Trading Stocks and Falsifying Books with Company Funds... Financial Supervisory Service Issues Internal Control Warning

Embezzlement Continued for Over 5 Years... Bookkeeping Manipulation Included
Disappeared After Trading Stocks with Company Funds
Guidelines for 6 Key Areas Issued Following Repeated Exposures

#. Kim Young-su (alias), a fund manager at Company A who has worked in the finance team for over 5 years, identified weaknesses in fund-related control procedures such as account transfers and voucher entries. He planned to embezzle funds by exploiting these internal control gaps. He transferred company funds to his personal bank account and, during settlement, disguised the embezzled amount as accounts payable to suppliers to reconcile the difference between the book cash balance and the actual cash balance. Immediately after settlement, he restored the falsified accounts payable to the original amount. Using this method, he continued embezzlement for over 5 years and eventually confessed when it became difficult to sustain.

#. Choi Min-young (alias), finance team leader at Company B, misappropriated company funds to trade stocks. When investment losses occurred, he forged daily cash reports and balance certificates to manipulate the accounting books, making it appear that the company held cash normally. As losses increased and the risk of embezzlement exposure grew, Choi withdrew funds in cash and then disappeared. The company only became aware of the embezzlement afterward. Notably, despite having previously received internal disciplinary actions for improper expense processing and misappropriation, Choi’s duties were not reassigned.

Recently, cases of accounting violations involving finance and accounting staff exploiting internal control weaknesses to embezzle funds or manipulate books have continued, prompting financial authorities to issue warnings.

According to the Financial Supervisory Service (FSS) on the 23rd, there were 3 such accounting violation cases from January to April this year. In 2021, there were 2 cases; in 2022, 7 cases; and in 2023, 1 case.

Embezzlement incidents cause damage not only to companies and investors but also undermine trust in the capital market, so companies must strengthen internal controls. To this end, the FSS provided six key areas of caution: approval procedures, segregation of duties, job rotation, balance checks, custody and approval, and internal audits.

First, companies must establish approval procedures for account opening, withdrawals, transfers, and voucher entries. Account opening should only be allowed after manager approval, and control procedures must be in place to ensure transfers and withdrawals are only made to pre-registered accounts. If transfers to unregistered accounts are unavoidable, a post-approval process must be established?for example, sending a text message to the CEO’s or CFO’s mobile phone notifying the transaction.

Finance and accounting personnel should be separated. A superior’s approval process for voucher entries must also be established. Many cases involve employees concealing embezzlement by disguising cash shortages as accounts receivable or accounts payable through voucher entries after embezzlement.

Job rotation for finance and accounting staff should be conducted regularly. Work should be adjusted so that no single employee handles finance or accounting duties for an excessively long period. Many cases involve employees managing finance tasks for over 5 years, as highlighted in the reported cases.

Cash and bank balances must be checked frequently. In addition to regular inspections, unannounced cash audits and balance inquiries should be conducted to detect embezzlement or misappropriation and to preemptively block motives for embezzlement. It is necessary to develop a habit of reviewing company books, balance certificates (external evidence), and internet banking screens.

Separate custody and approval procedures for bankbooks, corporate cards, seals, and other important documents are helpful. Important documents should be managed separately by different personnel, and approval procedures must be in place for their use.

An independent and substantive internal audit system is also necessary. An independent internal auditor should be appointed so that business directors, such as those in sales, do not concurrently serve as auditors. The organization should be capable of performing substantial internal control tasks such as compliance checks with internal control regulations and asset audits.

The FSS stated, "We plan to distribute and guide accounting audit findings related to embezzlement through relevant agencies to ensure thorough internal controls. If significant weaknesses are found in the internal accounting control system, we will impose strict measures, including increasing the penalty level for accounting standard violations by one step."

The FSS has included companies with assets exceeding 500 billion KRW in the audit scope starting from the 2023 fiscal year.