Hwacheon Daeyu Signs '5+α Agreement' but Omits It in Audit Report's 'Notes on Agreements'

Assemblyman Kwak Sang-do's Son 5 Billion Won
Former Executive Director A's 10 Billion Won Retirement Pay
According to 'In-House Performance Bonus Agreement'
'Notes on Agreement Items' Must Be Recorded
Intentional Omission May Indicate Accounting Fraud
"Since the 2018 SEC Decision,
Recording Notes on Agreement Items Has Become Sensitive"

[Image source=Yonhap News]

[Asia Economy Reporter Koo Chae-eun] It has been identified that Hwacheon Daeyu signed an agreement to pay its executives and employees "5 billion KRW (basic retirement pay) + a (performance bonus)" upon retirement but failed to disclose this in the audit report. Depending on whether this was intentional or accidental, it could constitute either accounting fraud or simple accounting irregularities, but in any case, since it violates regulations, punishment or other measures seem inevitable.

According to a comprehensive report by Asia Economy on the 29th, the 5 billion KRW performance bonus received by Gwak Byeong-chae, son of Assemblyman Gwak Sang-do, and the 10 billion KRW received by Mr. A, who served as an executive director at Hwacheon Daeyu, were based on an agreement made by Hwacheon Daeyu in June of last year. Hwacheon Daeyu explained in a phone call with this outlet, "We made an internal performance bonus agreement of '5 billion + a' with employees, and the 'plus alpha' is individually determined," adding, "(The 5 billion and 10 billion) were payments made accordingly." This means that Hwacheon Daeyu earned huge profits through development projects, and as the profits became visible in 2020, they distributed the profits according to the internal performance bonus agreement.

The problem is that such agreement contracts were not disclosed in the audit report. Asia Economy checked the '2020 Hwacheon Daeyu Consolidated Audit Report' submitted to the Financial Supervisory Service's electronic disclosure system on April 22 of this year. Although Byeong-chae stated that the contract was changed from 5 billion KRW in June 2020 to 5 billion KRW in March this year, both contract details were omitted from the audit report. As a result, 15 billion KRW in retirement performance bonuses for Byeong-chae and Mr. A were omitted from the accounting records. When including the amount to be received by the daughter of former special prosecutor Park Young-soo, whose retirement procedures are currently underway, and the shares of the remaining 11 employees, the omitted amount could increase to several tens of billions of KRW.

According to accounting standards, if there is an 'agreement' related to retirement pay or performance bonuses, it is considered a 'future expected expenditure' and must be recorded as a provision liability and disclosed in the audit report. Since 2019, the Financial Supervisory Service has highlighted 'note disclosure of provision liabilities and agreements' as one of the four major accounting issues and has been focusing on inspections. Experts suggest that it is difficult to believe there was no specific intent in omitting an expected expenditure item that could significantly increase beyond the 5 billion KRW plus 'plus alpha.'

An accountant who requested anonymity said, "Generally, unlisted corporations are thought not to be subject to such principles, but if it is an external audit corporation, the agreement content, which is a provision liability under accounting standards, must be disclosed," adding, "This is an issue that should be clarified through investigation or audit, and note disclosure of agreements has been a major issue in the accounting industry since the 2018 Securities and Futures Commission ruling. It is questionable whether this can be seen as a simple mistake." Asia Economy requested an explanation from Hwacheon Daeyu regarding these accounting fraud allegations but did not receive a response from the company.