Regulator says Samsung Biologics breached accounting rules
Shares of Samsung Biologics fell by a fifth after South Korea’s financial regulator said the biopharmaceutical company had violated accounting rules.
The Financial Supervisory Service said on Tuesday that it had notified the company and its accounting firms of its provisional decision and the potential measures it could take concerning the alleged breach.
Shares in Samsung Biologics sank as much as 20 per cent on Wednesday before closing down 17 per cent, while the benchmark Kospi Composite index was off 0.4 per cent.
“We think that there was an accounting rule breach but the final decision could change,” said an FSS director. The company will be given a chance to respond to regulators before they make a final decision, which is due within the next couple of months.
In a statement, Samsung Biologics denied any wrongdoing and said it would prove it followed proper bookkeeping practices.
The FSS said it began a probe into the company earlier this year after an activist group raised questions about the dramatic turnround in the company’s 2015 earnings, suggesting Samsung Biologics may have inflated its profits ahead of its November 2016 stock market listing.
After four straight years of losses, the biopharmaceutical unit of Samsung group reported a big swing to a net profit of Won1.9tn ($1.8bn) for 2015.
Samsung said that was due to a change in accounting methods for its holdings in Samsung Bioepis, the affiliate of Samsung Biologics that makes copycat versions of biological drugs derived from living cells.
Under the new accounting practice the stake that Samsung Biologics holds in Bioepis, which is a joint venture with US pharmaceutical company Biogen, was reflected according to its market value, instead of at book value as was previously done. That boosted its equity gains from the JV.
$1.8bn
Net profit reported by the biopharmaceutical unit of Samsung group for 2015, after four straight years of losses
Some analysts said the accounting shift was made to facilitate the controversial merger in 2015 between two Samsung group units — Samsung C&T and Cheil Industries. Activist investor Elliott Management has said Samsung C&T was undervalued for the merger to help the group’s founding family strengthen its grip on Samsung Electronics, the group’s crown jewel.
“At that time, Samsung group had to buoy the value of Biologics to justify the merger ratio,” said Park Ju-guen, head of corporate analysis group CEO Score.
South Korea’s accounting rules stipulate that a company’s stake in a unit should be accounted for at book value when the holding exceeds 50 per cent. Samsung Biologics had a 91.2 per cent stake in Bioepis in 2015 so it appears to have violated accounting rules by reflecting its stake in Bioepis at market value. The FSS declined to comment. Samsung said it followed global accounting rules.
Samsung Biologics is 75 per cent owned by Samsung Electronics and Samsung C&T, the group’s de facto holding company. With a 17 per cent stake, Samsung heir-apparent Lee Jae-yong is the largest shareholder in Samsung C&T, which in turn holds stakes in key units including Samsung Electronics and Samsung Life Insurance.
Samsung Biologics faces a fine of up to 20 per cent of the breached amount if regulators judge the accounting breach to have been intentional. Trading in its shares could be halted if the breached amount is more than 2.5 per cent of the company’s capital, according to KB Securities.
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