The smell of books cookingWhether Daewoo Shipbuilding & Marine Engineering (DSME) cooked its books or not is a hot issue in the business world. According to the Financial Supervisory Service (FSS) on Wednesday, DSME changed its 440.9 billion won ($385.9 million) operating profit reported in 2013 to an operating loss of 778.4 billion won, and revised a 471.1 billion won operating profit in 2014 to a 742.9 billion won loss. It faulted an accounting error. Its auditor, Deloitte Anjin, last week made a “mea culpa,” admitting to accounting errors in the accounts for 2013 and 2014.
The business world was shocked — and investors in the company enraged. The profit and loss statement is a company’s report card. Investors immediately prepared to sue as they incurred heavy losses by placing investments in the company, with confidence in its outlook based on its financial statements. A final three-year loss of 5.5 trillion won by 2015 won’t change, except for the fact that about 2 trillion won was made in the previous two years. Anjin said it could not leave the books unfixed when it came to learn of the errors.
But why now? Why has it kept silent over the last two years? How can a company that earned 400 billion won one year lose over 5 trillion won in just a year? Who is responsible here? Will there be anyone answering for the mess?
Things went from bad to worse for Korea’s shipbuilding industry from 2013 to 2015. The global economy was mired in a prolonged slowdown and oil prices tumbled. Amid the slump, competition to win orders turned intense.
The race was especially tough for three Korean shipbuilders who are the biggest in the global industry. They vied to land as many orders as possible in offshore projects regardless of pricing, despite the risks. Offshore plants were a very promising business at one time, but not at a time when the oil industry was on a steep downhill slope. Hyundai Heavy Industries and Samsung Heavy Industries reported billions in losses. DSME naturally should have been no different. But it seemed to make profit when the other two did not. Now we know it was an illusion.
Internal problems also worsened DSME’s woes. The chief executive position has been reserved for public officials without experience in management as the company was run by the state-run Korea Development Bank since it was salvaged through public funds when Daewoo Group went under. The CEO, who had been entirely engrossed in lobbying to keep his job, was replaced last year. The incoming CEO implemented a “big bath,” a strategy of manipulating the profit and loss statement to make poor results look even worse, allowing the new CEO to blame the poor performance on his or her predecessor and take credit for improvements in the following year.
All of these factors have built up to a true accounting disaster at DSME. Its accountants could walk off lightly. Window dressing is heavily punished, but errors in estimates are not. Whether it was intentional or not will determine the scope of the punishment. If it was intentional, the company will face criminal charges and its executives may head to prison. Anjin’s belated mea culpa may have been aimed to avoid the worst for itself.
The accounting firm, however, should not be pardoned. It was negligent in its oversight over its client. DSME, meanwhile, landed more offshore projects and added to its losses. The excuse that it had not received the documents from the shipbuilder cannot be passable. If it was denied necessary papers, it should have written that on the audit report. It should have at least warned investors of risks of massive losses. Anjin did neither. DSME should be blamed the most. It must uncover what was the primary cause of this debacle.
From 30 years in journalism, I have learned to differentiate what can be delayed and what cannot in truth-telling. In this case, it must not be deferred. Some already suspect the financial authorities will sweep the case under the carpet so the next administration can deal with it. But if the truth is told and actions are taken later, that will encourage more DSME-like corporate troubles. These kinds of dirty corporate secrets should be brought into the light as soon as possible.
JoongAng Ilbo, March 31, Page 30
*The author is an editorial writer for the JoongAng Ilbo.