Fix the alarm bells first

Korea’s major shippers and shipbuilders would not be in their pitiful state if they had been warned of the dangers ahead, and investors’ losses also could have been prevented. Samil PricewaterhouseCoopers concluded that Hyundai Merchant Marine was a viable company in a report to the Financial Supervisory Service after completing its audit of the cargo carrier. But the shipping company was in dire need of immediate liquidity to stay afloat. Its auditor noted that it had failed to reflect an “accounting miscalculation” worth 2.4 trillion won ($2.1 billion) in the company’s March appraisal.

An outside auditor is in charge of examining and checking the financial accounts of a company to ensure accuracy in the company’s figures and financial integrity. The job is restricted to licensed professionals. Without this mechanism, a company would be able to take all kinds of bookkeeping liberties to make its balance sheet appear better than it actually is in order to raise funds more easily through stock and bond issues or lending.

Accounting fraud is a serious offense that can have huge repercussions. And if an accountant’s audit evaluation is terribly poor, accuracy in the reports by ratings agencies and securities companies obviously cannot be assured, either.

Daewoo Shipbuilding & Marine Engineering’s debt was rated in the top-tier A- investment grade category before its actual liquidity woes became known. Investors would have bought shares and bonds with full faith in that rating. Related stock analysts that make up trade suggestions based on the accounting reports did not once recommend “sell” on the securities of Hanjin Shipping and Hyundai Merchant Marine. The state-run Korea Development Bank injected new loans into Daewoo Shipbuilding & Marine Engineering based on the shipbuilder’s poor and misleading financial report.

The government, in particular the legislature, must toughen guidelines on the outside auditing system. Companies and accountants will continue to polish up their financial statements if, once caught, they can simply walk away after paying some fines. Financial regulators must come up with ways to address the problem immediately.

JoongAng Ilbo, May 12, Page 30