Financial Supervisory Service Initiates Accounting Audit of Kakao Mobility
Kakao Mobility "Will Clarify Misunderstandings"
Kakao Mobility is undergoing an audit by the Financial Supervisory Service (FSS) on suspicion of inflating sales through accounting fraud. The FSS's argument is that the 'franchise contract' and the 'business partnership contract' should be considered as one contract, but Kakao Mobility accounted for them separately as two contracts, thereby recognizing both as sales. Kakao Mobility strongly opposed this. They emphasized that they have undergone transparent annual audits by several major domestic accounting firms and have received unqualified opinions on their financial statements from all auditors.
On the 31st, Kakao Mobility issued a statement saying, "We have been selected as a subject of the ‘accounting review and audit’ conducted by the Financial Supervisory Service, which randomly selects samples from publicly listed companies annually, and are currently undergoing financial statement review and audit," adding, "During this process, there is a difference in opinion with the supervisory authority regarding the accounting treatment of the franchise taxi’s ‘franchise contract’ and ‘business partnership contract.’"
The issue raised by the FSS concerns the 'franchise contract' and the 'business partnership contract.' Kakao Mobility’s subsidiary, KM Solution, signs contracts with transportation companies and acts as the franchise headquarters for 'Kakao T Blue' franchise taxis. KM Solution provides franchise services such as vehicle management and vehicle dispatch platform to franchise members and receives 20% of the operation revenue as franchise fees. Meanwhile, Kakao Mobility receives support such as vehicle operation data and advertising and marketing participation from franchise members with whom it has a business partnership contract and pays compensation for these services.
The problem arose in this process. The FSS views that since KM Solution receives 20% franchise fees from franchise members and Kakao Mobility pays support fees for advertising and marketing participation to franchise members under the business partnership contract, these should be seen as a single flow. For example, if a franchise member who has both a franchise contract and a business partnership contract pays 20% of operation revenue as franchise fees but receives support fees amounting to 15% of operation revenue, only 5% should be recognized as sales. However, Kakao Mobility has been recognizing the entire 20% franchise fee as its sales.
Regarding this, Kakao Mobility argued that the franchise contract and the business partnership contract cannot be attributed to each other. The franchise fees collected by KM Solution are used for providing franchise taxi services. On the other hand, data collected through the business partnership contract is not limited to the franchise business but is widely utilized in completely separate business areas, so they are different contracts.
In particular, Kakao Mobility claims that since the two contracts have different pricing criteria, they cannot be considered as one contract. The franchise contract receives a fixed rate of 20% of fare revenue as franchise fees. However, the business partnership contract has different pricing criteria for each component within the contract. Also, the franchise contract and the business partnership contract operate independently. Even if a franchise member signs a franchise contract, they may not enter into a business partnership contract.
Kakao Mobility emphasized, "It is known that the FSS considers the two contracts as an economic entity and suspects a ‘violation of accounting standards’ based on the core reasoning that both contracts’ prices are determined based on franchise taxi fares, but this is not true."
They further rebutted, "Although we did not charge the 20% franchise fee during the period when franchise services were temporarily unavailable due to a data center fire last year, we fully paid the compensation for advertising activities and data provision performed by franchisees during the same period according to the business partnership contract, which shows that each contract operates independently."
Regarding allegations of inflating sales for an initial public offering (IPO), Kakao Mobility dismissed them as "an unreasonable interpretation." Even if sales were inflated, it would not affect the actual cash flow and operating profit that represent the company’s intrinsic value. If sales increase while profits remain the same, the operating profit margin would decrease, which would rather lower the company’s value and be disadvantageous for listing.
The FSS plans to complete the audit as early as the beginning of next year and submit it to the Audit Committee. The presence or absence of accounting fraud and the level of sanctions will be finalized through the Audit Committee’s review and the Securities and Futures Commission’s resolution.
Kakao Mobility stated, "We will sincerely explain our business status through this audit by the Financial Supervisory Service to correct misunderstandings and will continuously improve any areas that need supplementation to create a more mature franchise service."
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