Stop fraudulent accounting

Accounting fraud has long been a prevalent and deep-seated problem. There had been various measures to tackle it, but fraudulent practices continue. Listed companies subject to routine audits live in fear of the bill they will get once the books are cleaned up.

Of course, the primary responsibility for stopping accounting fraud lies with the companies themselves. Companies can cook up the books and hide liabilities in many different ways if they want to, leaving their accountants to claim they could not uncover all those dubious practices.

But it is the accounting firm’s job to supervise and check a company’s financial figures to ensure they are correct. The results of those audits are the only objective criteria investors have for evaluating the companies they buy. If accounting fraud is tolerated, the stock market will lose the confidence of investors.

The Seoul Central District Court ruled in favor of shareholders of Forhuman and ordered the computer software company’s accountant, Samil PricewaterhouseCoopers, to pay 14 billion won ($13.25 million) in damages. This is the first major ruling against an accounting firm. Over the last three years, accounting firms had to pay a total of 3.4 billion won for partial responsibility and settlements in accounting scandal cases. Incorporated accounting companies came up with clever ways to escape responsibility over charged of negligence. For instance, the accountants at one company all quit en masse and then just created a new company to avoid a lawsuit against their former employer.

The latest court ruling demands a drastic change in the mind set and practices of accounting firms. Now that collective legal action on securities deals is possible, accountants can be pursued by lawsuits. They could end up paying a heavy price if they join with their clients in winking at fraud or collaborating in manipulating financial figures.

Accounting firms are now required to perform more rigorous audits and some worry about the quality of their audits. But their job is to pore over the books and dig up questionable numbers. They must strive to find the danger signs so that they can help prevent bad companies going worse and better protect investors from further losses. If bad signs are discovered, they must make a clear diagnosis to send the right message to the market. In that way, accounting firms will rightfully contribute to weeding out fraudulent companies and keep the market healthy.