- Outcome to affect not just entire group but biopharma sector
The accounting fraud allegation involving Samsung BioLogics has been one of the major issues in the domestic biopharmaceutical industry.
The outcome of ongoing litigation is drawing keen attention as it likely to affect not just the biological company and the entire Samsung Group but the nation’s nascent biopharmaceutical industry.
After a yearlong investigation into the case, the company is in a tight spot with prosecutors speeding up the probe into the alleged accounting fraud after reportedly securing evidence. Minority shareholders have also filed a lawsuit against the firm to demand compensations for damages.
The scandal started in May last year when the Financial Supervisory Service (FSS) gave preliminary notice to Samsung BioLogics and its auditors, explaining about the measures it could take concerning the alleged accounting breach.
The regulator’s probe centered on questions on how the biopharmaceutical company recorded large profits in 2015 after recording losses for the previous year. Samsung Biologics netted 1.9 trillion won ($1.72 billion) that year after it changed the method used to calculate the value of Samsung Bioepis.
Following the financial regulator’s move, the company held an emergency news conference to claim their innocence. "Our company did not violate any accounting regulations as it applied the International Financial Reporting Standards (IFRS) after consulting with outside experts," said Shim Byung-hwa, leader of Samsung BioLogics business innovation team. "To be classified as accounting fraud, we would have had to reap benefits from the accounting violations, but we did not."
Despite the company's quick rebuttal, the Securities and Futures Commission concluded that Samsung BioLogics' breach of accounting rule in 2015 was intentional, by making omission in its regulatory filing in July.
"Samsung BioLogics failed to notify investors of crucial information related to its joint-venture agreement with Biogen," SFC Chairman Kim Yong-bum said. "The missing information affected the evaluation of Samsung Bioepis." The agreement in question referred to Biogen's call option right to secure just below 50 percent shares in Samsung Bioepis.
The ruling marked the first crisis for the company as the Korean Exchange (KRX) suspended the share trading of Samsung BioLogics last November following the SFC ruling. The stock market operator even hinted at the possibility of delisting the company from the main KOSPI bourse.
Contrary to speculations that the company will be delisted from the main bourse, however, KRX allowed continued trading of Samsung BioLogics' shares in December, saying, ""Despite some shortcomings regarding its operational transparency, we have decided to maintain its listing, as we concluded that there was no serious concern about the company's continuity as its revenue and profitability have improved."
The resumption of Samsung BioLogics shares trading led the firm to recover market capitalization to the level of that before the allegation break out, suggesting that the company was out of the accounting controversy.
The good news did not stop there for Samsung BioLogics. The Seoul Administrative Court suspended both the Financial Services Commission (FSC)'s disciplinary action against Samsung BioLogics for alleged accounting fraud and disclosure violation in January and February this year.
The court accepted the company's argument that enforcing the penalties before a formal court ruling can cause irrecoverable damage to the firm.
"It can be recognized that the FSC’s move may cause damage to Samsung BioLogics difficult to recover in the future," the court said in the ruling. "Therefore, there is an urgent need to suspend the disciplinary action's effectiveness to prevent such a possibility."
Nevertheless, the company's luck turned downward again, as the prosecution began to speed up their probe into Samsung BioLogics.
In April, the Seoul Central District Prosecutors Office sought arrest warrant of two executives of Samsung Bioepis for allegedly destroying evidence linked to Samsung BioLogics's accounting fraud allegations.
The charges brought against the two included falsifying and destroying evidence and violating external audit laws. The arrest warrant was the first one filed after the SFC ruled that the company intentionally breached accounting rules in 2015 ahead of its initial public offering.
In the same month, a statement from accounting firms Samjong KPMG and Deloitte Anjin supporting that Samsung BioLogics deliberately breached accounting rules came to light through the prosecutor's investigation.
Accountants at Samjong and Anjin said that they had known about a call option in advance before the merger of Samsung C&T and Cheil Industries in 2015, as opposed to their initial testimony that they did not know it.
The statement went against Samsung BioLogics' previous claim that it did not intentionally conceal the existence of the call option as the accounting firm deemed that it met the accounting standards at the time.
On Friday, a cable news channel reported that a high-level management official at Samsung BioLogics admitted to cooking the books to the prosecutors.
According to YTN, the Samsung official acknowledged that there was illegal accounting during the revaluation of Samsung Bioepis' worth in 2014 and 2015.
"The official also confessed that the financial statements were manipulated by handing over falsified data to the accounting firms in 2016 and 2017," YTN reported. "At the time, Samsung demanded EY HanYoung, who was in charge of evaluating Samsung Bioepis' call option, to adjust the final report to Samsung's desired figures."
Samsung BioLogics handed over the falsified business plan of Bioepis directly to HanYoung to achieve such goals, the news channel added.
The information comes at a sensitive time for the company as a local court holds a second hearing Friday to review whether to issue an arrest warrant for Kim Tae-han, CEO of Samsung BioLogics.
In May, the court rejected the first warrant, ruling that there was room for dispute over charges of abetting the destruction of evidence in fraudulent accounting. This time around, the prosecutors have also added charges of accounting fraud and embezzlement.
If the arrest warrant is issued, the probe is likely to expand to higher-ranking officials at Samsung Electronics. According to the results of the investigation, prosecutors might summon Samsung Electronics Vice Chairman Lee Jae-yong.