Accounting Fraud
Financial authorities are carrying out a special audit for Samsung Biologics Co. on accounting fraud allegation while opening the possibility of innocence.
A senior official from the financial authorities said on March 1, “Since we haven’t finished the special audit for Samsung BioLogics, nothing has been decided yet.” The result of the special audit is expected to be finalized based on international accounting standards and overall opinions of experts.”
The Financial Supervisory Service (FSS) is planning to decide on whether to impose a penalty or not as soon as possible as the result of the special audit can affect not only the appropriacy of Samsung Biologics’ accounting method but also the valuation of Cheil Industries Inc., the largest shareholder of Samsung BioLogics.
Samsung BioLogics faced accounting fraud allegations after the company converted Samsung Bioepis Co. from a subsidiary to a related firm in 2015. Samsung BioLogics had recorded a loss for four years in a row since the establishment in 2011. However, the company posted a surplus of 1.9 trillion won (US$1.79 billion) in fiscal year of 2015 by converting the value of nearly 90 percent stake in Samsung Bioepis for its market value of 4.8 trillion won (US$4.53 billion) instead of its acquisition price of 300 billion won (US$283.18 million) in 2015 after Samsung Bioepis’ new medicines received European Commission approval. According to the international accounting standards, the value of the stake in a subsidiary can be converted for market values, instead of acquisition price, when a subsidiary turns into an affiliated firm.
The problem is whether it is proper for Samsung BioLogics to convert its subsidiary Samsung Bioepis to an affiliated company in terms of accounting. This is because Justice Party lawmaker Shim Sang-jung and the People's Solidarity for Participatory Democracy (PSPD) raised the question over Samsung BioLogics’ overvaluation of its corporate value in February last year. Accordingly, the PSPD argued that the value of Cheil Industries, the major shareholder of Samsung BioLogics at the time when Samsung C&T and Cheil Industries merged in 2015, was overestimated as well. Those who claim that Samsung BioLogics committed accounting fraud say that Samsung BioLogics and Samsung Bioepis cannot have a dominant-subordinate relationship in the first place because Biogen, a U.S.-based multinational biotechnology company which holds the remaining stake in Samsung Bioepis, has a low share ratio but has the right to call for joint management by increasing the stake to half. There, the FSS launched the special audit for Samsung BioLogics in April last year.
An official from the FSS said, “The share ratio is basically the decisive factor for a dominant-subordinate relationship, according to the international accounting standards. There are also cases that a company cannot consider as a controller even it has a high share ratio if it can win a majority of stakes by exercising a call option.”