Audit Rule Has Loopholes

Quarterly financial statements should improve the quality of investors' decisions, but financial industry officials are skeptical. They say because the statements are unaudited, they may be worse than none at all. If investors act on the information in those reports, they said, they may be burned.

A recent change in securities regulations for listed companies with 2 trillion won ($1.5 billion) or more in total assets requires outside audits of quarterly statements. But the large majority of companies listed on both the Korea Stock Exchange and the Kosdaq market do not fall under that requirement. Stock exchange data show that only a fifth of the 692 KSE-listed companies and just 23 of the 636 Kosdaq-registered companies are big enough to trigger the audit rule.

Recent recommendations by securities analysts were reported to have contained overly optimistic information. An industry official said Tuesday that there have been omissions of crucial information such as product costs or serious misinterpretation of financial data in the analyses. The company concerned and independent auditors later refuted the securities companies' conclusions. Share prices have also been affected by the recommendations, he said.

The official said, "It is almost impossible to expect that securities analysts will comb through financial statements and understand the complicated implications and dig out errors and irregularities." He said a policy change is urgently needed to ensure the credibility of quarterly financial statements.

The Financial Supervisory Service has also been accused of laxity in supervising larger companies that do fall under the quarterly data requirement. No action has yet been taken against 11 KSE companies and 17 Kosdaq firms that have not submitted audited statements.

by Kim Yong-seok