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[Editorial] End the Window Dressing

Posted December. 20, 2006 03:02,   


Justice Minister Kim Sung-ho announced a plan to exempt companies from criminal responsibility for window dressing. This is a good opportunity for companies to come clean on their long-standing accounting irregularities. Until now, many firms have been reluctant to own up to their wrongdoings for fear of criminal penalties on charges of embezzlement or misappropriation despite regulatory authorities’ recommendations for admission of their fraudulent accounting before the year 2004.

Companies also bought more time as the deadline for reporting their errors to the authorities was delayed from the end of this month to March next year when they will submit a report on closing accounts. The ministry will provide remorseful corporations with protection against collective suits prior to the full implementation of a class action lawsuit system next year. Companies’ involvement in class action lawsuits is highly likely to compromise the domestic stock market and the nation’s stature in the world. Thus, businesses in Korea have welcomed the rare hospitable gesture from the authorities. Certainly it is a step in the right direction reflecting the reality of many companies, though critics still point out it smacks of the campaign for the presidential election 2007.

Firms in the past took out loans very easily, inflated their earnings to boost stock prices, or deflated them after pocketing returns. Daewoo Group and SK Global are examples of such cases. However, the current global business setting requires transparent accounting. No country tolerates fraudulent accounting any longer. This is all the more so for Korea, where as much as 40 percent of foreign shareholders pay close attention to corporate activities after its capital market opening, and shareholder activism is widespread.

In this regard, companies should properly respond to the plan for its successful implementation. Only about 200 firms have come clean on their accounting irregularities so far, and not all them did so voluntarily. Some firms reported their misdeeds under pressure during investigation by the regulatory authorities. A number of phone calls inquiring about criminal penalties indicate that there are still many firms trying to get away with their shady business.

The Justice Ministry said it would take sterner measures against firms missing extended timetable. Now is high time for businesses to restore shareholder confidence by stopping its search for loopholes and by opening up.