This article was published on Jan. 7, 2025, at 5:47 p.m. on the CHOSUNBIZ MoneyMove site.
The Financial Supervisory Service (FSS) conducted an accounting review of Korea Zinc, but it is not expected to announce the results before the shareholders' meeting. The accounting review was a response by the FSS after Korea Zinc and MBK Partners, along with Youngpoong, accused each other of inaccuracies regarding key financial figures amid a dispute over management rights.
At that time, the FSS's commencement of the accounting review indicated its intention to verify the truthfulness of the claims by directly observing the company's accounting processes. Given that this shareholders' meeting would determine the management rights of Korea Zinc, it was anticipated that the FSS would disclose the results before the meeting for shareholders to make a clear judgment, but that now seems unlikely.
According to financial authorities on the 7th, an FSS official stated regarding the timing of the Korea Zinc accounting review announcement, “We will handle what needs to be processed as we follow procedures,” adding, “Although the shareholders' meeting of Korea Zinc is imminent, we will not act in accordance with that timing.” With the shareholders' meeting scheduled for the 23rd of this month, the possibility of the FSS releasing the review results seems low, given the current two-week timeframe.
However, both Korea Zinc and MBK Partners found accounting issues. The official noted, “The severity of the accounting errors needs to be further evaluated,” indicating that it is currently difficult to reveal which party made the greater mistake.
In September last year, MBK Partners claimed that Korea Zinc's liabilities surged 35 times (from 41 billion won to 1.411 trillion won) between 2019 and the first half of 2024. They also stated that Korea Zinc's consolidated operating profit margin fell from 12% in 2019 to 6.8% in 2023, and that its net cash, which stood at 250 billion won, would record minus (-) 44 billion won by the end of 2024. At the time, MBK Partners raised concerns, saying, “The current management of Korea Zinc is consuming cash extravagantly,” asserting, “This is something that cannot occur in ordinary corporations.”
Korea Zinc immediately rebutted this. The essence of its argument was that all figures from MBK Partners were distorted. Korea Zinc stated, “The companies we invested in from 2021 to 2024 generated net profits, not net losses.” They countered that far from turning net cash into the negative, they would still have around 80 billion won in cash remaining even after repaying all borrowings. Korea Zinc described this as a “malicious distortion by predatory corporate raiders.”
The following month, the FSS commenced an accounting audit of both Korea Zinc and Youngpoong, due to the significant discrepancies in their claimed figures. During the audit, the FSS discovered that Youngpoong had unrecognized environmental damage liabilities, prompting a transition to an accounting review.
An accounting review is a more binding phase than an audit; if a company fails to submit documentation without justifiable reason during this phase, it could violate external audit laws. A financial investment industry official stated, “The FSS shifted from an audit to a review for Youngpoong, and if no results emerge, there may be discussions within the FSS,” suggesting that they will be looking closely with the intent to find any issues.
Sanctions for violations in accounting processing are finalized by the Financial Services Commission's (FSC) Securities and Futures Commission following an FSS review. If the matter is serious, decisions are made at the FSC's deliberations. As the most significant issue that the Securities and Futures Commission faced recently, the accounting manipulation allegations concerning Kakao Mobility began in October 2023 and are expected to take several months to resolve, culminating in a conclusion last November.
Meanwhile, criticism has emerged that the FSS's involvement in the Korea Zinc management rights dispute is based on weak grounds. Lee Bok-hyun, chairman of the Financial Supervisory Service, triggered intervention by saying, “When financial capital (MBK Partners) with a structure that winds down business within 5 or 10 years dominates industrial capital (Korea Zinc), there could be a long-term risk of harming shareholder value.”
In response, Jeon Sung-in, a professor at Hongik University, pointed out, “The original intent of the textbook introduction of the separation of finance and industry (which prohibits financial and industrial capital from owning or dominating each other's sectors) is to prevent the failures of industrial capital from transferring to banks,” adding, “If Korea Zinc faced difficulties, it indicates that MBK Partners' business judgment was flawed, so rather than the FSS intervening, it should be resolved between the LP (limited partner) and GP (general partner).”
Seo Ji-yong, a professor at Sangmyung University, also noted, “The deterioration of investment assets is an investment risk that all private equity funds face,” stating, “Private equity funds generally have balanced portfolios, allowing for risk management to some degree even if the value of a particular asset declines.”