Despite pressure from civic groups and some lawmakers of the ruling Democratic Party, the Financial Supervisory Service (FSC) is unlikely to audit Samsung C&T in connection with the accounting fraud allegations against Samsung BioLogics.
Some civic groups filed a petition with the prosecution for investigation of Samsung Electronics vice chairman Lee Jae-yong and Samsung C&T management, claiming that they deliberately inflated the value of Samsung BioLogics to facilitate the merger between Samsung C&T and Cheil Industries.
They allege that Samsung C&T overestimated the value of Samsung BioLogics to set the swap ratio in favor of Cheil Industries, which was the largest shareholder of Samsung BioLogics. Lee was the largest shareholder of Cheil Industries.
In particular, some civic groups claimed that Samsung C&T task force held discussions with the financial department of Samsung BioLogics in 2015 to increase the latter’s value and deal with the call option granted to Biogen. The two sides, the civic groups argue, agreed to value BioLogics’ business at 6.9 trillion won (US$6.11 billion) in order to boost Cheil Industries’ stock price for the merger.
In response, Samsung BioLogics said that these allegations do not hold water because the swap ratio between Samsung C&T and Cheil Industries was set in May 2015 while Samsung BioLogics changed the accounting standards for Samsung Bioepis later that year.
For its part, the FSS says that the allegation that Samsung C&T inflated the value of Samsung BioLogics to set the merger ratio in favor of Cheil Industries is a non-accounting issue that requires investigation by the prosecution rather than auditing by the FSS.
The FSS says it cannot carry out an audit on Samsung C&T at the moment as there is no objective evidence that the valuation method that Samsung BioLogics used for its affiliate Samsung Bioepis was an apparent error. Under these circumstances, the FSS says it has to wait for the prosecution to investigate the accounting fraud allegations.
However, Samsung C&T can be subject to an FSS audit if Samsung BioLogics revises its financial statements in compliance with the verdict of the Securities and Futures Commission on Nov. 14, which in turn would necessitate revision of the financial statements of Samsung C&T, as it has become the parent company of Samsung BioLogics following its merger with Cheil Industries.
This is because a company that voluntarily revises its financial statements can be subject to FSS audit if the involved amount of money is large.
However, industry analysts say that there would be not much to be revised in Samsung C&T’s financial statements as it treats Samsung BioLogics as an affiliate, not a subsidiary. For an affiliate, the parent company does not assess the value of its assets for reflection on its own financial statements, they said.