Companies Busy in Collecting Forged Financial Records

As security-related class actions lawsuits are to be put in force starting from 2005, companies are expected to face difficulties in making business reports from the next year.

The reason is that business reports for fiscal 2004, which are submitted in 2005, will be targeted on lawsuits.

Also, companies have to collect financial records forged during fiscal 2003, which are to be submitted in the first half of the next year, in order to evade any involvement of class action suits.

According to the Ministry of Finance and Economy yesterday, the security-related class action lawsuits aimed at protecting shareholders, who can be damaged by forging financial records, stock price manipulation, and false stock-market disclosures, will be filed against companies with assets of at least two trillion won beginning 2005. Smaller companies will be subject to the suits starting in 2007.

Shareholders can file suits against companies’ stock price manipulation, false stock-market disclosures, and forging financial records from 2005. However, the problem is that business reports, which will be submitted in 2005, covers operations of fiscal 2004.

Accordingly, companies have to collect forged financial records in business reports of fiscal 2003, so that they can avoid any involvement with class lawsuits. However, experts said, as the “SK case” shows, companies, especially those with greater sales, are highly unlikely to get rid of it promptly since the amount of forged funds have been accumulated for a long period. Some companies have up to hundreds of billions of forged financial records.

Kim Kee-an, an analyst of Samsung Securities, said, “Companies with a high volume of trades with foreign counterparts and have branches abroad have a high possibility of forged financial records. It will be extremely difficult to solve this problem at one time.”

For this reason, some expect that accounts for collecting forged financial records will take a great portion in business reports for fiscal 2003, to be submitted in the first half of the next year, such as revised profit-and-loss account due to the error in the last accounts.

This account is set to add missed figures in the last account due to either mistakes or forged financial records so that the balance can be carried forward from the last account in balance sheet.

According to accounting companies, the amount of this account reached as much as 9,780 billion won in 7,509 manufacturing companies at audits of fiscal 1999.

Ki-Jeong Ko koh@donga.com