS implementation.

Regarding accounts receivable, Company C, which operates an online game service business, was pointed out for underestimating the allowance for doubtful accounts. Although an aging analysis of accounts receivable by numerous game users was required to set the allowance, the company received lump-sum payments from a payment agency and treated older receivables as collected first, resulting in a lower allowance calculation.

Additionally, Company D, which manufactures colorants for synthetic resins, was disclosed as a case involving equity and financial instruments because it did not recognize its investment in an affiliate (equity method) despite significant influence. This was due to each CEO serving as CEO and inside director of the investee companies and participating in board resolutions, but the equity ratio was below 20%.

There was also a case detected for failure to disclose notes. Company E, which manufactures auto parts, has a CEO (major shareholder) who is a sibling of ‘Gap’, the CEO (major shareholder) of Company G. Subsidiaries ‘H’ of Company G and ‘I’ of Company F are special related parties, but transactions during the period and year-end balances of sales and accounts receivable between ‘H’ and ‘I’ were not disclosed in the consolidated financial statement notes.

Such information can be searched in the review and supervision issue cases menu on the Financial Supervisory Service’s accounting portal.

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