The main ground for the Financial Supervisory Service’s allegations that Samsung BioLogics had committed accounting fraud was the company’s conversion in 2015 of the status of Samsung Bioepis from a subsidiary to an affiliate. But the FSS actually argued during its special audit of Samsung BioLogics in 2017 that the change should have been made in 2012.
Such an assertion of the FSS changing its views was reportedly put forward by officials of Samsung BioLogics during the recent deliberation meetings of the Accounting Oversight Deliberation Committee (AODC) and the Korean Securities and Futures Commission (SFC).
The FSS sent an advanced notice to Samsung BioLogics in May this year after wrapping up its year-long special audit. In the notice, it claimed that Samsung BioLogics had violated the accounting regulations by turning Samsung Bioepis from a subsidiary into an affiliate.
But, according to Samsung BioLogics officials, the FSS claimed during the special audit last year that Samsung Bioepis should have been turned into an affiliate shortly after Samsung BioLogics signed a call option contract with Biogen in 2012.
The FSS could have changed its earlier view based on evidence of accounting fraud it had secured in the process of the audit.
Samsung BioLogics officials said that the AODC and SFC meetings did not focus on their claims that the FSS changed its stance on the matter, as the core issue was whether Samsung BioLogics had violated the accounting regulations. But it seems that Samsung BioLogics’ claim drew the attention of the members of the Korean Securities and Futures Commission, given their move to examine Samsung BioLogics’ accounting books before 2015.
An official familiar with financial authorities said, "Samsung BioLogics claimed that the FSS's logic had changed, but the SFC is not discussing the matter as that is only a claim by Samsung BioLogics and does not constitute the core issue.”
The assertion that Samsung Bioepis should have been turned into an affiliate in 2012 is similar to that of the People's Solidarity for Participatory Democracy (PSPD). The PSPD said from the beginning that as Samsung BioLogics did not have exclusive control over Samsung Bioepis, it should assess its equity in Bioepis using the actual value method and evaluate Biogen’s call option, which is a derivatives debt, using a market value approach.
The PSPD’s judgment that Samsung BioLogics did not have exclusive control of Samsung Bioepis was based on the following points: 1) Samsung BioLogics designed the structure of Samsung Bioepis as a joint venture with Biogen, its US partner, from the beginning; 2) Biogen took part in capital increases of Samsung Bioepis in 2012 and 2013; and 3) the strike prices of call options in 2012 and 2013 were assumed to be similar to those of the new shares Biogen acquired by participating in the capital increases.
The FSS seems to believe that its alleged logic change itself is not a proble in that it does not affect the tentative conclusion that Samsung BioLogics committed accounting fraud. The FSS stresses that the core issue is Samsung BioLogics changed the accounting standards in 2015, even though Biogen did not exercise the call option at the time. The FSS also says the domestic approval of a biosimilar could not be a reason for a change in accounting standards.
However, if the FSS did change its logic, the regulator cannot escape the criticism that it lacked logical consistency in the process of reaching a conclusion.
"Since International Financial Reporting Standards is a principle-centric standard, there can be various interpretations on the same issue,” an accountant said. “But the FSS can hardly avoid criticism for a lack of consistency if it changed its logic in the audit process.”