'Reasoned HealthP·HealthDoc' Embezzlement and Breach of Trust Now a Monthly Event... "Strong Sanctions Needed"

Clio, LG Uplus, and Others Involved in Multi-Billion Embezzlement
Internal Control Management and Weak Sanctions of Listed Companies Under Scrutiny

A man in his 30s, Kim, an employee accused of embezzling 24.5 billion KRW of company funds over six years from KOSPI-listed company Kyeyang Electric, is leaving the Seoul Central District Court in Seocho-gu, Seoul, after completing the warrant hearing.
[Photo by Yonhap News]

[Asia Economy Reporter Lee Seon-ae] This year, incidents of embezzlement and breach of trust continue to erupt in the stock market. Market trust is being undermined, and fear of delisting is pervasive, causing investor sentiment to freeze solid. This ultimately triggers the Korea Discount (domestic market undervaluation), which uniquely prevents the Korean stock market from thriving among global stock markets. Individual investors are raising their voices, saying there is no difference between Hellspi (KOSPI + hell) and Helldak (KOSDAQ + hell).

According to the financial investment industry on the 26th, 44 days after the largest embezzlement case in domestic stock market history (221.5 billion KRW, Ostem Implant) occurred at the beginning of the year, another embezzlement case (Kyeongyang Electric) broke out, followed by LG Uplus and Clio becoming the protagonists of embezzlement cases in March.

Clio disclosed through its business report and audit report submitted on the 23rd that embezzlement had occurred. Clio stated, "An embezzlement incident involving one sales employee occurred, and a complaint has been filed against the employee, requesting an investigation." The embezzlement resulted in a loss of 2.22 billion KRW. Specifically, accounts receivable amounted to 1.11709 billion KRW, inventory assets 560.7 million KRW, and compensation for client damages 597.21 million KRW.

At LG Uplus, it was also found that an internal employee fabricated false sales and embezzled tens of billions of won on the same day. Although the exact amount of damage has not yet been calculated, it is estimated to reach 3 billion KRW. LG Uplus stated, "It appears there was an internal problem during operations," adding, "The detailed situation has not yet been confirmed. Further investigation is needed."

Last month, at Kyeongyang Electric, a deputy-level employee was prosecuted for embezzling 24.5 billion KRW by manipulating financial statements over six years. As a result, the company is currently under delisting review and its trading has been suspended. Ostem Implant’s trading has also been suspended since January 3rd, and on the 30th, the Korea Exchange’s Corporate Evaluation Committee will decide whether to delist, maintain listing, or grant an improvement period.

Consequently, criticism is mounting that internal control systems of domestic listed companies are lax. According to the Korea Exchange, as of March this year, 22 companies have been designated as investment caution stocks due to internal accounting control system inadequacies. This is five more companies than those designated last year. The issue is more concentrated in KOSDAQ than KOSPI. This is also cited as the main reason for the largest decline rate in KOSDAQ among global stock markets this year. Kim Jae-eun, a researcher at NH Investment & Securities, explained, "Under the overall trend of strengthening ESG (environment, social, governance) management, embezzlement, delisting reviews, accounting fraud, insider trading allegations, exit scams, and physical division suspicions are all linked to trust issues."

Experts advise that to prevent embezzlement problems, internal control systems must be strengthened and the effectiveness of government regulations increased.

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 motives 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 firm determination." Currently, the basic sentencing guideline for embezzlement and breach of trust crimes is only 5 to 8 years, so a reasonable sentencing standard considering stock price crashes and shareholder damages due to company trust deterioration should be reexamined. They also added, "Chronic unfair practices have also played a role, so stronger sanctions against unfair practices are needed."

Strict management and supervision by financial authorities are also demanded. The Korea Stock Investors Association urged, "As anxiety is growing in the stock market, we hope that financial authorities and the exchange 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.