Disruption of Existing Structure
A senior executive at Deloitte Anjin said on February 1 that his company would spin off its advisory division in the first half of this year and the existing company would continue to provide auditing and tax advisory services irrespective of the court’s ruling on its accounting fraud allegations related to Daewoo Shipbuilding & Marine Engineering and the following disciplinary action from the authorities.
If the spin-off occurs as scheduled, Deloitte Anjin, which is currently the second-largest accounting firm in South Korea, will rank fourth or fifth in size with the number of its accountants more than halving from 1,131. In addition, its sales are likely to drop in that the advisory division currently accounts for 39.1% of the company’s total sales. Then, the oligopoly of four accounting firms in the South Korean external audit market is broken for the first time in 15 years.
The disciplinary action is planned to be determined by the end of March this year. The possibility of a delay is still open though. “It cannot be said for sure that the procedure will be completed by March due to a variety of variables,” the authorities explained, adding, “During the handling of the case of Daewoo Engineering & Construction back in 2015, which had a size of 389.6 billion won, the conclusion was reached after lots of heated debates and the Securities & Futures Commission had to deliberate on the same issue on three different occasions.” He went on to say, “This case of Daewoo Shipbuilding & Marine Engineering is much more complicated with two trillion won to five trillion won estimated to be involved in the accounting fraud.”
The consensus of the authorities is that Deloitte Anjin should be subject to a penalty along with a suspension of business of up to one year. Such a suspension can lead to the shutdown of the firm because it cannot conclude a new external audit service contract at all during the period. Deloitte Anjin’s function as an external auditor can be completely lost if the suspension is imposed in April, when accounting firms and companies subject to external audit sign their contracts.