This article was published on April 3, 2025, at 2:27 p.m. on the ChosunBiz MoneyMove site.
When auditing a corporation, there are various elements that must be carefully scrutinized for signs of distress. For instance, consider the bio company AbClon, which missed the deadline for submitting its audit report and saw its stock price hit the lower limit. AbClon announced in January of this year that its tentative sales last year were 3 billion won, but there was a conflict with the accounting firm during the audit process. It was discovered by the external auditor that some revenues should have been recognized on a net basis rather than gross (aggregates). If AbClon had not corrected the reported revenue by the end, the audit opinion could have been 'limited' or 'negative.'An accountant from an accounting firm
As the regular shareholders' meeting at the end of March approached, the audit season for the accounting industry wrapped up, but listed companies that failed to report their audit results to shareholders continued to emerge this year. The primary reason is that external auditors did not receive sufficient audit evidence. Although delays in submitting audit reports do not directly lead to sanctions from financial authorities, caution in investment is necessary as these corporations are likely to have financial structural issues.
Even if an audit opinion is given as appropriate, it is common for accountants to hide warning signs somewhere in the footnotes. This is why investors need to be diligent and review the information themselves.
According to the Korea Exchange's corporate disclosure channel KIND, a total of 29 listed companies were found to have failed to submit their audit reports last year, including 3 on the KOSPI, 19 on the KOSDAQ, and 7 on KONEX. According to the Act on External Audit of Stock Companies, companies with December fiscal year-end must submit their business reports by the end of March, within 90 days of the end of their fiscal year. External auditors use this information to prepare the audit report, verifying whether the corporation's financial statements comply with accounting standards.
The main reason for failing to submit audit reports on time is primarily due to audit delays. However, this should not simply be viewed as a matter of being 'late,' but rather as a kind of warning light. The fact that a corporation could not provide proper financial materials to the auditors indicates a higher likelihood of later revelations of management misappropriation or fraudulent accounting.
When listening to accountants responsible for audit work, factors that may raise suspicion about distressed corporations include abnormal fluctuations in revenue, fictitious sales, cut-off errors, adjustments in revenue recognition timing, and differences between gross and net bases. Moreover, excessive related party transactions, discrepancies between operating cash flow and net income, long overdue receivables, and increases in inventories are also points that need to be examined. Corporations accumulating deficits may have raised funds through third-party allocation of paid-in capital or issued convertible bonds (CB) and bonds with stock warrants (BW), with outflows of funds to outside sources.
An accountant from a large accounting firm said, 'From the planning stage of the audit, we recognize signs of fraud and go through inspection procedures to establish appropriate audit strategies,' adding, 'related personnel gather and strategize over two to three days, and these fraud signs continue to be monitored during the audit procedure.'
If any discrepancies from accounting standards are found in such items and the internal control procedures are deemed inadequate, what actions can accounting firms take? They can request additional evidence from the corporation and recommend corrections upon discovering elements suspected of distress. This process causes delays.
Another accountant from a large accounting firm noted, 'When signs of distress are found, the depth and breadth of the audit increase, so if we typically use around 100 samples in computer audits, we might end up using 200 to 300 instead,' adding, 'The overall workload increases significantly, requiring more personnel and time, which naturally results in higher hourly compensation.'
Cases frequently arise where management fails to provide explanations for issues discovered during the accounting firm's thorough investigation or outright rejects them. Additionally, when an accounting firm issues an audit opinion of 'rejection' or 'negative,' they may delay the submission of the audit report as a stalling tactic. Corporations that exceed submission deadlines are designated as management items, and if they fail to submit within 10 business days thereafter, they will undergo delisting procedures.
Another accounting industry official said, 'Of course, not all corporations that delay submitting their audit reports can be deemed distressed, but there is a reason auditors scrutinize more closely,' and added, 'Moreover, the majority of these corporations are penny stocks with prices below 1,000 won or have already been designated as management or alert items by the exchange, so caution in investment is advised.'