Deloitte Anjin fined for DSME accounting fraud

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Deloitte Anjin fined for DSME accounting fraud

Deloitte Anjin, Korea’s second-largest accounting firm, could face a one-year business suspension and 1.6 billion won ($1.4 million) penalty from Korea’s top financial regulator for its role in manipulating balance sheets at Daewoo Shipbuilding & Marine Engineering between 2010 and 2014.

The Financial Services Commission determined that Anjin had “intentionally neglected or condoned accounting fraud” at DSME, one of Korea’s largest shipbuilders, during a committee meeting on Friday. The penalty will be finalized on April 5.

DSME is currently facing a massive liquidity crunch, but between 2010 and 2014, Anjin gave the company a “clean opinion,” which meant the shipbuilder was without any material misstatements in its financial statements.

The company reported 424.2 billion won in operating profit in 2013 and 454.3 billion won in 2014, but it was later discovered that the numbers were overstated to meet goals. In reality, the shipbuilder suffered operating losses of 789.8 billion won in 2013 and 754.6 billion won in 2014.

Upon revelations of the fraud, accountants at Anjin who were in charge of auditing the company were held responsible, and four employees were prosecuted.

The business suspension means Anjin will not be able to sign new contracts for a year. The firm on average audits about 1,100 companies in Korea annually. Sources in the industry speculate that Anjin could lose as much as 80 percent of its deals from the suspension this year.

Aside from the suspension, Anjin has been banned from providing services to DSME for five years.

The commission’s penalty comes just a day after its decision with two state-run banks to provide another round of bailouts to cover DSME’s debts and obligations, including a fresh cash injection of 2.9 trillion won. After the bailout announcement, Jung Sung-leep, CEO of DSME, held a press briefing on Friday at the company’s headquarters in Jung District, central Seoul, where he expressed gratitude for the government’s rescue measure.

Jung said DSME will spend the majority of the money from the two banks, Korea Development Bank and Export-Import Bank of Korea, to finish building vessels currently under construction. “It’s difficult for us to obtain additional financing at the moment, so there is a mismatch between when we need the funding for production and when we can actually get it,” Jung said. “Scarcity of funds due to this mismatch will reach a peak by September of around 3 trillion won. However, the new liquidity injection is likely to resolve the matter.”

When asked whether the company is planning another turnaround measure, Jung said, “We’ve already come up with three turnaround measures and do not have many more assets to sell. All we can do now is increase our productivity and downsize our labor force to save costs.”

Jung also responded to concerns of builder’s default, where buyers of ships can cancel contracts in case DSME goes under. The Financial Services Commission and banks cited this as one of the main reasons why the shipbuilder needed another bailout, and Jung said the concern was valid. The value of many of DSME’s contracts are 10 to 20 percent higher than the average market price, the CEO explained, and filing court receivership would give clients an excuse to pull out of the contracts in search of a better deal.

If DSME goes into court receivership, then clients can cancel their contracts, citing builder’s default as an excuse, which would mean the capital spent on construction will go to waste and the creditors, local banks, would have to foot the bill in the form of a refund guarantee.

Prior to the press briefing, DSME’s labor union expressed concern about salary cuts. In a statement, Hong Seong-tae, head of the union, said their salaries have already been reduced to a level of 10 years ago and that further cuts would be burdensome. “We ask for a four-way talk among the union, company, government and creditors,” Hong said. All four parties have to come to a consensus on cost-cutting measures for them to go into effect.


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