[Exclusive] Financial Authorities Consider Launching Accounting Audit on Hwacheon Daeyu

Hwacheon Daeyu 5 Billion Retirement Pay and
‘Juseok Agreement’ Omission Accounting Fraud Suspicion
FSS, “Depending on Investigation Results,
Will Consult with FSC and KICPA on Whether to Start Accounting Inspection”

[Image source=Yonhap News]

[Asia Economy Reporter Koo Chae-eun] The Financial Supervisory Service (FSS) announced on the 5th that it plans to discuss initiating an accounting audit regarding Hwacheon Daeyu's failure to record in its accounting books the performance bonus worth 5 billion KRW given to Gwak Byeong-chae, son of lawmaker Gwak Sang-do, despite the criticism from this publication that such action was wrong.

On the same day, the FSS stated in a written response submitted to Yoon Chang-hyun of the People Power Party concerning allegations of accounting fraud by Hwacheon Daeyu, "We will consult with the Financial Services Commission and the Korean Institute of Certified Public Accountants on whether to start an accounting audit." Additionally, the FSS mentioned, "After initiating the audit, it is also possible to request submission of materials to verify the performance bonus agreement."

According to the FSS's response, Hwacheon Daeyu Asset Management Company is an unlisted company and is subject to audit oversight by the Korean Institute of Certified Public Accountants under Article 44, Paragraph 4 of the Enforcement Decree of the External Audit Act. To proceed with the audit, consultation with the Financial Services Commission and certified public accountants is necessary. Hwacheon Daeyu had signed an agreement with its executives and employees to pay "5 billion KRW (basic retirement pay) + a (performance bonus)" upon retirement but failed to disclose this in its audit report, raising suspicions of accounting fraud (reported by this publication on the 29th). Including the retirement pay of Byeong-chae and former executive director A of Hwacheon Daeyu, at least 15 billion KRW was omitted from the accounting books.

According to accounting standards, if there is an ‘agreement’ related to retirement pay or performance bonuses, it must be recorded as a provision liability and disclosed in the audit report. If intentional omission or poor auditing is detected through an accounting audit, the accounting firm or responsible accountant may face penalties such as license revocation, suspension of business, or criminal charges.

An official from the financial authorities stated, "Whether the performance bonus agreement actually existed can be determined through document requests during the audit," while also noting, "If a performance bonus agreement was made, it should be recorded in the audit report." In fact, since 2019, the Financial Supervisory Service has highlighted ‘disclosure of provision liabilities agreements’ as one of the four major accounting issues and has been focusing inspections on this. In 2018, the Financial Services Commission imposed an 8 billion KRW fine, considering failure to disclose agreement details as ‘accounting fraud.’

However, the FSS added the caveat, "Article 23, Paragraph 6, Subparagraph 1 of the External Audit Regulations stipulates that accounting audits may not be conducted for cases under investigation or criminal litigation." Accordingly, it is expected that the financial authorities will decide whether to proceed directly with an accounting audit immediately after the investigation or to have accounting experts participate in the investigation in a dispatched capacity to the investigative authorities currently divided among the Corruption Investigation Office for High-ranking Officials, prosecution, and police.