[NOTEBOOK] One Way to Reach Transparency

Reinforcing the Audit System Is Necessary to Prevent Falsification

The foreign press is busy reporting the news about layoffs in American companies. Many outstanding companies, including America Online, the largest Internet service provider in the world , Chrysler, Amazon.com, Walt Disney Company and Lucent Technologies are at the center of the news. General Electric, the most prominent firm in the world, also reportedly is planning a mass layoff.

American companies are astir because of the declining earnings they reported for the fourth quarter last year. Because they determined that the speed of economic stagnation is faster than forecast, they are coming up with new survival strategies.

These companies have announced quarterly earnings for years and all sectors of the economy pay attention every time the announcement is made. Not only the companies, but also stock investors, government authorities and analysts all become busy checking the accuracy of their economic forecasts.

Such behavior, which is repeated every three months, may seem to be troublesome in our perspective, but this system is the most urgent and mandatory means to secure transparency in corporate management as well as to understand economic trends accurately.

In particular, it has a strong meaning for our economy, which has been extremely vulnerable in terms of transparency. "Transparent corporate management" has become a vital point that we have to respect to survive, not because of pressures from other developed countries and the International Monetary Fund.

The recent investigation by prosecutors unfolded and confirmed that falsified financial statements triggered the Daewoo Group crisis, which proved to be the decisive blow that put an end to the recovery of our economy.

Although the way to reach transparent management seems to be long and rough, the prescriptive measure can be surprisingly simple. All we have to do is conduct accurate audits on the financial statements of companies. Keen and strict financial audits can reveal all those undesirable events in which conglomerate owners embezzle money from companies and fund insolvent affiliates.

The problem is how to discontinue the practice of falsifying financial statements. Most of all, the abilities and vocational ethics of certified public accountants have to be enhanced while the supply of available accountants has to be enlarged. At the same time, the system of quarterly reviews of finance has to be introduced as soon as possible. The parties directly concerned by such a system will be the company, accountants and shareholders. Among them, accountants and investors, of course, greatly support adopting such a system, but companies do not. They give the reluctant response that "every time the company is audited, we become totally exhausted."

Why do they become exhausted when being audited? Is it because they are trying to adjust numbers on financial statements when they are audited? The argument of the companies that oppose adopting the system of quarterly reviews of financial statements is certainly no longer persuasive because listed companies have already made their data on quarterly settlements available to the public, starting last year.

Currently, earnings reports of each quarter are announced to the public as they are prepared but not reviewed by accountants, unlike semi-annual earning reports. What do the companies mean by saying that they have no problem at all announcing their earnings reports not reviewed by accountants, while it is exhausting to be audited? Isn't it true that the companies, in fact, are admitting that the numbers in the two cases, one not reviewed by accountants and the other the audited version, are different? It means that when there is no audit, the companies falsify their financial statements, and we are reaching the conclusion that it is necessary to reinforce the system of audit and supervision.

The writer is international economic news editor of the JoongAng Ilbo.

by Shim Shang-bok