Local Accounting Firms Face Series of Lawsuits Due to Poor Inspection

Accounting firms in South Korea are struggling with a series of lawsuits as an increasing number of investors are filing a suit against them for incompetent audit. They have failed to pick out companies committing accounting frauds worth trillions of won, including Daewoo Shipbuilding & Marine Engineering (DSME), due to poor audit over recent years. The cost of suits against accounting companies surged 55 percent in the past year.

According to the data from “2016 Fiscal Year Accounting Firms’ Business Report Analysis” released by the Financial Supervisory Service (FSS) on August 29, 20 accounting companies faced a total of 82 lawsuits, which amount to 297.4 billion won (US$264.12 million) as of the end of March. The cost of lawsuits showed a whopping 54.5 percent, or 104.9 billion won (US$93.16 million), from 192.5 billion won (US$170.96 million) a year ago.

By company, the cost of lawsuits of Deloitte Anjin, which audited the DSME, stood at 225.5 billion won (US$200.27 million), accounting for 75 percent of the total. Samjong KPMG, which audited STX Offshore & Shipbuilding that went into court receivership last year, also faced lawsuits worth 8.8 billion won (US$7.82 million).

An allegation that Samil PricewaterhouseCoopers, the external auditor of KAI, also committed wrongdoings in its audit of KAI is being generated. The prosecution seized the circumstantial evidence of window dressing accounting of hundreds of billions of Korean won by Korea Aerospace Industries (KAI).

Apart from the nation’s top four accounting firms, Shinhan Accounting Corporation, which audited Jeil Savings Bank that went bankrupt due to accounting fraud, had the highest cost of lawsuits totaling 23.5 billion (US$20.87 million).

Last year, the amount of compensations for damages paid by accounting firms reached 16.4 billion won (US$14.56 million) after losing the suits, up 248 percent from 4.7 billion won (US$4.17 million) a year earlier. Accounting companies paid 22.5 billion won (US$19.98 million) for compensations for damages in the past three years.

Meanwhile, the number of accounting firms continuously increased from 141 at the end of March 2015 to 157 in 2016 and 165 this year. This is because it is easy to establish an accounting company if 10 people raise capital of 500 million won (US$444,050) in total. An official from the FSS said, “When there are too many small accounting firms, the quality of audit can be degraded. We will come up with various ways to supervise them. We will also check if accounting companies are setting up effective risk management systems.”