KT&G likely to get slap on wrist for alleged accounting fraud

An audit review committee under South Korea’s financial regulator has concluded that tobacco maker KT&G did not intentionally violate accounting rules when it acquired an Indonesian firm in 2011, according to news reports Sunday.

The latest decision, when officially announced, will likely help the Korean tobacco giant to eliminate delisting concerns.

In a meeting last Thursday, the committee reportedly decided that the breach of local accounting rules was mere “gross negligence,” or “negligence” -- which will allow it to avoid a prosecutorial probe.

The Financial Services Commission began audit reviews in November 2017 as fraud allegations regarding KT&G’s acquisition started to emerge in political circles.

The firm was accused of having executed poor due diligence on Indonesia’s then sixth-largest tobacco manufacturer Trisakti. It also allegedly kept making massive investments in the Indonesian firm, which had been in red for years.

In a preliminary notice sent to the KT&G in March, the financial watchdog warned that it could face prosecutorial probe and dismissal of executives in charge for falsely reporting its Indonesian affiliate in its consolidated financial statements, although it has no actual ownership in the firm.

The FSC had judged that the company does not actually own the Indonesian tobacco firm because of a dual contract it had signed with former stakeholders.

After a nearly two-month long scrutiny since April this year, the FSC committee, specialized in reviewing companies’ accounting practices and frauds, has concluded that KT&G violated financial reporting standards unintentionally.

The company was careful in responding to the financial regulator’s interim decision last week.

“(KT&G) isn’t fully aware of the details of the Thursday meeting,” said a company official.

“We will continue to explain our position and prove our innocence to the authorities.”

The local financial law divides penalties for accounting frauds into three categories based on severity --“negligence”, “gross negligence” and “intentional.”

The final level of punishment will be confirmed through additional meetings held by the FSC and the Securities & Futures Commission, which oversees the capital market. The follow-up procedures will take more than a month.

Once the committee’s conclusion is authorized, KT&G will be able to avoid prosecution as well as delisting risks. Under the current regulations, the Korea Exchange can review delisting shares of firms that are prosecuted.

By Choi Jae-hee (cjh@heraldcorp.com)