Financial authorities have confirmed that they have begun to prepare sanctions against external organizations that perform corporate fair value assessments absurdly. The reality is that it is hard to make even 100 million won, yet these organizations exaggerate evaluations, claiming the companies will make 10 billion won next year. If failing corporations seek funding based on distorted valuation results, it could lead to harm for innocent individual investors.
On the 7th, a senior official from the financial authorities noted, “If fair value assessments are conducted excessively optimistically, favoring corporations, the companies will fail to adequately reflect various risks that should be included in their financial statements.” They added, “If failing corporations present inflated or deflated financial statements to raise funds through convertible bonds (CB) or bonds with warrants (BW), investors will bear the full brunt of the damage.”
This official said, “We plan to amend the system to impose sanctions on accounting firms or credit rating agencies that conduct fair value assessments inaccurately. However, we have not yet concretely established sanctions; relevant departments within the financial authorities and related organizations have just begun studying the necessary system revisions.”
Corporations receive fair value assessments periodically from external organizations. Fair value is a concept used to measure the actual market value of assets or liabilities, playing an important role in understanding a corporation's financial condition. Fair value assessments are primarily handled by accounting firms. Credit rating agencies and securities companies also often participate as external evaluators.
The problem is that the valuation standards of these accounting firms and credit rating agencies are uncertain and vary widely. They do not recognize each other’s analytical results. A financial authorities official said, 'If we consider a company exporting auto parts to China, the valuation results vary drastically depending on how the external institutions perceive the Chinese auto market.'
The financial authorities are sanctioning accounting fraud by corporations and external auditors through the Securities and Futures Commission. However, external organizations conducting fair value assessments have been in a gray area due to the lack of appropriate penal standards.
It is reported that departments such as the Capital Markets and Fair Markets divisions and the Accounting Systems team within the Financial Services Commission are participating in the study. The government is also planning to commission external experts to design policy frameworks. A financial authorities official said, 'We expect to finalize the sanctions plan as early as the second half of this year.'