Daewoo Shipbuilding and Marine Engineering (DSME)’s $2.6-billlion accounting fiasco; KDB, management, Deloitte share blame

http://www.koreatimes.co.kr/www/news/opinon/2015/07/202_183859.html

Updated : 2015-07-30 17:06

Daewoo’s $2.6-bil. fiasco

KDB, management, Deloitte share blame

Daewoo Shipbuilding and Marine Engineering (DSME) Wednesday disclosed an operating loss of 3.03 trillion won or about $2.6 billion on sales of 1.67 trillion won in the second quarter. This disastrous performance is the work of three incompetent parties ― the Korea Development Bank (KDB), the shipbuilder’s previous and current management and accounting firm Deloitte Anjin. As usual, the taxpayers are the victim. The state bank should take the biggest portion of the blame. As the controlling shareholder, it either failed to detect or condoned what has gone wrong with its “subsidiary.”KDB claims it was not aware of the bottom line crash until the last minute, but this makes little sense considering the shipbuilder’s chief financial officer is from the bank.

The biggest contributor to DSME’s problem is the rising amount of money it failed to receive from ship owners who placed orders.

This amount skyrocketed from 3.36 trillion won in 2012 to 9.4 trillion won in the first quarter of this year. In other words, the writing has been on the wall for so long that it’s hard to miss. Daewoo’s two biggest rivals ― Hyundai and Samsung Heavy Industries ― took a “bath” with large losses on their books, while it made a hefty profit. Is it possible for the CFO not to know something was amiss and say he did his job?

If KDB knew of the trouble in advance and feigned ignorance, it would not just be a dereliction of duty but could open it to a major lawsuit by shareholders, who have seen their DSME stocks half in value in less than a month.

The bank has without question violated its stated role of last resort and tried to act as a profit-oriented commercial bank. This meant it ended up losing a chance to sell its stake and privatize the shipbuilder by engaging in years of pursuing an elusive highest bidder. The public fund of 1 trillion won used for the debt-to-equity swap in 2000 has already been recovered.

The real stickler, however, is that KDB together with the powerful Financial Services Commission (FSC), also a stakeholder, is taking an extraordinary step to order creditor banks to extend more loans and provide export guarantees. Eight banks have about 20 trillion won in combined exposure to DSME. State-guaranteed by taxpayers’ money on their loans, the banks have happily obliged.

The shipbuilder’s previous CEOs are suspected of playing musical chairs to avoid having snowballing losses under their watch in the hope of having a second term on the job. They claim innocence, arguing that losses are inevitable under the unique circumstances involving contracts for special rigs.

The shipbuilder explains that this kind of contract involves a lot of unpredictable elements that result in cost overruns, among other things, but if they shuffled figures to make them look good, it constitutes fraud. Daewoo competed fiercely with Hyundai and Samsung to win an incredible combined 70 percent of global orders of this kind.

Last but not least, Deloitte Anjin should take the blame as a watchdog that failed to bark when it was supposed to. It also plays second fiddle to its customer, citing the unpredictable nature of the deal. But it’s a good accountant’s job to predict dangers ahead and minimize the “risk of material misstatement” to smooth things out for shareholders, clients and other stakeholders. Remember Arthur Andersen, remember Enron!

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