The Securities and Futures Commission Files Criminal Complaint Against Etron for "Accounting Violations"

The financial authorities took measures against Etron for accounting violations, including a three-year auditor designation and referral to the prosecution. Wave Electronics and Ecovibe also faced disciplinary actions.

According to the financial authorities on the 27th, the Securities and Futures Commission under the Financial Services Commission held its 4th meeting the previous day and deliberated and resolved measures such as fines and auditor designations against three companies, including Etron, which prepared and disclosed financial statements in violation of accounting standards, as well as their auditors.

Etron did not classify investment stocks related to investee companies, over which it had significant influence, as equity-method investment stocks from 2019 to 2022. The amounts were 48.122 billion KRW in 2019, 29.832 billion KRW in 2020, 26.065 billion KRW in 2021, and 7.574 billion KRW in 2022.

Additionally, although the company provided financial assets as collateral to the subscribers of its newly issued bonds with warrants (BW), it failed to disclose this in the notes. Furthermore, in 2022, it accounted for convertible bonds (CB) that did not meet the accounting transfer conditions as if they were transferred, thereby underreporting CB-related valuation losses by 7.5 billion KRW.

There was also obstruction of external audits. Although a supplementary agreement reflecting the substance of the CB transfer contract was separately prepared, it was not submitted to the auditor. Moreover, deficiencies were found in the design and operation of the internal accounting control system, including cases where it was operated differently from the facts.

The Securities and Futures Commission imposed a three-year auditor designation on the company and recommended dismissal or removal for one former CEO and two former executives. The company, one former CEO, and one former executive were also reported to the prosecution. The fine will be decided later by the Financial Services Commission.

The audit firms Sejung Accounting Corporation and Donghyun Accounting Corporation, which handled Etron’s accounting audit, were criticized for neglecting monitoring procedures related to equity-method investment stocks and failing to properly reflect the accounting violations in their audit opinions. The fines for the two accounting firms will be finalized by the Financial Services Commission. Additionally, Etron received a two-year audit restriction and was required to increase its joint compensation fund by 30%.

Wave Electronics received a two-year auditor designation, a recommendation for dismissal of the responsible executive, and a six-month suspension from duty. The fine will be decided by the Financial Services Commission. The company accounted for research expenses that did not meet intangible asset recognition criteria as assets, thereby overstating equity and net income.

It was also pointed out that the company used the financial statements of an affiliate that recognized redeemable convertible preferred shares as equity rather than financial liabilities without review, resulting in overstatement of equity-method investment stocks and net income.

Ecovibe received a three-year auditor designation, a fine of 4.8 million KRW, and a recommendation for dismissal of the former CEO. The company, the former CEO, and the former executive director were also reported to the prosecution. The imposition of fines on the company and related parties will be decided later by the Financial Services Commission. Ecovibe was criticized for omitting accounting for borrowings and provisions and for violations in the disclosure of small public offering documents.

The Securities and Futures Commission also resolved two cases related to auditors’ violations of the External Audit Act. Taeil Accounting Corporation, which violated the rule that an auditor cannot audit a company with which its employees have creditor or debtor relationships, was restricted from auditing the relevant company for one year. The firm was also required to increase its joint compensation fund by 10%. The responsible certified public accountant received a one-year suspension recommendation and a five-year audit restriction for the relevant company.

Hanmi Accounting Corporation violated the rule prohibiting audit firms from performing audit work for three consecutive business years of large unlisted stock companies and then auditing the following three consecutive business years. The affiliated certified public accountant received a one-year audit restriction for listed and designated companies.