Rich & Co., the ongoing controversy over accounting fraud. Accounting Keywords, 『Accrual Basis』!

The center of controversy at Hanmi Accounting Corp., has been audited for eight years...

호주브레이크뉴스 | 기사입력 2020/11/06 [10:09]

Rich & Co., the ongoing controversy over accounting fraud. Accounting Keywords, 『Accrual Basis』!

The center of controversy at Hanmi Accounting Corp., has been audited for eight years...

호주브레이크뉴스 | 입력 : 2020/11/06 [10:09]


▲     ©aubreaknews


Controversy continues over the accounting fraud of Rich & Co. (CEO Han Seung-pyo), which runs an independent insurance agency (GA).


At the center of the controversy is Hanmi Accounting Corp., which has been the audit and accounting firm of Rich & Co. for eight years. A thorough supervision by the financial authorities is being demanded.


In addition, Rich & Co. has recently failed to pay fees to policy lenders. Numerous lawsuits have been filed. The Financial Supervisory Service is also receiving a series of petitions pointing to such fraudulent accounting. It is pointed out that the Financial Supervisory Service's Insurance Supervision Bureau is urgently needed for precision supervision and management


Most GA companies now adopt cashism, or pragmatism, in their accounting processes. Cashism is the method of recognising transactions at the time of receipt or payment of cash by the method of government accounting.


But Rich & Co. is unique. It chose Accurate Basis.


Sales accrualism is a concept that corresponds with cashism. It has nothing to do with the income and expenditure of cash. It is solely the basis for recognising period gains and losses at the time when revenue and expenses are incurred. There is room for some company performance using accrualism. This is the background of the controversy over accounting fraud.


The accrual accounting principle allows financial statements to be packaged in large profits even if the company enters into a contract for processing sales. Let's say it was a genuine sale. However, even if the contract is not executed, it will be reflected in book profits for now. Therefore, accounting experts point out that "the principle of accrualism can lead to large-scale accounting fraud."


This is the case with Daewoo Shipbuilding & Marine Engineering Co.'s accounting fraud worth trillions of won, which inflicted damage on numerous shareholders, clients and creditors four years ago. At that time, the audit accounting firm, the Anjin Accounting Corp., and the accountants, were sentenced to prison terms after receiving massive disciplinary action from the Securities and Futures Commission. This is because the accountants turned a blind eye to accounting fraud.


◈Rich & Co. "65% storm growth in Corona" Accounting expert "Looks like Daewoo Shipbuilding & Marine Engineering Co.'s accounting fraud"


Rich & Co. made its position public through an insurance media outlet last month. Rich & Co. claimed through the media, "We have received appropriate opinions from accounting firms every year and our competitors in the same industry are adopting these accrual accounting principles."


Regarding the recent financing in the capital market, he added, "It is a business structure that requires working capital investment to grow sales due to discrepancies in the collection of trade bonds from the original insurance company and the payment period for the designer, and financing has been conducted legally through legal reviews."


According to Eclin Service, which can see Rich & Co.'s performance, Rich & Co.'s sales and operating profit reached 165.7 billion won and 16.7 billion won in the first half of this year. The figure is up 36 percent and 65 percent, respectively, compared to the same period last year-on-year. Despite the prolonged aftermath of Corona 19, the company showed off its huge performance. As a result, insurance planners are also flocking to Rich & Co., the company is promoting.


As of September, the number of Rich & Co. designers stood at 3,600. Compared to the same period last year, it increased by 27 percent. Rich & Co. said in an article in the media, "Rich & Co. is seeing a rise in performance, operating profit, and designer numbers, and its fundamentals are getting stronger." "Rich & Co continues to drive digital innovation, leading the insurance distribution market and showing a new normality in insurance distribution."


Park Sang-hyun, executive director of Rich & Co., also explained the reason why most companies and large companies in the same industry do not adopt revenue generationism is because they do not have accounting infrastructure.


However, the opinions of accountants and insurance industry officials were quite the opposite.


First, accountants say that at least the insurance agent industry's adoption of accrualism without adopting cashism for the sales of insurance recruitment fees is a very dangerous approach.


Furthermore, he shook his head, saying that the explanation that infrastructure is needed to adopt accrualism is totally an unconvincing explanation.


Of course, accrualism itself is not a violation. However, it is controversial because the timing of the return of gains and losses should be based on the date when the financial insurance industry is finalized. This is because there are many definite variables of profit or loss, such as the cancellation of the contract in the middle. Therefore, it should not be classified into items of sales or assets.


In particular, he pointed out that the extent of fluctuations in financial statements in the future could grow astronomically, such as Daewoo Shipbuilding & Marine Engineering, if the government adopts such an accrualism because there are many cancellations of customers in the insurance industry.


In other words, due to the nature of the industry, the contract alone has many definite variables for profit or loss. This means that sales and assets should not be classified as items. In particular, the extent of changes in future financial statements' gains and losses could be very large if accrualism is adopted, because there are many cancellations of insurance customers. So did Daewoo Shipbuilding & Marine Engineering.


In 2016, Daewoo Shipbuilding & Marine Engineering announced 2.7 trillion won in losses alone. Prior to that, it showed steady growth every year. However, when accounting fraud was pointed out and the principle of accounting was changed, companies that had been over-packaged were revealed. At that time, the audit accounting firm of Daewoo Shipbuilding & Marine Engineering was Anjin Accounting Corp.


While conducting an external audit of Daewoo Shipbuilding for the 2013-2015 fiscal year, the accountants at Anjin found out that Daewoo Shipbuilding committed accounting fraud through account receivables generationism. Nevertheless, he was indicted on charges of falsely writing the audit report.

"The defendants did not take necessary measures, such as expanding the scope of the audit, even though they recognized the possibility of irregularities or errors in accounting for Daewoo Shipbuilding & Marine Engineering," the court said.

At that time, Anjin and related accountants made excuses to shareholders and investigative agencies, saying that large losses were reflected under the pretext of falling oil prices. Inside, however, a bomb of over-counted accounting fraud caused by account receivables eventually exploded in a mountain.


The Supreme Court sentenced Bae (48), a former director of Anjin Accounting Corp., to two and a half years in prison on charges of violating the law on external audits of the corporation. Lim (47) and Kang (39), the accountant, were also sentenced to one and a half years in prison. Uhm, 48, was sentenced to one year in prison and suspended for two years.


The court also ruled that the Anjin accounting firm, which was indicted together under a punishment rule that punishes both illegal actors and their subsidiaries, should pay 75 million won in fines. The ruling contained the judiciary's strong will to end the misdeeds of accounting fraud.


▲ Hanmi Accounting Corp. emphasized 'sustaining growth rather than humanly developing its appearance.' Capture of the home page of Hanmi Accounting Corp.  ©aubreaknews


◈It has been 8 years since the Korea-U.S. accounting firm, Rich & Co., which closed its eyes to Hansol Art One Paper's accounting fraud in 2013.


Currently, Rich & Co.'s auditor is a Korean-American accounting firm. If he is audited from 2103 to this year, he will be in charge for eight consecutive years.


It takes about a long time. As a result, accountants also pointed out the risk of collusion between auditors and companies.


Due to the nature of financial-related businesses that require transparency, it is customary to change auditors once every three years. On the other hand, there are many concerns that Rich & Co. and Hanmi Accounting Corp. have been together for too long.


▲ Table of audit details in the 2019 Rich & Co audit report. Capture of the Financial Supervisory Service's electronic disclosure system.  ©aubreaknews


According to the audit report of Rich & Co., which was posted in the electronic disclosure by the Financial Supervisory Service, the Korea-U.S. accounting firm has never conducted financial transaction inquiries, bond financial inquiries, and lawyer inquiries. Despite numerous companies' sales receivables and the company's litigation cases, they gave "appropriate" opinions without conducting outside inquiries. Experts have pointed out that it is very unusual.


Hanmi Accounting Corp. audited Hansol Art One Paper, a listed company, in the same year that Daewoo Shipbuilding & Marine Engineering Co. broke out in 2016. In the process, the audit opinion was not properly expressed by neglecting the audit procedures for overstatement of trade receivables and accounting for the equity method of subsidiaries.


In addition, Hansol Art One Paper incorrectly accounted for development costs of intangible assets as expenses, but it did not properly reflect this in its audit opinion.


As a result, the Securities and Futures Commission of the financial authorities imposed strong sanctions on the Korea-U.S. accounting firm for violating accounting audit standards, including the restriction on auditing work and the establishment of additional compensation funds for damages.


In addition, the Securities and Futures Commission imposed strong measures on certified public accountants belonging to each corporation, such as listing their sovereignty, limiting auditing of designated companies, limiting auditing duties of the companies concerned, and training of their duties.


◈lich & Co., the higher the sales and net profits, the lower the cash shortage of billions of won every year...


Such account receivables accrualism means that financial statements can receive "appropriate" opinions when their sales performance is over-packaged. They say that accounting fraud is highly risky.


In this case, the value of the company's stock increases. In addition, the company's financing could be as bold as that. In addition, a large number of insurance fundraisers are flocking to the market, and the company's financial loans are as easy as that.


However, the problem is when the trade receivables should actually be recovered. If a refund is made due to a small amount or cancellation of the contract, the company will then accumulate loan-loss reserves on the trade receivables. The bubble of assets that had been overpackaged since that moment is reflected in the financial statements. It is a structure in which numerous victims are forced to be mass-produced.


▲ Rich & Co. Cash Flow Statement   ©aubreaknews


In fact, if you look at Rich & Co.'s cash flow table over the past three years, the 2018 operating activity cash flow has increased by 17.4 billion won in sales receivables and increased sales by more than 20 billion won. Net profit was 3.7 billion won.


However, the result is a cash shortage of minus 3.2 billion won.

The cash flow of business activities in 2019 increased by 195 billion won in sales receivables and increased sales by more than 60 billion won. Net profit was 5.5 billion won. As a result, however, there was a cash shortage of 8.3 billion won.


▲ The shin-ryu law firm filed a petition with the Financial Supervisory Service requesting supervision of Rich & Co.'s accounting fraud and misconduct.    ©aubreaknews


Rich & Co.'s request for supervision of accounting fraud and misconduct was explained by the Financial Supervisory Service, "The existence of processed sales bonds in the balance of sales receivables and the excessive recognition of processed sales receivables that are not collected in cash are causing negative cash flows in business activities even if sales, operating profit and net profit all increase."


He added, "The ultimate accumulation of such fraudulent practices could result in a surplus if there is a shortage of funds. Currently, the company is raising funds by issuing bonds (KRW 20 billion) and borrowing money from financial institutions based on more than KRW 100 billion in sales receivables derived from fraudulent accounting due to a lack of operating capital," he told reporters, informing them of the risks of Rich & Co.'s handling of sales-generating stocks.


According to Article 70-3 of the Enforcement Decree of the Corporate Tax Act and Article 69 of the Enforcement Decree, "The timing of profit and loss attribution, such as insurance premiums imported from insurance businesses by corporations operating insurance agents under the Korean Standard Industrial Classification, is a business year that includes the date when the profits and losses are confirmed." It is urgent for financial authorities and the National Tax Service to investigate whether Rich & Co.'s accounting for accruals violates the applicable tax law.


Of course, it is not to conclude that Hanmi Accounting Corp. has committed accounting fraud. However, if deep concern becomes a reality, the damage will become a snowball.


Mangwoo Boreok(亡牛補牢) It means to repair the barn after losing the cow. In other words, that should not be the case.


Meanwhile, reporters tried to make phone calls to the Hanmi Accounting Corp. several times. I wanted to confirm my rebuttal position or another view. However, he was consistent with no comment.

<Writers/columnists Sanders Lee & Park Cheol-seong are waiting for us.>

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