[At a Crossroads: Listed Companies] Ostem Implant Board Faces Growing Accountability Debate Over Internal Control Failures③

[Asia Economy Reporter Park So-yeon] The responsibility of the board of directors, including the CEO, is emerging in the large-scale embezzlement case at Osstem Implant. The question is how a single manager-level employee was able to bypass the accounting audit system and embezzle a huge amount close to 190 billion KRW. Although the company draws a line by calling it a personal misconduct case of the manager-level employee, the prevailing view is that it is difficult to see it as a solo crime. If lawsuits arise from this incident in the future, voices are emerging that not only the CEO but also inside and outside directors will find it difficult to avoid responsibility for neglecting compliance monitoring duties.

According to Osstem Implant’s 25th quarterly report on the 5th, the company has board members including CEO Eom Tae-gwan (inside director), Hong Seong-jo, head of production (inside director), Kang Du-won, head of sales (inside director), Shin Jeong-wook, outside director (professor at Inje University Department of Biomedical Engineering), and Jeong Jun-seok, outside director (vice chairman of EY Han Young Accounting Corporation). In the case of director Jeong Jun-seok, he is currently vice chairman of EY Han Young and formerly served as the elected vice chairman of the Korea Institute of Certified Public Accountants. This raises criticism that despite having the country’s top accounting experts on the board, internal accounting controls were not properly implemented.

Recently, courts have been expanding responsibility for internal control failures not only to the CEO but also to board members, raising the issue of responsibility for inside and outside directors as well. There is a trend of increasing the board’s compliance monitoring duties, with rulings stating that if the board neglects compliance monitoring duties, it must compensate shareholders.

The Seoul High Court Civil Division 18 (Presiding Judge Jeong Jun-young) recently ruled partially in favor of plaintiffs in a shareholder derivative suit filed by the Economic Reform Solidarity and Daewoo Construction shareholders against former Daewoo Construction CEO Seo Jong-wook and 10 inside and outside directors for breach of monitoring duties related to bid rigging in the Four Major Rivers project. The court ordered former CEO Seo to pay 395 million KRW and the other directors to pay between 46.5 million KRW and 102 million KRW.

The court held that directors of a stock company, as members of the board, have the duty not only to express approval or disapproval of proposals submitted to the board but also to monitor the execution of duties by the CEO and other directors comprehensively. If there is reason to suspect that the CEO or other directors’ execution of duties is illegal, and the directors intentionally or negligently violate their monitoring duties and neglect them, they are liable to compensate for damages incurred by the company. Even if directors were not involved in individual tasks or did not receive reports and thus did not know about the incident, they violated monitoring duties by failing to establish and ensure the proper operation of an internal control system.

Despite these recent precedents and critical public opinion, the company maintains that it was an individual’s solo crime and that there was no problem with the company’s control system operation. A company official said, “There was no problem with the operation of the control system, but it has been identified so far that the crime was committed by manually adjusting the balance confirmation system.”

However, the fact that a single employee, not even an executive, was able to divert 188 billion KRW into personal bank and stock accounts without being caught by the company’s accounting monitoring system is expected to be the biggest consideration in the Korea Exchange’s decision on whether to delist the company. Even if the balance confirmation documents were forged, the fact that such a large-scale embezzlement was not detected by the internal monitoring network for a long time points to inadequacies in the internal accounting control system.

An accounting industry official said, “Even if the internal balance confirmation documents were forged, it is common practice for the financial institution handling the transactions to notify the company’s Chief Financial Officer (CFO) or CEO of large withdrawals and deposits that differ from routine cash flow,” adding, “It is not logically understandable, even considering industry practices, that no one knew about the embezzlement of funds amounting to 190 billion KRW.”

A legal industry official said, “The company and the board can avoid legal responsibility only if they claim and prove that it was an individual’s misconduct,” but added, “Given the enormous amount involved in this embezzlement case, it seems difficult to accept the claim that it was solely individual misconduct.”

Meanwhile, the actual report lists a total of seven people responsible for managing the internal accounting control system. According to Osstem Implant’s 2020 business report, those responsible for the internal accounting control system include auditor Jo Jae-du, CEO Eom Tae-gwan, internal accounting manager Song In-seop (head of finance division), accounting office head Na Yong-cheon, ERP office head Kim Tae-yong, financial strategy office head Lee Jin-jun, and audit office head Kang Ki-tae.

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