Financial Disclosure Reform Needed?

The finance department of the A Group, which has over two trillion won in assets, is very busy every spring.

The finance department needs to create the group’s combined financial statements starting from late February, when affiliate companies complete their individual financial statements. This group has over 20 affiliate companies and many are not public companies that do not disclose their information, so it takes over three months just to gather the materials and check numbers.

One official of the group’s finance department said, “We stay up all night for many days during the last few weeks. It makes one wonder whether the combined financial statements are worth all this work.”

There is a lot of talk over whether the combined financial statements, which are required for groups with over 2 trillion won in assets, should continue to be required.

Required only in Korea -

After the Asian financial crisis, companies started creating combined financial statements since 1999, par the International Monetary Fund’s (IMF) order to improve companies’ leveraged management status and the transparency of group accounting practices.

The problem is that unlike consolidated financial statements that advanced countries use, combined financial statements are only used in Korea.

For this reason companies state that combined financial statements are unprecedented regulations on companies.

Professor Lee Man-woo (Department of Business Administration) of Korea University pointed out, “No financial department, no scholar uses combined financial statements. We should try to abolish this regulation as fast as possible.”

Adopting international accounting standards in 2009 –

Financial authorities are also in agreement in abolishing the combined financial statements. One official of the Financial Supervisory Service (FSS) stated, “We are all leaning toward eliminating it. And the question is currently being discussed at the Ministry of Finance and Economy.” But as this issue requires an amendment of the “Law concerning External Audit of Limited Companies,” the FSS has not released an official position on the matter.

If the combined financial statements are abolished, 2009 would be timely when international accounting standards will be adopted in stages. International accounting standards ask public companies to use consolidated financial statements and not combined financial statements.

But the Fair Trade Commission is disagreeing with the move, saying, “If combined financial statements are abolished it would be impossible to know the internal dealings of chaebol.” So whether it will be abolished or when it will happen has not yet been decided.

jarrett@donga.com jinhup@donga.com