[Strange Daejang-dong Accounting] Financial Authorities Consider Starting Accounting Audit of Hwacheon Daeyu

Financial Supervisory Service, "Depending on investigation results,
will consult with Financial Services Commission and Korean Institute of Certified Public Accountants
on whether to initiate accounting audit"

[Image source=Yonhap News]

[Asia Economy Reporter Koo Chae-eun] The Financial Supervisory Service (FSS) announced on the 5th that it plans to discuss launching an accounting audit in response to this publication's criticism that Hwacheon Daeyu's action of giving a performance bonus worth 5 billion KRW to Gwak Byeong-chae, son of lawmaker Gwak Sang-do, without recording it in the accounting books was wrong.

On the same day, the FSS stated in a written response submitted to Rep. Yoon Chang-hyun of the People Power Party regarding suspicions 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 initiate an accounting audit." Furthermore, the FSS said, "After starting the audit, it is also possible to request the submission of documents 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 44-4 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 signed agreements with its executives and employees to pay '5 billion KRW (basic retirement pay) + a (performance bonus)' upon retirement but failed to record this in the 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. When adding 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 swell to several tens of billions of KRW.

According to accounting standards, if there is an 'agreement' related to retirement pay or performance bonuses, it must be recognized as a provision and recorded in the audit report. If it is found through an accounting audit that the content was deliberately omitted or that there was a negligent audit, the accounting firm or the responsible accountant conducting the audit may face measures such as cancellation of registration, suspension of business, or criminal prosecution.

[Image source=Yonhap News]

A financial authority official stated, "Whether there was an actual agreement on the performance bonus can be determined through an audit by requesting documents," but also mentioned, "If there was an agreement on the performance bonus payment, it should be recorded in the audit report." In fact, since 2019, the FSS has highlighted 'notes disclosure of provisions such as agreements' as one of the four major accounting issues and has been focusing on inspections. In 2018, the Financial Services Commission imposed an 8 billion KRW fine, considering the failure to disclose agreement notes as 'accounting fraud.'

However, the FSS added the caveat that "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 conduct 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.

An accountant who requested anonymity said, "Generally, it is thought that such principles do not apply to unlisted corporations, but if it is an external audit corporation, the agreement content, which is a provision under accounting standards, must be recorded," adding, "The disclosure of agreement notes and parts to be revealed through investigations or audits became a major issue in the accounting industry after the 2018 Securities and Futures Commission ruling. It is questionable whether this can be seen as a simple mistake."