FSS Releases 10 Cases Identified in Accounting Reviews and Audits

The Financial Supervisory Service announced on the 11th that it will release 10 cases identified during accounting reviews and audits in the first half of this year, including overstatement of inventory assets and misclassification of related companies.

Among the cases cited by the Financial Supervisory Service in the first half of the year, three cases each involved investments in subsidiaries and associates, inventory assets, and tangible assets by type, while there were two cases each related to sales and cost of sales, and other assets and liabilities.

In one major case, three companies within the same group held significant influence over each other through a circular shareholding structure, but the company disclosed the investee as not being an associate.

Company A, which operates in the wholesale trade sector, formed a circular shareholding structure with Company B and Company C, both belonging to the same group. However, despite having significant influence over Company B, Company A incorrectly classified its investment in Company B as a financial asset measured at fair value through other comprehensive income (FV-OCI), and overstated its current profit and loss, according to the Financial Supervisory Service.

The Financial Supervisory Service stated, "When a company forms a circular shareholding structure with affiliates or shares management personnel, special attention must be paid to the accounting treatment of investment stock classification," adding, "If the effectiveness of voting rights restrictions is in doubt, sufficient and appropriate audit evidence must be obtained to determine whether significant influence is held."

In another case, Company D, a cosmetics retailer, identified an error in cost of sales recognition that occurred during a change in its production process, but failed to correct it and instead obstructed the external audit to conceal the error.

Company D continued to record the raw materials of products already sold as inventory assets instead of recognizing them as cost of sales, thereby overstating the net profit and equity for the year. In addition, by recognizing the cost of sales in the following year, it understated the net profit and equity for the next year. The Financial Supervisory Service also pointed out that the company improperly intervened in the external confirmation process of the external auditor, thereby obstructing a proper external audit.

The Financial Supervisory Service explained, "We will continue to regularly release major cases identified through reviews and audits to help investors identify potential risk factors and make informed decisions," adding, "We will also share these cases with companies and auditors through relevant institutions to help prevent the recurrence of similar cases."

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