Key cadastral cases of accounting review and supervision
Cases of accounting by companies that changed contracts to inflate sales and returned construction costs reflected in internal computer systems to make massive losses to the next year have been disclosed.
On the 28th, the Financial Supervisory Service unveiled 10 major cases of accounting review and supervision in the second half of last year so that companies and auditors can prevent similar errors in the settlement and audit process.
The Financial Supervisory Service is disclosing cases by shortening the cycle from once a year to half a year starting in 2024.
Software development and supplier A recognized the full amount of consideration received from advertisers as sales while running a personal broadcasting advertisement business that connects advertisers and live streamers. However, Company A was an agent arranging for the streamer to provide actual broadcast services, so only the commission had to be reflected in the sales as a net amount.
In particular, it was found that Company A revised the contents of the contract to appear to be the person directly providing the service when the issue of judgment of the person or agent was raised during the settlement process. Some of the basic contracts were transferred to detailed contracts or e-mails so that the basis for recognizing net amounts, such as commission rates, was not revealed. As a result, operating income and operating expenses were overestimated as much as the streamer’s share, respectively, but there was no impact on net profit.
Special fuel tank supplier B signed a change contract with a customer to increase the contract amount and outsourcing processing cost as outsourcing processing costs increased due to rising raw material prices and labor costs. In the process, the contract, which was expected to have an operating profit of about 2 billion won, was changed to a structure with an operating loss of about 10 billion won.
However, Company B reflected only part of the contract change effect in its current performance and passed the rest to the next year due to concerns about the impact on performance-based incentives linked to financial statements and operating profit. The net profit and equity capital were overestimated by distorting the progress by canceling some of the contract amount and the increase in the execution budget, which were originally reflected in the internal computer system.
The Financial Supervisory Service stressed, “The effects of contract changes should be reflected in all fiscal years that have occurred, and provisions related to loss-bearing contracts should be properly recognized.”
In some cases, agreements made with investors in exchange bonds of subsidiaries were omitted from the notes. Company C granted an investor the right to request the purchase of exchangeable bonds and other subsidiary shares in case of breach of contractual obligations, but did not disclose this on the grounds that it was not a related party transaction.
The Financial Supervisory Service determined that the agreement corresponds to contingent liabilities that may require the delivery of cash and other financial assets depending on whether future events occur. It is explained that contingent liabilities should be disclosed in the notes regardless of whether or not related parties are traded.
The Financial Supervisory Service said, “We should comprehensively check transaction-related data such as detailed contracts and e-mails as well as contracts, and closely examine whether the person or agent is or is an agent in the third-party transaction and whether the effect of contract change is reflected in the current period.”
