Avoiding Delisting Leads to Accounting Fraud 'Misstep'... Financial Supervisory Service Initiates Proactive Accounting Audit

Some KOSDAQ and KOSPI Listed Companies Detected

#. A company listed on KOSDAQ recently falsified sales by supplying products to related parties on a one-time basis to avoid being designated as a management item due to operating losses. The proceeds earned in this way were recovered through the CEO's nominee account.

#. In the case of B company listed on KOSPI, sales were inflated by falsely recording sales as if they had normally sold fabricated products, which were not actually manufactured, to related parties to avoid designation as a management item due to sales falling below 5 billion KRW.

On the 26th, the Financial Supervisory Service (FSS) announced that it has proactively started accounting reviews and audits on companies showing signs of being marginal enterprises.

The FSS explained, "We intend to induce early exit by proactively conducting accounting reviews and audits on marginal enterprises," and added, "We will take swift action in case of accounting violations."

It further elaborated, "Accounting fraud not only causes a loss of trust and value across the entire capital market but also hinders the financing of normal companies, making prompt restructuring necessary."

The FSS plans to comprehensively analyze criteria such as proximity to management item designation requirements, consecutive operating losses, interest coverage ratio below 1, sudden increase in financing, and going concern uncertainties to determine signs of marginal enterprises.

This year, the FSS will begin financial statement reviews on some marginal enterprises showing such signs and plans to expand the scale of reviews and audits from next year onward.

In this process, any matters suspected of unfair trading will be shared with investigative departments for a full-scale response.

According to the FSS, as high inflation and high interest rates persist for a long time, the number of companies struggling to pay even interest from their earnings is increasing, and marginal enterprises engaging in accounting fraud to avoid delisting are continuously being detected.

The number of listed companies with an interest coverage ratio below 1 for three consecutive years increased by 63.9%, from 285 in 2018 to 467 last year.

Cases of manipulating allowance for doubtful accounts on accounts receivable to inflate operating profit and net profit have also been uncovered.

The FSS urged external auditors (accounting firms) auditing corporate financial statements to conduct strict external audits on marginal enterprises.

The FSS emphasized that since marginal enterprises with continuous operating losses have incentives for intentional accounting fraud to avoid auditor designation evasion, sufficient audit evidence must be secured in cases of sudden sales increases, inventory transfers, and unusual accounting treatments in such companies.

It also added that if fraud, legal violations, or accounting standard violations are discovered during the external audit process, auditors must strictly comply with related procedures, such as notifying the audit (audit committee) under the External Audit Act.