South Korea’s financial regulator on Thursday imposed a top-level sanction on Samsung BioLogics over a past accounting irregularity, concluding that its omission of key governance information notices was intentional, but reserved its final opinion on accounting fraud charges.
The biopharmaceutical affiliate of Samsung Group is therefore to face a prosecutorial probe over the case and have its stock transactions suspended, but has so far avoided the worst scenario of being delisted.
“The commission has concluded that the company violated accounting rules and intentionally omitted the official notices in full awareness of the breach,” Kim Yong-beom, vice chairman of the Financial Services Commission and chief of the regulator’s Securities and Futures Commission, said in a press briefing.
“We will thus charge (Samsung BioLogics) to the prosecution and recommend that the executive member in charge be dismissed.”
Once the company publicly announces the sanction, its stock transactions will be suspended until the final probe results on the accounting breach, according to the stock market operator Korea Exchange.
The “intentional breach” decision and the consequent prosecutorial charge were some of the maximum measures possible. For some time, observers speculated that the regulator may end up defining the case as “gross negligence” in a compromising gesture.
“Samsung BioLogics’ accounting processes have been in accordance with the International Financial Reporting Standards,” the company said in a press release, after the FSC announcement.
“We shall look for all legal solutions possible such as administrative lawsuits in order to protect investor interests.”
In May, financial authorities gave a preliminary notice to the pharmaceutical company on its suspected breach of accounting rules in 2015.
The inspection mostly focused on the company’s sudden profits after changing the value calculating method for its affiliate Samsung Bioepis.
Samsung Bioepis was a joint venture established by Samsung BioLogics and US-based Biogen in 2012. The US company held the right to a call option to raise its stake in the joint venture to 50 percent minus one share, a right effective until June 2018, but this was not reflected in the company’s official notice until 2015.
In that year, BioLogics changed its accounting standards to view Bioepis as an affiliate, no longer as a subsidiary, claiming that it had become likely for Biogen to exercise its call option as Bioepis’ value soared after the approval of two biosimilar drugs. It was only in early 2018, however, that Biogen finally confirmed its plan to exercise the disputed call option. Biogen exercised the call option to raise its stake in their joint venture Samsung Bioepis to 49.9 percent in June.
After the dubious accounting shift, Samsung BioLogics logged a one-time net profit of 1.9 trillion won ($1.68 billion), after four straight years of deficits.
Suspecting that BioLogics had no reason to change the accounting standards at the time, regulators viewed the move as a deliberate accounting violation seeking to overestimate its profit ahead of its initial public offering in the following year.
The FSC panel, however, held off its decision on whether the company’s rule change itself constituted a breach of accounting rules, citing the lack of grounds.
The financial market watchdog Financial Supervisory Service, while pointing out the accounting rule change in 2015, had not clearly pointed out which of the two methods is legitimate, according to Kim.
“In order to impose an administrative measure, the range and content of illegality should be clear and specific,” Kim said, demanding the FSS for further inspection on the given issue.
By Bae Hyun-jung (firstname.lastname@example.org)