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The Samsung BioLogics building in Incheon. A red light symbolically flashes next to the company, which under fire for accounting fraud.
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The US’ Enron scandal resulted in strict sentences and increased oversight
In 2001, the US energy/communications company Enron was caught cooking its accounting books by inflating its profits to the tune of 1.5 trillion won (US$1.3 billion). The resulting accounting fraud scandal went down as a major incident in terms of destroying trust in US cutting-edge businesses; even today, the company’s name is the first to be mentioned when talking about fraudulent accounting. A closer look into the recorded details of the case offers a jaw-dropping glimpse at just how brazenly the company’s greed-blinded executives were able to manipulate the numbers with the tacit approval of their accountants – cloaked behind the impenetrability of the “accounting” world to outsiders. The loophole they exploited waived the requirement to include special purpose entities (SPEs) in consolidated financial statements according to accounting regulations as long as they maintained an ownership percentage below 97%. Profits were inflated by using these companies to borrow money that was not included on the financial statements; the companies in question numbered in the hundreds. An episode that illustrates the complacency of the company’s management at the time came in an Apr. 2001 conference call with institutional investors. One securities analyst noted that Enron was “the only financial institution that can't produce a balance sheet or cash flow statement with their earnings.” “Thank you very much, we appreciate that – asshole,” replied CEO Jeffrey Skilling. With his overt insult, Skilling appeared to be attempting to avoid an awkward situation by rebuking the analyst for “failing to understand” their complex accounting methods. The Enron scandal ended up exposed after an insider blew the whistle. In Aug. 2001, then Vice President Sherron Watkins sent an anonymous six-page letter summarizing the accounting issues to CEO Kenneth Lay. When the management attempted to cover up the truth, Watkins took the letter to the media. Enron ended up confessing to accounting fraud that October. The Samsung BioLogics fraudulent accounting scandal can’t be directly compared with Enron’s – but it is no less brazen or enormous in terms of the amounts implicated in the book-cooking (4.5 trillion won, or US$4 billion). It’s also no exception to rule that accounting fraud incidents generally involve the top management’s interests and tacit approval by accountants. Referring to the accounting practices in question, Samsung Bio said, “We respect the outside auditor’s position demanding a rigorous assessment according to international accounting standards, and we accepted them as a global company in the interest of promoting accounting transparency.” The explanation came at the accounting company’s request. But recently disclosed Samsung Bio internal documents show the aim was to ensure appropriate stock values for Cheil Industries at the time of its merger with Samsung C&T. In other words, it is directly tied to a merger that was carried out to pave the way for vice president Lee Jae-yong to assume the management reins. The internal document also mentions the names of four domestic accounting corporations – whose silent acquiescence is difficult to account for except in terms of the power of the “Samsung empire.” So what sort of conclusion is in the cards for this case? If we look back at the Enron case, that company and its accounting firm Arthur Andersen both went bankrupt the following year in 2002. Lay was sentenced to 24 years in prison, but suffered a fatal heart attack before beginning his sentence. Skilling was released this past August after 14 years in prison. American capitalism may be a jungle, but the reason it manages to function anyway is because of this kind of strict punishment. The US government enacted the Sarbanes-Oxley Act at the time, using it as a turning point in stepping up accounting oversight. Unfortunately, South Korea does not appear to have yet learned any lessons from the numerous accounting fraud cases that it has experienced – including ones involving 3 trillion won (US$2.7 billion) at Kia Motors, 1.5 trillion won (US$1.3 billion) at S Global, 22.9 trillion won (US$20.4 billion) at the Daewoo Group, and 5 trillion won (US$4.4 billion) at Daewoo Shipbuilding and Marine Engineering. Part of that has to do with the relative lightness of the punishments. Company accounts represent the most basic units of the capitalist economy. When they are falsified, it prevents trust from forming and undermines the economic system itself. Punishments and institutional improvements will need to be carried out so that this case can serve as a turning point to a new form of South Korean capitalism. By Park Hyun, Economic editor Please direct comments or questions to [english@hani.co.kr]
