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CEO of DSME Summoned on Charge of Window Dressing Accounting


Jung Sung-lip, CEO of Daewoo Shipbuilding & Marine Engineering (DSME) was summoned as a suspect by the prosecution on the charge of fraudulent accounting on Jan.17.

On January 17, Jung Sung-lip, CEO of Daewoo Shipbuilding & Marine Engineering (DSME) was summoned as a suspect by the prosecution on the charge of fraudulent accounting, casting clouds over the prospects of the company’s normalization.

After his inauguration in 2015, Jung has been taking the lead in restructuring and normalizing DSME through support from creditors. If prosecutors’ investigation into Jung becomes prolonged, it will inevitably have a negative impact on normalizing the beleaguered shipbuilder.

DSME employees were at a loss as its incumbent CEO Jung was summoned as a suspect with its former CEOs Nam Sang-tae and Ko Jae-ho already in jail

If the prosecution finds CEO Jung guilty of the accounting scandal, it cannot be completely ruled out that creditors will be asked to give up giving support to the company.

It is Jung that successfully mustered support from the government and creditors last year, claiming that DSME which faced a crisis of going under was still capable of surviving. The government, which had been considering whether to rescue DSME made up its mind to save the company in spite of oppositions from other large shipbuilders at the end of last year. As of the end of June last year, DSME had capital of minus 776.3 billion won (US$, which means its capital was completely impaired. Its debts exceeded 18 trillion won. Its debt ratio soared to 7,000 percent at the end of last year. There were many claims that it was natural to liquidate the company based on global management standards.

“The Korean government needs to liquidate DSME and change the shipbuilding industry into a Big Two (Hyundai Heavy Industries and Samsung Heavy Industries) system,” said McKinsey that carried out consulting work about the Korean shipbuilding industry for the Korean government through the Korea Offshore and Shipbuilding Association in its consulting report, However, the government ignored McKinsey’s consulting results and agreed with Jung who claimed that the Korean government should save the shipbuilder.

“It is an egregious national loss to let the company dissolve,” Jung said. “We have to normalize it for two years, and after three years, we must merge it with another shipbuilder or sell it off to a third party.” Finally Jung get the creditors to pledge 4.2 trillion won in aid, most of which was invested in rescuing DSME and only 700 billion won is now remaining. Jung has put his company’s own forecast that the shipbuilding market will turn around within two years.

However, McKinsey had a different outlook on the shipbuilding market. McKinsey predicted that the order volume for the next five years will drop 34 percent over the next five years. In the period of 2018 to 2020, when an order cliff starts, sales of the three leading Korean shipbuilders will stay at 41.7% of their sales from 2011 to 2015, its report forecast.

If Jung’s allegation is proven true, the company’s current status and projected results, which were used as a ground for the company’s comeback, will also lose much credibility. The troubled shipbuilder announced in a public disclosure that the company went into the black both in 2013 and 2014. After Jung took office in 2015 DSME publicly disclosed that the company posted 3 trillion won in loss. In March of last year, the company revised its accounting figures by chalking up about 750 billion won in 2013 and 2014 respectively.

It was found that DSME faked the figures to hide losses as the shipbuilder received offshore plant projects at low prices and incurred the losses. Former presidents Nam Sang-tae and Ko Jae-ho are being tried under arrest for being involved in such accounting swindles. Former president Ko is suspected of committed accounting frauds involving a total of 5.4 trillion won by fraudulently cutting back on cost or exaggerating sales and operating profits in the offshore and shipbuilding business from 2012 to 2014. Previously, in June 2016, former president Nam was put in jail on the charge of embezzlement and misappropriation during his term from 2006 to 2011.

It is said that the prosecution secured circumstantial evidence that current president Jung also committed the double-dealing. The prosecution believes that Jung ordered the Accounting Department of DSME to commit the accounting fraud — cutting its operating loss in 2015 by about 120 billion won last year. The prosecution suspects that Jung ordered the company to manipulate its accounting books because Jung worried that it will be designated as a supervised issue in the stock market if its capital impairment rate exceeds 50%.

The Original Posted by Michael Herh/Business Korea

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