Financial authorities will improve the system to impose penalty surcharges on the actual owners of corporations that committed accounting fraud. Until now, even if it was suspected that a corporation owner led the accounting fraud, authorities couldn't impose sanctions unless they proved that he received a salary or other benefits. The government plans to make improvements through the revision of enforcement decrees and supervisory regulations in the second half of the year. The case of former I Group Chairman Kim Young-jun is reported to be a crucial turning point for strengthening sanctions.
On the 20th, a high-ranking official from financial authorities said, “We are working on system improvements to include the actual owners of corporations in the scope for imposing accounting fraud penalty surcharges,” and added, “The big picture is all laid out, and we will refine the details and announce them soon.”
A significant number of accounting fraud cases involve actual owners who hold the title of chairman or those without titles but directing from behind. This is particularly true for smaller corporations. The problem is that under the current system, only the CEO and the Chief Financial Officer (CFO) of the company where the fraud occurred are subject to financial penalties. The owner, who is the actual executor of business directives, is excluded from the penalties if it's not proven that he received a salary or dividends from the corporation.
Financial authorities have reportedly confirmed instances of direction, coercion, and intimidation by actual owners during discussions with numerous individuals related to corporations involved in accounting fraud. Notably, the controversy surrounding I Group, due to the owner's embezzlement, false public disclosure, and tax evasion, has been a direct catalyst for strengthening sanctions against actual owners.
Former I Group Chairman Kim Young-jun was arrested on charges of using affiliate funds to falsely register his family as consultants and creating slush funds under the pretext of salary payments. He is also suspected of instructing affiliates to sell subscription rights and convertible bonds at prices lower than the market and hiding these facts through false disclosures during the investigation for embezzlement and breach of trust. Evidence has also surfaced showing he embezzled hundreds of millions of won through false accounting manipulation.
The Korea Exchange decided to delist three I Group affiliates (EID, Ehwa Technologies Information, ETRON) all at once in February when their stock trading was suspended. A financial authority official stated, “If the group’s actual owner exercised influence to induce employees' accounting fraud, it is reasonable to include (the actual owner) in the scope of financial sanctions.”
Additionally, financial authorities plan to strengthen the level of penalty surcharges for accounting fraud. Intentional financial misstatement or accounting fraud over several years will be subjected to higher surcharges than the amounts specified in the current external audit law. They will also revise the internal audit sentencing guidelines, which previously received a reduced measure compared to the CEO and CFO. If efforts were made to prevent accounting fraud, sanctions will be reduced, whereas no reductions will be granted for negligence.
Financial authorities expect that improvements related to the accounting fraud system can be made by refining enforcement decrees and supervisory regulations and plan to accelerate the process. A financial committee official noted, “We aim to complete improvement plans in the first half of the year and implement them in the second half.”
Meanwhile, since 2019, the Financial Services Commission has been rewarding informants who help detect and address accounting fraud under external audit law with government budget funds. Last year, the total amount spent by the government for accounting fraud reward payments was 407 million won, which is 1.6 times higher than the previous year’s 251 million won. The average payment amount per case also increased to 58.14 million won, up 1.8 times from 31.31 million won the previous year.