TRUE CONFESSIONS
Korean accounting comes clean.
By Jennifer Lee

Korean companies had their chance to come clean. And around 200 companies – an eighth of the total listed companies in Korea – did just that, admitting to regulators that their books held accounting irregularities.

Prompted by a national drive to make Korean companies more globally competitive, Korea’s Financial Supervisory Commission (FSC) and Justice Ministry two years ago gave listed companies until March 31 this year to tidy up their books. Those that reported within the grace period will escape criminal charges and face reduced penalties.

Companies have had another reason to admit their wrongdoing. A new law that came into effect this year allows minority shareholders to bring class-action lawsuits against companies with less than 2 trn won (US$2.2 bn) in assets. (Larger companies have been open to class action since 2005.) Such suits can be brought against companies for manipulating share prices, false regulatory filings, or misleading investors. The added financial liability will be a good deal more damaging – in the US, for instance, the average class-action award in 2006 was US$86.7m.

The list of companies that took advantage of the grace period includes heavyweights such as Korean Air and Kia Motors. And while one-eighth of listed companies is an alarming figure, Anthony Moon of Nomura Securities in Korea says he’s surprised there weren’t more. “There were a lot of irregularities left over from the financial crisis [of 1997],” says Moon. The grace period was offered, he says, partly to encourage companies to implement financial-management software to improve their governance. “[The need for better corporate governance] is driving the will of upper management to make investments in technology,” he says. The technology makes it harder to hide errors – intentional or otherwise – and regulators didn’t want to give companies reason to put off the change.

Korea’s aggressive campaign to repair its market credibility, damaged over the years by accounting fraud and insider trading, continues with a roadmap laid out by the FSC, which includes plans for listed companies to use International Financial Reporting Standards starting in 2011. Although Korea is Asia’s second-largest market by number of companies listed, it is third-largest by market capitalization, behind Japan and Hong Kong. Hong Kong has 500 fewer listed companies than Korea, but its market size is nearly double.

Moon is positive about the progress of the accounting reform so far, but notes one more stumbling block – the consolidation of numbers on a quarterly basis (the current practice is once a year). “This is the next big step,” says Moon. “From where I sit, [when that happens] Korea won’t be too far away from global standards.”