A sledgehammer won’t help

The sixth largest Korean stock with a market value of 22 trillion won ($19.6 billion) could actually be delisted after the Securities and Futures Commission, the decision-making board of the Financial Services Commission, concluded that Samsung BioLogics intentionally breached accounting rules. Most analysts believe the company is unlikely to be expelled from the Kospi bourse, but shareholders are nevertheless fretful about the money they’ve invested in the company. If the value of their holdings is depreciated, they could file a class action lawsuit against the company. The contract drug maker, which was on a path to becoming the largest in the world in capacity, could also lose credibility and customers. Since ethical standards have become important to multinational drug brands, the stigma of accounting fraud could cost it future orders.

Samsung BioLogics denies any wrongdoing and is threatening an administration lawsuit. Although the fault obviously lies within the company’s suspicious books, the authorities’ handling of the case has also raised questions. The Financial Supervisory Service (FSS) shot down the allegation when civic activist groups first raised the issue in late 2016. It embarked on a special probe when the Samsung Group de facto CEO was implicated in the bribery and influence-peddling scandal of ousted President Park Geun-hye and ahead of the snap election in May 2017. Under the liberal government that was elected, which has many key officials recruited from civic activist groups critical of Samsung and other chaebol, the FSS finding was reversed.

The ramifications of the burgeoning bio engineering industry are worrying. That sector has to take a lot of risks and spend a lot on R&D and capital investments for many decades to get ahead in such a cutting edge industry. A blockbuster invention is rare even after years of research and investment. Because of the high risk and frequent failures, it is hard to decipher the value of such companies’ assets. Hedging against risk becomes crucial, making bookkeeping and accounting complicated.

A rigid application of accounting standards based on the norms for traditional industries can be unfair to a risk-taking sector. Conservative bookkeeping can dampen R&D activities. Authorities should ensure transparency in accounting and auditing, but nevertheless should take the industry’s unique features into consideration. It is also an international norm that judgments should be made in favor of a company in a situation in which various interpretations are possible.

The Korean bio sector has been in a lengthy slump since the scandal by stem cell scientist Hwang Woo-suk in 2005. Regulations were toughened and investment drained away, putting Korea’s stem research behind the United States, the United Kingdom, and Japan. But drug makers pushed on with their projects and earned investors’ confidence, making a rising growth engine for Korea. With Samsung, SK, and LG joining the game, bio has achieved economies of scale and global recognition. The government also promised full backing to raise Korea’s share in the global bio market to 5 percent by 2025 from the current 2 percent. The industry is still at a tender stage. Authorities should be careful lest the accounting scandal put a damper on the industry.

JoongAng Ilbo, Nov. 16, Page 30