Financial Supervisory Service Begins Audit of Kakao Mobility
Suspected Accounting Manipulation to Inflate Sales
Kakao Mobility "Will Diligently Explain"
Kakao Mobility continues to face internal and external challenges. Following a fine imposed by the Fair Trade Commission, the Financial Supervisory Service (FSS) has now launched an audit regarding allegations of 'accounting manipulation.' However, the three major accounting firms in Korea (Samil, Samjong, and Han Young) have expressed that there are no issues with Kakao's accounting methods. Although Kakao Mobility strongly opposed the allegations, the turmoil is expected to continue.
Inflating Revenue vs Independent Contracts
On the 31st, Kakao Mobility explained that the accounting manipulation allegations raised by the FSS were a 'misunderstanding.' In July, the FSS began an accounting audit after identifying potential issues with the accounting treatment of franchise and business partnership contracts related to Kakao Mobility's franchise taxi business.
The key issue is whether the franchise contract and the business partnership contract can be considered independent contracts. Kakao Mobility receives 20% of the franchise taxi operation revenue as franchise fees through its subsidiary, KM Solution. In return, Kakao Mobility pays partnership fees to franchisees who have business partnership contracts, provided they supply vehicle operation data and participate in advertising and marketing. These fees are generally known to be 15-17% of revenue.
Kakao Mobility has recorded the entire franchise fee as revenue, arguing that the franchise contract and the business partnership contract are separate. However, the FSS judged that the entire franchise fee should not be recognized as revenue. They believe only 3-5%, excluding the amount paid under the 'business partnership contract' to franchise taxis, should be recorded as revenue.
Kakao Mobility stated, "It is known that the FSS based its judgment on the core premise that both contracts determine prices based on franchise taxi fares, considering them the same contract and a potential 'violation of accounting standards,' but the reality is different," and rebutted, "The franchise contract collects 20% of the fare as a fixed rate, while the business partnership contract has different pricing criteria for each component within the contract."
They added, "Since the actual profit is 3-4% of the fare, there is no reason to inflate revenue and reduce operating profit margin."
Kakao Mobility cited compensation for franchise contracts due to the Kakao data center fire in October last year as evidence that the two contracts are separate. During the period when franchise services were temporarily unavailable due to data disruptions, Kakao Mobility did not charge franchise fees of 20% to franchise members. However, the fees for advertising activities and data provision performed by franchisees during this period were fully paid by Kakao Mobility to franchise members under the 'business partnership contract.'
Kim Beom-su, former chairman of Kakao, is appearing at the Financial Supervisory Service on the 23rd to be investigated regarding allegations of stock price manipulation related to the acquisition of SM Entertainment. Photo by Kang Jin-hyung aymsdream@
A Taxi Business That Is Unprofitable and Increasingly Controversial
Controversies surrounding Kakao Mobility persist. As of 2021, Kakao Mobility's taxi app call market share stood at 93%, effectively holding a monopolistic market dominance. This has drawn significant attention from political circles and authorities, increasing the pressure on the company. However, the taxi business itself generates almost no profit, making it a burdensome asset.
In the previous year, Kakao Mobility recorded sales of 791.5 billion KRW and an operating profit of 19.5 billion KRW. While sales increased compared to the previous year, operating profit barely grew. Moreover, the taxi business accounts for less than half of the sales, and excluding proxy call and parking lot businesses, it is reportedly operating at a loss.
During the same period, the net loss was 27.7 billion KRW. Although the company posted its first net profit since spinning off from Kakao in 2021, it returned to losses. The 27.1 billion KRW fine imposed by the Fair Trade Commission in February affected this outcome. The Fair Trade Commission accused Kakao Mobility of manipulating the dispatch algorithm for mid-sized taxis in the 'KakaoT' application to favor 'KakaoT Blue' franchise taxis, issuing corrective orders and imposing the fine.
Kakao Mobility has provided various explanations regarding the fine and has filed an administrative lawsuit. However, the stigma of 'call favoritism' is difficult to remove once attached. The current controversy over 'inflated revenue' is similar. The FSS plans to complete the audit and submit it to the audit committee as early as the beginning of next year, so related controversies are expected to continue until a conclusion is reached.
Some view the FSS audit of Kakao Mobility as an attempt to pressure Kakao. Not only Samil and Samjong accounting firms but also Han Young accounting firm have expressed that recognizing 20% of revenue as sales in Kakao Mobility's accounting advisory service is appropriate. Based on last year's sales, the three major domestic accounting firms have sided with Kakao. Selecting an unlisted company arbitrarily for an audit is seen as an effort to increase pressure on Kakao. Recently, the FSS summoned Kim Beom-su, head of Kakao Future Initiative Center, over allegations of market manipulation during the acquisition process of SM Entertainment.
Professor Jeong Do-jin of Chung-Ang University's Business Administration Department explained, "The FSS's issue with both contracts being priced based on franchise taxi fares seems to deviate from the accounting principle of gross amount recognition," adding, "If only 3-5% is recognized as revenue according to the FSS's logic, information about where Kakao Mobility earns money and where it spends money disappears, which contradicts the fundamental philosophy of accounting."
© The Asia Business Daily(www.asiae.co.kr). All rights reserved.
