Deloitte Anjin may face closure

Deloitte Anjin, Korea’s second largest accounting firm, could suspend business for several months if it’s found responsible for accounting fraud at Daewoo Shipbuilding & Marine Engineering.

Anjin audited DSME’s balance sheets starting in 2010. Until 2014, the accounting firm said the shipbuilder’s financial situation was optimal.

However, in March, the accounting firm said the 2 trillion won ($1.7 billion) of operating losses on some 5.5 trillion won revenue in 2015 should be included in the company’s 2013 and 2014 balance sheets. The shipbuilder’s operating profit reached 424.2 billion won in 2013 and 454.3 billion won in 2014. However, the figures turned out to be an operating loss of 789.8 billion won in 2013 and 754.6 billion won in 2014.

DSME’s manipulation of its balance sheet is now causing problems for Anjin and its accountants. A former Anjin accountant was prosecuted and detained in December and three more employees have also been prosecuted. The corporation itself also was indicted for not managing its employees well. The ruling on the corporation is expected in May.

The key point of the case is whether Anjin was involved in DSME’s manipulation as a whole corporation. Anjin denies the charge.

“The companies that operate based on number of orders they receive and obtain like shipbuilders are hard to audit based on the documents they provide since many rely on speculation and estimates” said Lee Jung-in, a director at Anjin. “We don’t have an authority to investigate on our own.”

Whether Anjin will run into the worst-case scenario of shutting its business down is now in the financial authority’s hands.

Analysts expect the accounting firm will close business for several months as early as next month. However, questions arise whether the financial authority has a right to suspend the business of Anjin, even before the court ruling has been announced.

Most firms in the country sign deals with accounting firms on their yearly audits in late March and April. Anjin currently has 1,400 companies to audit and the accounting firm needs to sign new contracts with 1,100 of them this year. If they are suspended from operating in March, Anjin will lose about 80 percent of potential deals.

“Even if we are found not guilty in May by the court, we won’t be able to recover if we are suspended by the financial authority in March,” said Lee at Anjin.

“We will decide [on the penalty] as soon as we are done with our own investigation regardless of the court’s ruling since we believe that there was considerable wrongdoing in the corporation,” said an official at the Financial Supervisory Service.

If the financial regulator decides to penalize Anjin, it might look different than its 2007 case against foreign bank HSBC. HSBC requested the financial regulator allow the bank to acquire shares of Korea Exchange Bank before it went bankrupt, but the FSS rejected the request while it was waiting a court’s ruling on KEB’s stock manipulation charge.

“I think it is against the fundamental principle to suspend an accounting firm from operating due to simply poor audits,” said Choi Joong-kyung, president of the Korean Institute of Certified Public Accountants. “The financial regulator’s possible penalty given to the accounting firm will have a direct impact on its employees even though the court hasn’t come up with the ruling.”

BY KO RAN [kim.youngnam@joongang.co.kr]