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Despite 'value-up' drive, firms omit solvency risks in disclosures

Published: 28 May. 2025, 14:17

The Kospi, left, the foreign exchange rate between the dollar and won, center, and the Kosdaq are seen in a dealing room of Hana Bank in central Seoul on May 28. [AP/YONHAP]

Despite Korea’s push to boost stock market appeal through its “Value-up” program, critical gaps in corporate disclosure remain.

A recent investigation by the JoongAng Ilbo found that nine Kosdaq-listed companies failed to properly disclose going-concern risks in their annual business reports for fiscal 2024, even though their audit reports raised red flags about financial viability.

One of the most prominent cases is Zaigle, best known for its infrared grill products. The company, now listed on the Kosdaq market, received an audit opinion for fiscal 2024 citing “material uncertainty related to going concern” due to accumulated losses.

Auditors flagged doubts about Zaigle’s ability to remain operational. According to financial regulations, such a warning must be summarized in the main body of a company’s business report under Section V: Auditor’s Opinion. However, Zaigle's public filing made no mention of this.

Widespread disclosure lapses

In a comprehensive review of 2,629 listed firms on Tuesday, the JoongAng Ilbo identified nine companies that either omitted required disclosures about going concern issues or included incorrect information.

Under Korea’s Financial Supervisory Service (FSS) guidelines, listed firms receiving a qualified or adverse audit opinion — or even a clean audit with a going-concern warning — must summarize the issue and its impact on financial statements in their business reports.

Failing to do so could mislead investors. A previous case involving Lotte Tour Development illustrates the risks.

In April 2023, the firm’s audit report noted going-concern issues, but its business report did not. Confused retail investors flooded message boards with conflicting interpretations: “The audit says sell,” wrote one user, while another replied, “The business report says there’s no problem. It’s a buying opportunity.”

Four companies — Winpac, TS Trillion, Leaders Cosmetics and Taihan Fiber Optics — marked “not applicable” in the relevant section of their reports, despite their audit reports highlighting going-concern concerns. Five others — Zaigle, Xplus, Hyper Corporation, Medicox and Sejong Medical — left the section blank.

The Financial Supervisory Service's headquarters in Yeouido, western Seoul [YONHAP]

Omissions tied to higher risk of delisting

FSS data from the 2022 fiscal year suggest that companies flagged for going-concern risk, even if they receive unqualified audits, face significantly higher odds of delisting or receiving a modified audit opinion. The risk stood at 25.9 percent for firms with going-concern warnings, compared to just 1.8 percent for those without — more than a 14-fold difference.

While Korea’s Capital Markets Act allows for punishment in cases of false or missing disclosures — including potential restrictions on securities issuance, executive dismissals and referrals to prosecutors — regulators often stop short of formal enforcement.

“It’s hard to prove intent in disclosure omissions," an FSS official said.

"Since the audit reports include the information, we usually encourage voluntary corrections. We also hold regular seminars to improve compliance, but we keep seeing cases that fall short of the rules."

Experts urge tougher oversight

Experts say regulators need to impose tougher penalties.

Jung Do-jin, a business professor at Chung-Ang University, argued that companies that repeatedly or deliberately omit unfavorable items like going-concern risks should face top-priority audits.

“These cases should be among the first to trigger accounting reviews,” Jung said.

Translated from the JoongAng Ilbo using generative AI and edited by Korea JoongAng Daily staff.
BY KIM DO-NYUN, LEE BYUNG-JUN [[email protected]]