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Tougher punishments for fraud

The Financial Services Commission (FSC) came up with a measure to crack down on fraudulent accounting practices or window-dressing. It announced that fines will be sharply increased on companies found to have cooked their books. It replaced a regulation that punished a company found guilty of accounting manipulation as one incident regardless of how long the malpractices went on.

Previously, fines on such companies did not go beyond a maximum of 2 billion won ($1.7 million) even if they had falsified records on financial statements and securities on numerous occasions. Under a new rule, any violation in any report can be fined up to 2 billion won. For instance, 10 falsified records could be punished with fines up to 20 billion won. Embattled Daewoo Shipbuilding and Marine Engineering, which has been revealed to have cooked its 2012-2014 financial statements to hide losses of 5.4 trillion won, was fined only 2 billion won under the previous regulation.

If fines are relatively small, companies cannot stave off the temptation to falsify their accounts. Big losses tempt companies to tamper with their books. The troubled shipbuilder cooked its books to report that it had made a profit of 450 billion won when it had actually lost money. Through its lie, it pulled in 4.5 trillion won in new loans and paid employees bonuses worth 490 billion won. An outside accounting firm could not stop the company because of the soft punishment. Since it was hired by the company, it could not press to see the genuine accounts.

In the United States and Japan, accounting fraud can break a company. Enron, a large energy company, had to shut down for that reason. Toshiba was slapped with a record fine of 7.4 billion yen ($73 million) for inflating profits for several years.

The FSC must toughen punishments on accounting irregularities to the extent that companies do not dream of tampering with their books. It should consider upping the maximum fine of 2 billion won. A company must be aware that it could be forced out of business if it cooks its books.

JoongAng Ilbo, July 9, Page 26