Will the Financial Supervisory Service (FSS) audit Samsung C&T, the parent company of Samsung BioLogics, in connection with the accounting fraud allegations that the regulator raised against the biosimilar production company?
This question is raised by analysts as Choi Jong-koo, chairman of the Financial Services Commission (FSC), acknowledged on Nov. 7 the need to audit Samsung C&T to determine whether Samsung BioLogics had intentionally committed accounting fraud.
The suggestion that Samsung C&T also needs to be audited was made by Rep. Park Yong-jin of the ruling Democratic Party at the National Assembly`s Budget and Account Committee meeting.
Park suggested that Samsung C&T needs to be audited as Samsung BioLogics had committed accounting fraud to facilitate the merger between Samsung C&T and Cheil Industries.
"I think the suggestion that Samsung C&T needs to be audited makes sense," Choi said, adding, however, that “It is a matter for the FSS and the Securities and Futures Commission (SFC) to decide.”
Until now, civic groups, including the People's Solidarity for Participatory Democracy, have raised suspicions that Samsung BioLogics’ alleged accounting fraud may be related to the merger between Samsung C&T and Cheil Industries in July 2015.
They allege that Samsung BioLogics committed accounting fraud to set the swap ratio for the merger in favor of Cheil Industries, its largest shareholder, and Samsung Electronics vice chairman Lee Jae-yong, the largest shareholder of Cheil Industries.
Samsung BioLogics, which had been in the red since its establishment in 2011, recorded a net profit of 1.9 trillion won in 2015, just before it was listed on the KOSPI. The secret behind the turnaround was the company's change of the status of Samsung Bioepis from a subsidiary to an affiliate.
The FSS, which has audited Samsung BioLogics twice, argues that it could not find any justifiable reason for the company’s change of the status of Samsung Bioepis. Hence its allegations that Samsung BioLogics committed accounting fraud to boost its value, which facilitated the merger between Cheil Industries and Samsung C&T.
Park said Samsung BioLogics’ internal documents he has managed to secure support the allegations presented by the FSS. He said the documents, written by Samsung BioLogics’ accounting team, explains the company’s decision to change the status of Samsung Bioepis in a way widely different from that of the company’s top management.
According to the documents, Park said, Samsung BioLogics changed its accounting standard to avoid the company falling into the state of capital impairment due to U.S.-based Biogen’s exercise of its call option with regard to Samsung Bioepis.
Biogen is a multinational pharmaceutical company that established Samsung Bioepis in February 2012 with Samsung BioLogics. It was granted a call option to raise its stake in the joint venture from the initial 15 percnt to 50 percent minus one share, effective until June 2018. On June 29, 2018, Biogen exercised its call option.
The likelihood of Biogen to exercise its call option increased following the Korean government’s approval of biosimilars developed by Samsung Bioepis.
According to the documents, Biogen’s exercise of its call option would cause Samsung BioLogics a valuation loss of 1.8 trillion won, which would push the company into the state of capital impairment. The documents suggest that the company had to change the accounting standard to avoid this scenario.
Park further said, “The internal documents show that Samjong Accounting Corp. and Anjin Accounting Corp. inflated the value of Samsung BioLogics to 8 trillion won, while the company’s own estimate was 3 trillion won.”
Park said the inflated figure was submitted to the National Pension Service, which voted in favor of the merger between Samsung C&T and Cheil Industries.
Park maintained that the internal documents are new evidence that supports the allegations that Samsung BioLogics intentionally committed accounting fraud. He stressed that accounting fraud is a serious crime that should be sternly punished.
As to the criticism that the Securities and Futures Commission (SFC) is protecting Samsung, Choi said, "The commission is making a fair judgment independently without any external influence or pressure. The criticism is totally groundless.”
"It is taking time because of the complexity of the issue and it is being discussed mainly by experts from the private sector," Choi said. "We will make fair and objective results as soon as possible."
Meanwhile, the People's Solidarity for Participatory Democracy filed a request with the prosecution on Nov. 7 for an investigation of Samsung Electronics vice chairman Lee, his family members and former executives of Samsung C&T on charges of manipulation of stock prices and breach of trust.