[Asia Economy Reporter Lee Jung-yoon] The Financial Supervisory Service (FSS) analyzed cases of fraud detected over the past three years to encourage thorough accounting audits and provided guidelines for caution.
According to the FSS on the 4th, an analysis of 22 cases of fraud detected by accounting firms during external audits over the past three years revealed 15 cases of accounting fraud to conceal embezzlement by management and others, and 7 cases of accounting fraud carried out to achieve specific objectives such as avoiding delisting.
Among the perpetrators, 73% were management and 27% were employees. Most fraudulent acts occurred by neutralizing internal controls, with management holding authority generally having high incentives and opportunities for fraud.
By type, there were 7 cases of distorted financial statements and 15 cases of distorted statements to conceal embezzlement. Notably, a case was uncovered where a capitalless M&A group acquired a listed company, embezzled funds raised through issuing convertible bonds (CB), and concealed this by falsely recording loans. There were also cases where fictitious sales were recorded or double bookkeeping of inventory assets was used to overstate inventory in order to meet stock listing requirements.
Of the 22 cases, 15 were discovered through analytical reviews evaluating financial information by analyzing the plausible relationship between financial and non-financial data. Additionally, fraud risks were detected through external whistleblowing (3 cases), company self-investigation (1 case), and review of pending litigation (1 case).
Regarding audit opinions, 8 cases were deemed appropriate, including 2 restatements, while 14 cases received non-appropriate opinions such as disclaimers.
The FSS anticipated that in the current economic downturn, incentives for fraudulent financial reporting by management would increase to facilitate smooth fundraising, defer debt repayments, and meet financial maintenance requirements of listed companies. It also expected that the sharp decline in asset values such as stocks, real estate, and virtual assets would worsen the financial condition of executives and employees, increasing incentives for embezzlement.
Accordingly, the FSS provided the following audit cautions: ▲ Pay attention to abnormal fund transactions in presumed capitalless M&A companies ▲ Exercise caution when auditing companies subject to market corrective financial standards ▲ Suspect existence issues if temporarily used asset accounts are recorded for a long period ▲ Consider fraud risk if frequent fund transactions occur with related parties ▲ Analyze the characteristics of the industry the company belongs to and check for fraud risk factors.
Furthermore, the FSS urged thorough fulfillment of reporting obligations when fraud is identified, enhancement of audit capabilities of accounting firms, and active reporting. An FSS official stated, "Employees and business partners who recognize accounting fraud need to promptly report to the FSS with supporting evidence," and added, "Investors should carefully verify through business reports and other disclosures whether the investment target company is a capitalless M&A company, a company subject to market corrective actions, or frequently transacts with related parties before investing."
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