Accounting Frauds in Korea

Lim, Do Yeub

(from Worldquant)

In 2017, Korea ranked 63rd place out of 63 countries in the accounting transparency ranking conducted by the International Institute for Management Development. Unlike its economic status in the world, Korea’s accounting credibility level is still close to that of developing countries. Accounting fraud problems are one of main reasons for this dishonor. It is important to be aware of the seriousness of the accounting fraud problem and a way to solve it. Let’s begin with the reason why accounting fraud is a serious problem.

Accounting fraud induces serious problems in two ways. Firstly, trust towards Korean accounting information is degraded. According to an article from Seoul Economics in 2019, investors devalue Korean firms because their accounting information is distrustful. Experts criticized that continuous accounting fraud scandals have impacted forming distrust of the Korean accounting system. Secondly, investors will face a huge financial loss. According to an article from newsworks in 2016, Daewoo Shipbuilding & Marine Engineering Corporation deceived investors by doing accounting fraud in 2013 and 2014. It reported operating profits in its financial statements, but later it was revealed that operating results were actually a 2 billion won loss. As the stock price collapsed after the scandal, the shareholders experienced a huge financial loss. To sum up, accounting fraud is a serious problem because trust towards the accounting system will be degraded, and investors will face a huge financial loss.

A periodic designation of auditor can solve accounting fraud problems. Preventing companies and auditors from making inappropriate relationships with each other is a key to solving the problem. According to a report written by professor Kim of the Korea Auditor Federation, the Korean Financial Services Commission declared a new regulation regarding a periodic designation of an auditor in 2018. Companies could freely choose auditors before. However, they now have to be audited 3 times by a designated auditor every 6 year. As a result, auditors now can concentrate on audits with less concern about relationships with clients. After the regulation was applied, the accounting transparency ranking increased up to 37th in 2021 from 63rd in 2017. The rigidness of an audit has also increased accordingly. According to an article from Hankukilbo in 2020, the number of companies which received an ‘inappropriate’ level by auditors increased to 65 in 2019 from 43 in 2018. It means auditors have begun to be more strict toward violation of accounting standards. In short, a periodic designation of an auditor solves accounting fraud by reducing inappropriate relationships and improving autonomy of auditors.

In conclusion, accounting fraud is a serious problem which results in negative credibility of accounting and a huge financial loss. To solve this problem, a periodic auditor designation can be a solution by improving the credibility of the audit process. Warren Buffett once said, ‘accounting is the language of business.’ This phrase strongly emphasizes the importance of accounting in business. With accounting fraud, business will not function properly. Therefore, it is significant to make sure business participants use the language of business correctly.

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