[OUTLOOK]Venturing into the realm of fraud

With first-generation major start-up companies such as Locus Corp. and Turbotek Co. falling one after the other, I am concerned that investments in technology ventures, which barely recovered this year, might shrink again. Seeing the wretched state of those once lauded as heroes because of their success stories, which were once the objects of envy, I worry that it might damage the spirits of small and mid-sized business owners who are working so hard to revive their businesses.
Whenever a start-up company collapses, it is not due to a failure of business, but one of false accounting practices. Accounting fraud has been revealed not only in the cases of Locus and Turbotek, but also in the cases of Serome Technology and Gold Bank two and three years ago, respectively. Experts on start-up companies do not exclude the possibility that additional incidents could be caused by the fraudulent accounting practices of start-up companies.
The false accounting practices of venture companies should therefore be treated not on a case-by-case basis, but as a regressive syndrome occurring in a very important part of our economy, and we need to think seriously about the matter. Accounting irregularities deceive an unspecified number of investors and inflict financial losses on them. Moreover, they hurt the credibility of the capital market and consequently discourage investment, resulting in an overall discount of the Korean economy. Therefore, the issue needs to be fundamentally addressed in order to restore national credibility and maintain order in the market economy.
Accounting irregularities are the result of the issue, not the cause. A company might deliberately inflate its assets or sales in order to make it look good or manipulate accounting records in order to hide a misappropriation of company funds or assets. Once they rig the book, they cannot stop the irregularities.
Of course, those start-up company owners who have failed to draw a clear line between their corporate and personal finances deserve to be criticized for their lack of moral standards and slack corporate ethics. However, in order to prevent accounting fraud systematically, there must be a serious review of the social and systematic elements which venture businessmen are tempted to exploit.
We need a comprehensive examination that takes into consideration the peculiarities of start-up companies. Among the questions that need to be answered are whether the market flow is smooth enough so that companies need not attempt irregular practices; whether a proper merger and acquisitions market is created and a reasonable return is expected from an investment; whether financial institutions regularly evaluate start-up companies and their technologies; whether managers and capitalists specializing in venture businesses are educated; whether the conditions necessary for healthy start-up companies to grow exist and the supervisory function of the market and policy-making authorities are working well; whether there are no flaws in the accounting system (such as accounting inspection); and whether the excessive support of the government has caused the morality of start-up companies to slacken.
Furthermore, I think that the obsession with “miraculous high-growth,” which can still be found all over the Korean economy, lies in the fundamental background of the failures of the start-up companies caused by accounting irregularities. A start-up company accepts the challenge of trekking into unknown business territory, and by nature, the success rate is bound to be very low. Even in the United States, where the various conditions for venture business are well-prepared, only about 5 percent of start-up companies survive and succeed. Failure is not unusual.
However, the obsession with success pressures businessmen to commit irregularities in order to succeed, makes society increasingly less tolerant of failure, and encourages the government to try to nurture as many start-up companies as possible over a short period of time. We need to look back and think about whether the social atmosphere has created so much pressure on venture businessmen to succeed that they even manipulate their accounting records.
The venture industry is a territory ruled strictly by the principles of the market economy, where the rewards for success and responsibilities for failure are clear. Start-up companies can grow in a healthy manner only when these principles are respected. All economic entities need to cooperate and help out small and mid-sized start-up companies, which are the leaders in the digital knowledge-based economy and a vital engine for an innovation-oriented economy, in order to focus on truly substantial “ventures” instead of creating spectacular success story.

* The writer is a director of the Korea Small Business Institute. Translation by the JoongAng Daily staff.

by Kim In-ho