A local court ordered one of Korea’s largest accounting firms to pay a massive $36m compensation to the shareholders of a delisted Kosdaq company for failing to conduct its audits with due care

Accounting firm to pay in suit by shareholders

BY SER MYO-JA, KIM KI-HWAN [myoja@joongang.co.kr]

Nov 19,2013

A local court ordered one of the country’s largest accounting firms to pay a massive compensation to the shareholders of a delisted Kosdaq company for failing to conduct its audits with due care. The Seoul Central District Court on Sunday ruled in favor of a group of 137 Forhuman shareholders, a computer software developer, ordering the company’s CEO and Samil PricewaterhouseCoopers to pay a total of 38.4 billion won ($36.18 million).
The shareholders filed the lawsuit to claim compensation for their losses after the company was delisted from the Kosdaq exchange over embezzlement and accounting fraud scandals.
The court accepted the shareholders’ demand that the company and accounting firm pay 80 percent of the damages. Lee Yong-hee, the company’s CEO, was ordered to pay more than 24 billion won, while Samil PricewaterhouseCoopers was ordered to pay more than 14 billion won.
Forhuman was listed on the Kosdaq market in 2002. From 2008 to 2010 it recorded 16.4 billion won of net losses. However, the software developer forged its accounting logs, recording 41.4 billion won of net profit instead. During that period, Samil PricewaterhouseCoopers was in charge of auditing the company’s accounts and consistently gave Forhuman high evaluation scores.
The software developer was delisted from Kosdaq in 2011, while its CEO was indicted on charges of embezzling 10 billion won. A separate trial against Lee is currently ongoing.
According to Sunday’s ruling, the accountants failed to put in the minimum amount of effort in checking Forhuman’s contracts, although the company has insisted that it didn’t have to accumulate allowances for bad debts. And during their audits for Forhuman’s affiliate business partners in Japan, the accountants also visited the wrong companies at the direction of the accounting firm.
Samil PricewaterhouseCoopers argued that executives of Forhuman and its affiliates made organized attempts to forge documents, making it difficult to spot fraudulent accounts. However, the court ruled that the accounting firm failed to do its job because there were records of suspicious sales. In the embezzlement trial against Lee, a Forhuman executive also testified that the accountants received certain entertainment during audit periods. They were taken to Japan for golf, the witness said, and took trips to the hot springs.
The ruling against Samil PricewaterhouseCoopers was the second decision made by the same court in the same month that an accounting firm is responsible for negligence. The Seoul Central District Court ruled on Nov. 9 that BDO Daejoo LLC, the Korean member of the U.K. Company BDO International Limited, is partially responsible for compensating investors of a failed savings bank.
According to the ruling, Samhwa Mutual Savings Bank and BDO Daejoo must pay 24 investors of the bank for their losses. Of the 1.9 billion won in damages, the bank was ordered to pay 70 percent, while the accounting firm was ordered to pay 20 percent.

2013-11-19 17:01

Duties of accountants

Given that investors, especially minority shareholders, make investment decisions based on audit reports written by accounting firms, accuracy in financial reporting is imperative. But the realities that people experience are quite the opposite.
On Sunday, a Seoul court ordered Samil PricewaterhouseCoopers, the nation’s largest accounting company, to pay 14 billion won in compensation to 137 shareholders of Forhuman, a computer software developer, for failing to fulfill its minimal duties as an outside auditor.
This is the first time that a court has ruled to hold big accounting firms such as Samil responsible for poor auditing. This ruling is a move in the right direction, considering that small investors have frequently fallen prey to the negligence of auditors in terms of their duties or collusion with companies, as has been seen in the savings banks and Tongyang Group scandals.
Samil hinted that it would lodge an appeal, saying it had no alternative but to work with records presented by the company under the relevant law. The financial regulator also defended Samil, arguing that it would be wrong if an auditor should assume responsibility for what was perpetrated by a client company.
True, Forhuman, listed on the Kosdaq market in 2002, posted 16.4 billion won in net losses from 2008 and 2010, but doctored its accounting books to make it appear as if it had recorded 41.4 billion won in net profits. During that period, Samil was in charge of auditing the company’s accounts and consistently gave Forhuman high evaluations.
The company’s shareholders filed a compensation lawsuit for their losses after Forhuman was delisted from the Kosdaq market in 2011. Lee Yong-hee, the company’s CEO, was also ordered to pay 24 billion won.
It’s open to debate as to what extent accounting firms ought to be responsible for losses that resulted from poor financial reporting. But expanding the boundary of auditors’ responsibilities is right in light of strengthening protection for small investors. In this respect, Samil should be held accountable for its failure to detect the company’s cover-up and fabrication attempts.
The time is long past for accountants to cling to old methods. This will only entail a heavy price, considering that a rising number of class-action lawsuits are being lodged in connection with poor auditing.
The financial authorities need to overhaul auditing-related regulations in order to ensure the independence of auditors and strengthen their authority so that accounting firms won’t be subservient to client companies. More importantly, accountants involved in fraudulent auditing should be punished severely, and it will be necessary to enact a law that will make it obligatory to weed out those who commit more serious crimes.