Accounting firm to pay in suit by shareholders

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.

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