Suspension of Business
The Securities & Futures Commission (SFC) of the Financial Services Commission (FSC) of South Korea decided to impose a restriction on audits by Deloitte Anjin, the second-largest accounting firm in the country, for the fiscal year of 2017 for its involvement in Daewoo Shipbuilding & Marine Engineering’s accounting fraud.
During the period, Deloitte Anjin can sign no audit contract with any stock-listed corporation, corporation with an auditor designated by the SFC and unlisted financial company. Those listed three years ago and having to renew their contracts with Deloitte Anjin have to find a new auditor as well and the same applies to those that already renewed their contracts with Deloitte Anjin before the SFC’s decision. The FSC is expected to vote for the measure at its regular meeting on April 5. In this case, it is effective until April 4, 2018. The measure also includes a fine of 1.6 billion won (US$1.4 million) for a false registration statement, a penalty of 20 million won (US$17,400) for its submission of a forged audit statement in 2014, exclusion from audit of Daewoo Shipbuilding & Marine Engineering’s accounts for five years and addition to its deposit in the joint fund of compensation for damages for breach of contract that is equivalent to 100%.
The FSC minimized the potential confusion in the market by forbidding only new audits and allowing the measure to become effective in early April after the submission of audit reports by most companies. Under the circumstances, direct damage to the accounting firm’s business is likely to be less than anticipated. At present, the number of the firm’s clients is approximately 1,100 and about 150 of them have to renew their contracts or fall under the category of those with an auditor designated by the SFC.
Still, Deloitte Anjin may have to face a series of contract cancellations because the majority of its clients have lost their trust in the accounting firm and the FSC is going to allow listed corporations that signed their audit contracts with the firm one year ago or two years ago to change their auditor if they signed new audit contracts this year for certain business activities.
It is being said that Deloitte is looking to sever its relationship with Anjin. This year, the accounting industry of South Korea is likely to go through a sea change with the rest of the top four in it benefitting from the suspension of Deloitte Anjin’s business.