[Editorial] Lessons from the `23 trillion won` padded accounting

The Stocks and Futures Committee (SFC) under the Financial Supervisory Commission is shily-shallying without making disciplinary decisions against the persons who were involved in the padded accounting for the making of Daewoo Group`s financial statements. The SFC`s decision as to what constitutes the just level of punishment against them has been delayed because of the committee`s sympathetic and lenient disposition toward the accounting firm and Daewoo executives. Given the usual circumstances of Korea`s financial auditing, accounting firm is weaker than the company which hired it for accounting. Also, the Daewoo executives were mere functionaries for the Group`s chairman to simply follow his instructions.

The public fund which is raised out of the taxpayers` money will offset the substantial portions of Daewoo`s losses in astronomical sum which were incurred by the padded accounting of Daewoo`s financial statements. In view of the people`s enormous financial burdens, a recourse to a legal punishment is inevitable against the persons who were involved in inadequate auditing and padded accounting in the making of Daewoo`s financial statements. Through this painful experience, we must see to it that advanced nations` transparent accounting and auditing systems must take root in the domestic firms` accounting and auditing practices.

The present system to select an accounting firm as an outside auditor at shareholders` general meeting has little meaning in the case of Korea although it may work satisfactorily in advanced countries where the ownership is separated from the firm`s management. In Korea, the major shareholder with controlling interest can at his will and discretion select the auditor at the stockholders` general meeting because he has the major shares to control the general meeting. Besides, Korea`s usual business practice has been that insolvent companies are only interested in finding an outside auditor who can help cover up their insolvency instead of thoroughly accounting and detailing about the insolvent causes.

Under such business environments, what most of accounting firms have relied to was the hazy principle, "what is good to the other is also good to me." This being the case, the international community, immediately after the International Monetary Fund (IMF) intervention, started totally discrediting the financial statements prepared by domestic accounting firms. Due to the loss of confidence in domestic accounting firms, some companies are hiring foreign accounting firms by paying high retainment fees.

What is urgently called for here, therefore, is to secure reliability and confidence in our accounting firms and to establish the system of a `see-through` transparency of business managements. This will prevent foreign accounting firms` total dominance over our business accounting and auditing markets.

The Ministry of Finance and Economy (MOFE) is reportedly considering to revise the laws relevant to the selection of outside auditor in the wake of Daewoo`s padded financial statements and accounting. The idea is to select the outside auditor by the Auditor Selection Committee (ASC) instead of by the stockholders` general meeting. But, this new system will not entirely solve the problem inherent in the committee`s make-up.

The ASC is composed of 2 auditors, 2 outside directors, 2 from the second and third major stockholders, and 2 creditors. But the auditors and outside directors are not entirely free from the controlling stockholder`s influence, nor is it easy for the 2 committee members, representing the second and third major shareholders, to oppose the major stockholder with controlling interests.

Under the MOFE`s new system, the major shareholder`s wishes can still dictate business management. It is imperative, therefore, that the method to compose the ASC must fundamentally be changed in order to ensure the genuinely transparent and independent financial auditing system. The ASC must be reorganized in such a way as to have over half of its members represented by the creditors and small shareholders who are independent from the controlling shareholder`s influence.