Korea seeks to improve shipyards' accounting practices

The South Korean top financial regulator said Wednesday that it will seek to tighten monitoring of local shipbuilders' accounting practices amid their massive losses stemming from an industrywide slump.

In the second quarter, the country's big three shipyards -- Hyundai Heavy Industries Co., Daewoo Shipbuilding & Marine Engineering Co. and Samsung Heavy Industries Co., -- racked up a combined loss of 3.78 trillion won ($3.3 billion) due largely to a rise in shipbuilding costs and losses from offshore plant construction.

And their combined operating loss was 4.75 trillion won, also marking the largest-ever shortfall, according to industry data.

Daewoo Shipbuilding alone suffered a net loss of 2.39 trillion won in the April-June period, the largest red figure among the three players.

Its huge quarterly loss sent a strong shockwave in the South Korean financial market, cutting its stock price by half to 6,600 won in the beginning of September from 12,500 won in mid-July.

The Financial Services Commission said the sudden far worse-than-expected loss was attributable to murky accounting practices, dubbed "big bath," under which companies make huge write-downs on their expenses in previous quarters and take these losses all at one time.

The so-called 'heavy-tail' payment system also weighed on their balance sheet as some 60 percent of contract money is paid at the time of contract deadline.

"When they sign long-term projects, their quarterly net profit is measured by some vague terms," said the FSC. "It gives imprecise information to investors."

The FSC will come up with new guidelines before the end of this year to require companies to reflect changed expenses and losses on their financial book evenly and accurately.

The regulator said it will also tighten monitoring on account cooking to prevent such practices.

"We will force shipbuilding companies to disclose related accounting information and to have external audits," the FSC said. (Yonhap)