[At a Crossroads] Osstem Implant Criticized Competitors' Accounting Practices... But Its Own Accounting System Is Flawed①

[Asia Economy Reporter Hyungsoo Park] Ostem Implant, the nation's top implant manufacturer, is facing difficulties due to a large-scale embezzlement scandal. The Korea Exchange is reviewing whether to subject the company to a delisting review, and it is uncertain whether an audit opinion can be obtained. Doubts are growing in the implant industry about whether it is possible for an individual’s deviation at Ostem Implant, which had previously criticized competitors' accounting methods, to embezzle funds amounting to 188 billion KRW.

According to the Korea Exchange on the 5th, a decision will be made by the 24th on whether Ostem Implant will be subject to a delisting review in connection with the embezzlement and breach of trust allegations. If subject to the review, the Korea Exchange will proceed with deliberations and resolutions by the Ostem Implant Corporate Review Committee. If not subject to the review, stock trading will resume.

The financial investment industry believes that the possibility of Ostem Implant being delisted from the domestic stock market is low, but it expects that a considerable amount of time will be needed before stock trading resumes.

Given the embezzlement scale, which amounts to 91.8% of Ostem Implant’s equity capital, it seems difficult to finalize the loss amount by the audit report submission deadline, and it is also not easy to assess the adequacy of the internal accounting control system. Ostem Implant explained that the embezzlement was carried out solely by a fund management employee. Since this can be interpreted as indicating problems in the internal control system, Induk Accounting Corporation, which is conducting the audit, will have to scrutinize the internal accounting control system strictly. If an audit opinion is refused, the suspension period of Ostem Implant’s trading will be extended.

In October 2016, Ostem Implant inquired with the Financial Supervisory Service about the legality of the accounting treatment of its competitor Dentium. Subsequently, it requested an audit from the Korean Institute of Certified Public Accountants, which concluded that Dentium was at fault. Ostem Implant also raised accounting treatment controversies regarding another competitor, Dio. Ostem Implant, which had been sensitive to accounting treatments, commissioned Samil Accounting Corporation in 2019 to establish an internal accounting control system.

An analyst who was in charge of analyzing Ostem Implant at a domestic securities firm research center in the past also experienced difficulties estimating Ostem Implant’s performance. Ostem Implant recorded sales of 118.6 billion KRW in the fourth quarter of 2018, achieving the highest quarterly sales ever. However, operating profit was only 300 million KRW, falling short of the market expectation of 9.2 billion KRW. The discrepancy was caused by an increase in overseas subsidiary return provisions and additional return provisions set due to changes in accounting standards (IFRS 15).

In the second quarter of 2019, Ostem Implant again set a record for quarterly sales, but operating profit was about 40% below market expectations. At that time, an analyst lowered the target price for Ostem Implant, calling it a "habitual earnings shock starting again."

Looking at this series of events, it is a situation where criticism could arise that Ostem Implant was strict about competitors’ accounting methods but lenient about its own internal controls.

This content was produced with the assistance of AI translation services.