The Financial Supervisory Service disclosed major findings from accounting reviews and inspections for the first half of 2025.
On the 2nd, Financial Supervisory Service (FSS) disclosed 10 findings from accounting reviews and inspections in the first half of this year. By type: ▲ three cases involving investment shares in subsidiaries and associates ▲ three cases involving inventories and property, plant and equipment ▲ two cases involving revenue and cost of sales ▲ two cases involving other assets and liability, such as overstated development costs.
Financial Supervisory Service (FSS) has steadily disclosed representative review and inspection cases since 2011. Starting in 2024, it shortened the disclosure cycle from once a year to twice a year. The total number of cases disclosed so far is 192.
A representative case detected in this review involved misclassifying investment shares in an associate. Company A, which operates in other specialized wholesale, was found to have inflated current profit and loss by not treating Company B as an associate despite forming a circular shareholding structure with Company B and Company C within the same group.
Specifically, the group has a circular shareholding structure that goes from Company A → Company B → Company C → Company A. Each holds 21%, 29%, and 23% equity, respectively, making each the largest shareholder of the investee it holds. In such a structure, Company B is an associate of Company A, so Company A should have recognized the loss from selling Company B shares in current profit and loss.
However, Company A did not classify Company B as an associate, arguing that "it agreed not to exercise 5% of the voting rights with Company B," thus claiming its effective equity was below 20%. Instead, it presented the Company B shares as financial assets at fair value through other comprehensive income (FV-OCI) and excluded the loss on the sale of Company B shares from current profit and loss. This resulted in overstated current profit and loss.
Financial Supervisory Service (FSS) determined, "Company A, as the largest shareholder of Company B, has an equity ratio of 20% or more, and there is interaction among management, such as an A director concurrently serving at B and actively participating in processes like deciding the allocation of new shares in B's paid-in capital increase targeting A." It also viewed the agreement restricting voting rights as lacking credibility.
Another representative case involved overstating development costs. Company D, a KOSDAQ-listed maker and seller of wired and wireless communication equipment, treated new product development activities as an intangible asset (development costs) even though they failed to meet the criteria for recognition as an asset. As a result, performance that had recorded operating losses for three consecutive years appeared to have swung to a profit, and at the same time, it avoided the risk of being designated as an issue for management.
Financial Supervisory Service (FSS) said, "The technology in question is implemented in a new way that did not previously exist and is very difficult, but the company failed to present objective evidence of technical feasibility," and noted, "It failed to distinguish between the research and development stages and included all labor costs unrelated to new product development in development costs, meaning it did not reliably measure expenditures incurred during the development process."
There was also a case of recording inventories higher than actual. Company E, a cosmetics seller, had an incentive to inflate profits as exports plunged due to COVID-19. In this situation, it changed its production process at the request of an outside processor. Previously, the outside contractor purchased materials and supplies directly to produce, but after the change, Company E purchased materials and supplies and provided them to the outside contractor.
The problem arose because this change was not immediately reflected in the ERP system, leading to manual control of materials and supplies issues. In the process, Company E omitted some materials and supplies issues used in products already sold, resulting in books that showed inventories higher than actual. By inflating inventories, the related cost was not recognized as an expense in the current year and was deferred to the following year, which distorted results by overstating net income and equity compared to reality.
An Financial Supervisory Service (FSS) official said, "We will continue to regularly disclose major findings from reviews and inspections to help investors identify potential risk factors and make reasonable judgments, while also sharing the findings with corporations and auditors through related agencies to prevent the recurrence of similar cases."