Restrictions on Earnings Inflation for SPAC-Listed Companies... Proactive Review of Business Reports

Key Inspection Items in 2023 Audit Reports
Including Post-Merger Information of SPAC-Listed Companies
Analysis and Documentation of Actual-Estimated Discrepancy Rates

The Financial Supervisory Service (FSS), which announced plans to revise the disclosure system for Special Purpose Acquisition Companies (SPACs) listed from the first quarter of this year to prevent 'inflated corporate valuations,' will proactively review the 2023 corporate audit reports.

On the 19th, the FSS stated that non-financial items, including post-merger information, will be included as key inspection points in the 2023 business reports. Non-financial items are matters that are closely examined when there are significant issues during the relevant period.

The FSS will inspect post-operational performance information in business reports of SPAC-listed companies, such as the differences between forecasted and actual operating results and the causes of these differences. It will also verify whether the deviation rates were correctly calculated according to preparation guidelines. When the deviation rate exceeds 10%, the FSS will check whether detailed analyses of the reasons and causes for each item, including sales, operating profit, and net income, have been thoroughly documented.

Generally, companies with a December fiscal year-end must submit their previous year's audit reports by April 1. However, for companies not applying Korean International Financial Reporting Standards (K-IFRS) and with total assets under 2 trillion KRW at the end of the most recent fiscal year, the submission deadline for consolidated financial statements and consolidated audit reports is extended by 30 days.

The FSS’s proactive focus on SPAC-listed companies aligns with the SPAC disclosure system improvement plan announced at the end of last year. In December, the FSS announced plans to require accounting firms to disclose their external evaluation history and details of other engagements alongside external evaluation work for SPAC-listed companies in securities registration statements starting from the first quarter of this year. It also announced improvements to the reporting format to ensure SPAC-listed companies fully disclose post-operational performance information. Additionally, within the first half of this year, the FSS plans to promote system improvements that allow relative valuation methods to complement the current absolute valuation methods, such as the discounted cash flow method.

The authorities raised concerns because SPAC-listed companies, which lack institutional demand forecasting procedures, have increasingly inflated their future operating performance. According to the FSS, among 139 companies listed via SPACs from 2010 to August 2023, the proportion of companies that fell short of sales estimates averaged 76%, and those that fell short of operating profit estimates averaged 84.1%. The average actual sales were 17.8% below estimates, and operating profits were 58.7% below estimates. For example, one bio company projected sales of 143 billion KRW while developing a treatment for a specific disease but failed to generate any sales even one year after the expected sales start date. During this process, sponsors such as securities firms and external evaluators like accounting firms were criticized for failing to fulfill their monitoring roles.

However, the lack of direct enforcement authority limits the FSS’s ability to impose mandatory measures. The FSS plans to use the inspection of submitted previous year business reports to select companies with serious misstatements for financial statement reviews and strengthen disclosure examinations. An FSS official explained, "We announced improvements to the SPAC disclosure system, but since there may be deficiencies in form preparation, we are conducting this as a preliminary inspection. Because we cannot take direct punitive actions, if deficiencies are found, we will continue to request corrections from the companies."

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