Sharing the blame“I couldn’t help but laughing bitterly after reading the audit report on the Korea Development Bank by the Board of Audit and Inspection. The BAI inspected the Korea Development Bank almost every year, so how can they have only discovered the Daewoo Shipbuilding and Marine Engineering’s trouble?”
Mr. A, a former Financial Supervisory Service official, wrote in an email on June 16. This is how he felt after the Board of Audit announced the audit report on the accounting fraud of 1.5 trillion won by Daewoo Shipbuilding and Marine Engineering and the slack supervision by its major shareholder KDB. “The Financial Supervisory Service is also responsible for failing to properly supervise the KDB, but the Board of Audit and Inspection’s inspection was also problematic.”
In order to verify his claim, I looked up the audit reports by the BAI. In fact, the BAI inspected the KDB every year in the past six years except for 2011. But it never pointed out the slack management of the Daewoo Shipbuilding. In 2013, during the Lee Myung-bak Administration, the BAI focused on the high interest-rate savings plan that the bank had sold for privatization. In 2014, improper management on Tongyang Group’s sales of fraudulent company bond as a major creditor bank was pointed out. Earlier last year, the inspection addressed excessive vacation, retirement bonus and medical subsidies for the KDB employees. It was when the government was advocating public agency reform. Financial insiders criticize that the BAI only investigates the issues that are in fashion and failed to detect the fundamental issue of Daewoo Shipbuilding. The BAI’s KDB inspection was inspired by exposure of the new management of Daewoo Shipbuilding on 5 trillion-won of insolvency in July, 2015.
Not much is new in the BAI report. One of the major outcomes was that the KDB did not applied the financial abnormality analysis system on Daewoo and failed to discover the accounting fraud. However, in September, 2009, then Democratic Party lawmaker Kang Ki-jeong raised the concern at the parliamentary inspection of the Korea Development Bank. The inspection report also mentions that the loss from 2013-2014 was not reflected and the deficit was changed to a gain. But Daewoo and Deloitte Korea had admitted it as an error and made a correction in March, 2016.
The financial authorities are just as responsible as the Board of Audit and Inspection. Mr. A said that the Financial Supervisory Service’s inspection on the KDB was more of a consulting session as it did not conduct a thorough inspection as the Korea Development Bank was under the Financial Services Commission. “Financial Supervisory Service can’t avoid responsibility for failing to detect Daewoo’s trouble because of the association with the Financial Services Commission.” Moreover, the Financial Services Commission has 8.5 percent of Daewoo Shipbuilding and is the second largest shareholder after the Korea Development Bank, which holds 49.7 percent. As one of the key shareholders, the Financial Supervisory Commission failed to monitor slack management of Daewoo Shipbuilding. However, the Board of Audit and Inspection did not mention FSC’s responsibility. Mr. A concluded his email, “The insolvency of Daewoo Shipbuilding was a collaborated work of the Board of Audit and Inspection, the Financial Supervisory Service and the Financial Services Commission. Unless monitoring system on government-run banks is improved, there will be another Daewoo Shipbuilding catastrophe.”
JoongAng Ilbo, June 17, Page 31
*The author is a business news reporter of the JoongAng Ilbo.