Kakao Mobility Accounting Fraud 'Highest Level' Sanction... Kakao's Funding at Risk

FSS Applies 'Intentional Level 1'
Management Replacement and Compensation Lawsuit Possible
Unavoidable Impact on Entire Kakao Group

Kakao Mobility, suspected of inflating sales, has been notified of the highest level of sanctions by the Financial Supervisory Service (FSS). If the sanctions are finalized, the impact is expected to extend not only to Kakao Mobility, which received a recommendation for the dismissal of its CEO, but also to the entire Kakao Group. This is because audits and revisions of financial statements related to Kakao could trigger an emergency in external fundraising.

According to industry sources on the 23rd, the FSS sent a preliminary notice of measures regarding the accounting fraud allegations to Kakao Mobility on the afternoon of the previous day. It is reported that the highest penalty standard, 'Intentional Level 1,' was applied in the measures. The penalty standards are divided according to the motive and severity of the illegal act, and the heaviest responsibility was imposed on both aspects. Accordingly, the measures are understood to include not only fines but also a recommendation for the dismissal of CEO Ryu Geung-seon and a referral to the prosecution.

The push for the highest level of sanctions suggests that the scale of the accounting fraud is significant and the intent is strong. In the franchise taxi business, Kakao Mobility returned about 16-17% of the fare to transportation companies as compensation for participating in advertising and marketing, while the transportation companies paid about 20% of the fare as commission. Kakao Mobility recognized the entire 20% of the fare as revenue under the gross method, whereas the FSS judged that only 3-4% should be recognized as revenue under the net method. The FSS estimates that the inflated sales amount to 300 billion KRW just last year.

The repercussions of the sanctions on Kakao Mobility are expected to spread across the entire group. First, Kakao Mobility is likely to see a replacement of key management and face damage compensation lawsuits from major shareholders. Besides the largest shareholder Kakao, global private equity firms Texas Pacific Group (TPG) and Carlyle Group hold about 26% of the shares.

Kakao is also inevitably affected. Since Mobility is reflected in the consolidated financial statements, Kakao itself may undergo an FSS audit. Kakao is also considering this possibility. Choi Hye-ryeong, Kakao’s Chief Financial Officer (CFO), recently stated during an earnings conference call, "A review of revenue recognition under the net and gross methods from a consolidated perspective is underway."

If Kakao’s consolidated financial statements are revised, it could disrupt external capital inflows. Jeong Do-jin, a professor at Chung-Ang University’s Business School, explained, "Kakao Mobility’s IPO itself could become difficult, and corporate bond issuance may not proceed on time."

If Kakao’s funding channels are blocked, the entire group will suffer. As of the end of last year, Kakao’s cash and cash equivalents stood at 5.269 trillion KRW, which is not insufficient. However, most subsidiaries are operating at a loss and require funding, and continuous investment is needed in new growth engines such as artificial intelligence (AI), cloud, and healthcare. This will inevitably hinder the group’s efforts to improve its organizational structure.

The final level of disciplinary action against Kakao Mobility will be confirmed through the Audit Committee and the Securities and Futures Commission. Kakao Mobility stated, "We have faithfully explained our accounting treatment method, but it seems that it was not sufficiently clarified," and added, "Since reviews by the Audit Committee and the Securities and Futures Commission remain, we will sincerely explain our position."