'Embezzlement and Breach of Trust' Hotbeds HealthP and HealthDoc, Delisting Woes... Korea Discount with Reason

[Asia Economy Reporter Lee Seon-ae] Just 44 days after the largest embezzlement case in the history of the domestic stock market (Ostem Implant) occurred at the beginning of the year, another embezzlement case (Gyeyang Electric) has emerged. As the stock market suffers from risks such as embezzlement and breach of trust from the start of the year, market confidence has been severely damaged, causing investor sentiment to freeze solid. This fear of delisting is leading to a Korea discount (domestic stock market undervaluation). Amid various adverse factors such as inflation, interest rate hikes, tightening measures, and concerns over Russia's invasion of Ukraine shaking global stock markets, the decline in the KOSPI and KOSDAQ indices is largely attributed to these issues.

According to the Korea Exchange on the 17th, about 40 domestic listed companies are currently under delisting review this year. On this day, the decision on whether Ostem Implant will be subject to a delisting suitability review will be made. The Exchange is expected to conclude that Ostem Implant will be subject to a delisting suitability review.

In the case of Gyeyang Electric, whose trading has been suspended since the 16th due to the discovery that a finance team employee embezzled 24.5 billion KRW, accounting for 12.7% of the company's equity capital (192.6 billion KRW), the decision on whether it will be subject to review is expected around the 10th of next month.

Other companies such as Gyeongnam Pharmaceutical Healthcare, Skin&Skin, Chamzon Global, and Huons Global are also under review. Most of these companies have been suspended from trading due to involvement in embezzlement, breach of trust, and stock price manipulation cases. Gyeongnam Pharmaceutical Healthcare had its trading suspended in April last year after management was implicated in embezzlement and breach of trust amounting to 1.36 billion KRW. Skin&Skin also faces delisting after key executives were found to have embezzled 15 billion KRW. Barun Electronics has been under trading suspension for years due to delisting suitability review triggered by stock price manipulation and embezzlement/breach of trust allegations involving management prior to 2018.

Since the mandatory implementation of internal accounting audits in 2019, the frequency of embezzlement and breach of trust cases has generally declined, but this year's record-breaking embezzlement case has once again put the lax internal accounting systems of listed companies and the financial authorities' supervision under scrutiny.

According to the Korea Capital Market Institute, the frequency of embezzlement and breach of trust cases has decreased overall since the mandatory internal accounting audits began in 2019. Cases dropped from 93 in 2019 to 79 in 2020, a 15.1% decrease, and further declined to 55 in 2021, a 30.4% reduction. The enhancement of certification levels for internal accounting control systems has indeed contributed substantially to raising internal control standards and preventing fraud. However, voices are calling for more thorough and supplementary measures to better protect individual investors. To this end, it is argued that the motivation for violations must be fundamentally suppressed and post-regulation of unfair practices strengthened.

The Korea Capital Market Institute emphasized, "It is necessary to increase the predictability of sentencing for embezzlement and breach of trust crimes to fundamentally suppress the motivation for violations," adding, "Especially when internal accounting control systems are rendered ineffective, supervisory responsibilities should be strictly applied to strengthen incentives for responsible parties to have a firm commitment." Currently, the basic sentencing guidelines for embezzlement and breach of trust crimes range only from 5 to 8 years, and there is a need to reconsider reasonable sentencing standards considering stock price crashes and shareholder damages caused by loss of company credibility. They further added, "Chronic unfair practices have also played a role, so stronger sanctions against unfair practices are necessary."

Strict supervision by financial authorities is also demanded. The Korea Stock Investors Association urged, "As anxiety is growing in the stock market, we hope that financial authorities and the Exchange will establish a strict management and supervision system to prevent recurrence of such incidents."

Meanwhile, over the past five years (2017?2021), 152 companies have been delisted, of which 45 companies (29.6%) were delisted due to settlement-related reasons. Among settlement-related delisting causes, 'adverse audit opinions' accounted for the largest share with 39 companies (86.7%), followed by 'failure to submit business reports' with 4 companies (8.9%). The Exchange emphasized, "We plan to establish a cooperative system with external auditors regarding audit report submissions to induce prompt disclosure of audit reports and take timely market actions against companies with adverse audit opinions."

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