Why KT&G Was Cleared of Trisacti Accounting Fraud Allegations

Financial Authorities Conclude "Accounting Errors Correct but No Intentional Misconduct"... Avoiding Negative Factors Such as Possible Prosecutor Investigation

[Asia Economy Reporter Park Ji-hwan] The financial authorities' decision not to impose severe penalties on KT&G for violating accounting standards related to the Indonesian tobacco company Trisakti, which KT&G acquired in 2011, stems from the judgment that although there were accounting errors, there was no 'intentionality,' a crucial criterion for fraudulent accounting. As a result, KT&G has avoided situations such as prosecution notification, indictment, trading suspension by the Korea Exchange, and review for delisting eligibility.

According to the financial authorities on the 16th, the Securities and Futures Commission under the Financial Services Commission held a regular meeting the previous day and concluded that KT&G's violations of accounting standards were due to 'gross negligence' without intent. The financial authorities classify accounting errors based on motive into intentional, gross negligence, and negligence. If intentionality is confirmed, it can lead to charges of fraudulent accounting, prosecution notification, indictment, and dismissal of executives.

A Financial Services Commission official stated, "KT&G's preparation of consolidated financial statements despite lacking effective control over Trisakti is clearly an accounting error," adding, "However, no evidence was found to specify intentional concealment, manipulation, or intent in these actions, so it was concluded that there was no intentionality."

The Securities and Futures Commission pointed out nine issues regarding KT&G, including including an affiliate without control as a consolidated subsidiary and failing to recognize provisions related to product defect compensation. In response, the commission imposed light measures such as a two-month restriction on securities issuance and a one-year designation of an auditor. Sanctions below 500 million KRW in fines do not require separate approval from the Financial Services Commission, so the sanctions were finalized at this stage.

Initially, the Financial Supervisory Service judged that KT&G's preparation of consolidated financial statements for Trisakti, despite lacking effective control, constituted intentional fraudulent accounting. KT&G acquired Renzoluk, a Singapore-based special purpose company (SPC) holding the management rights of Trisakti in 2011, owning more than 50% of Trisakti's shares. However, due to hidden agreements with existing shareholders, KT&G did not have effective control and therefore should not have prepared consolidated financial statements, according to the Financial Supervisory Service. However, in May, the Audit Committee, an accounting expert body under the Financial Services Commission, overturned the Financial Supervisory Service's original position, stating that intentionality could not be recognized in this case, and this stance was maintained by the Securities and Futures Commission.

Under current accounting standards, whether a company is a subsidiary is determined by comprehensively considering factors such as shareholding ratio and board composition. Even if shareholding is below 50%, if effective control is exercised, it can be subject to consolidated accounting; conversely, having a large shareholding does not automatically make it a subsidiary. An accounting industry official said, "The Financial Supervisory Service took issue with KT&G's view that it could exercise control despite restrictions under shareholder agreements preventing it from making significant decisions alone on the board."

As KT&G has finally shed the label of fraudulent accounting after 2 years and 8 months since the Financial Supervisory Service began its audit, the financial investment industry is issuing positive forecasts. Shim Eun-joo, a researcher at Hana Financial Investment, said, "With the Securities and Futures Commission's final conclusion of 'no intentionality,' KT&G has escaped the negative factor of potential prosecution," adding, "A positive impact on future supply and demand is expected."