Kakao Mobility's Accounting Issue Deemed 'Gross Negligence' Without Intent... Case Forwarded to Prosecutors

Judged as 'No Intent'
Instead, Work Documents Referred to Prosecutors
Disciplinary Level Lowered to 'Gross Negligence'
Actual Measures Similar to Original Plan

The Securities and Futures Commission under the Financial Services Commission judged on the 6th that Kakao Mobility's accounting violation was a case of 'gross negligence' without intent. However, it separately resolved to forward the work materials to the prosecution.

The financial authorities have decided on a severe disciplinary action against Kakao Mobility for accounting fraud allegations, judging the case as 'gross negligence,' one level lower than the original proposal. Contrary to the original plan, they determined there was 'no intent' to inflate sales. However, by separately deciding to hand over work documents to the prosecution, the content aspect is considered similar to the original proposal.

The Securities and Futures Commission (SFC) under the Financial Services Commission held a regular meeting on the 6th and judged that Kakao Mobility, which overstated operating revenue and operating expenses, "recognizing the entire franchise fee as operating revenue constitutes a serious violation of accounting standards."

The final sanction against Kakao Mobility was concluded about six months after it was first submitted to the Audit Committee in April. The SFC explained, "As this is the first major case related to accounting treatment of the 'platform business structure' based on fees, it could serve as a precedent for similar cases in the future, so we exercised caution in our judgment."

SFC: "Gross Revenue Method Violates Accounting Standards"

The first issue was revenue recognition. Kakao Mobility, through its subsidiary KM Solution, signed franchise contracts with taxi companies and receives 20% of the fare as a commission. Separately, it signed a business partnership contract with franchised taxis to return about 17% of the fare as compensation for participating in marketing activities such as providing driving data.

Kakao Mobility recognized the franchise fee (about 20%) as operating revenue and the business partnership fee (about 17%) paid back to taxis as operating expenses, accounting using the gross revenue method. The Financial Supervisory Service (FSS) took the position that the net revenue method, recognizing only the amount after deducting the business partnership fee from the franchise fee (about 3%) as operating revenue, was correct.

At the regular meeting, the SFC pointed out, "KM Solution is merely an agent of the company," and "the company recognized the entire franchise fee as operating revenue based on the apparent contract structure, despite failing to calculate a reliable fair value for the driving data provided under the business partnership contract." They added, "This constitutes a serious violation of accounting standards."

"No Intent for Accounting Fraud"... But Work Documents Transferred to Prosecution

Regarding the biggest issue of 'intent,' the SFC judged differently from the FSS. Previously, the FSS suspected that Kakao Mobility's accounting treatment (gross revenue method) was motivated by an initial public offering (IPO).

First, the SFC judged there was no intent based on the fact that three major accounting firms, including the designated auditor, acknowledged the company's accounting treatment and no collusion was found during the process.

Also, the argument that factors affecting the offering price include not only sales but also operating profit and net profit gained credibility. In particular, the SFC explained, "Even if the offering price is calculated based on sales, the key factor is not only the absolute amount of sales but also how the multiple is set," adding, "Considering this, it is difficult to conclude that the company's violation was intentional."

The accounting period in question (2020?2022) was also considered as the early stage of a new business called 'platform business.' The fact that the accounting policy was established in consultation with accounting firms in a situation where accounting practices were not yet settled influenced lowering the disciplinary level to 'gross negligence.'

Additionally, the tax authorities' instruction to add the business partnership fee paid as compensation for collecting driving data and participating in marketing to taxable income (taxable income inclusion) was also judged as evidence of no intent. This means the value of driving data was substantively recognized.

Kakao's Accounting Fraud Allegations Facing Prosecution's Time

While it is fortunate for Kakao Mobility that the judgment found no intent, the actual disciplinary content is similar to the FSS's original proposal. The SFC concluded that the accounting violation without intent warrants severe disciplinary action (gross negligence) and separately announced that the SFC's review materials will be forwarded to the prosecution as 'business information transmission.'

The SFC stated, "Among the issues found during the audit process, some could not be reflected in the final decision due to legal authority limits of the SFC and FSS, but if additional facts are revealed through investigations or judicial procedures, there is a possibility that intent may be confirmed," and "If intent in the company's accounting violation is revealed during judicial procedures, the SFC plans to reconsider and take additional measures on its own authority."

In particular, the prosecution's involvement, separate from the financial authorities' final sanction, is a significant burden. The day before, the Financial Investigation Division 2 of the Southern District Prosecutors' Office conducted a search and seizure at Kakao's headquarters and seven related companies, including its subsidiary Kakao Mobility. This is the first time the prosecution has conducted a forced investigation related to Kakao Mobility's accounting fraud allegations.

Inside and outside the financial authorities are paying attention to the career of Prosecutor Jang Daegyu, head of the Financial Investigation Division 2, who led the search and seizure. Prosecutor Jang served as a legal advisor to the Financial Services Commission from September 2023 to June 2024. At that time, as an ex officio member of the Audit Committee, he reportedly expressed an opinion that the case involved 'intent.' This means that the investigative agency, like the FSS, may judge that there was intent in the accounting violation.