South Korea’s financial regulators are moving to change the rules so they can fine the real owners of companies involved in accounting fraud.
Until now, even if a company owner was suspected of leading fraudulent accounting practices, they couldn’t be punished unless authorities could prove they received a salary or other financial benefits. However the government plans to revise the enforcement rules and oversight regulations so that the changes can take effect in the second half of the year.
The case of Kim Young-jun, former chairman of the conglomerate known as EGroup (formerly Ewha Group), was a major reason for the push to strengthen penalties. Kim was accused of violating the Capital Markets Act by using company funds for personal gain and covering it up with false accounting.
A senior financial official said “We are working on revising the system so that company owners can also be fined for accounting fraud,” adding that the main framework was already in place and the details were being finalized for an official announcement soon.
In many cases of accounting fraud in S. Korea, company owners—whether they hold the official title of chairman or operate behind the scenes—are directly involved, especially at smaller firms. However, current laws only allow fines for CEOs and chief financial officers (CFOs), meaning the actual owners often escape punishment unless they receive a salary or dividends.
Authorities have reportedly found cases where company owners pressured, threatened, or persuaded employees to manipulate financial statements. Kim’s case, in which the company’s owner was accused of embezzlement, fraud, and tax evasion, played a key role in the decision to strengthen penalties.
Former chairman Kim was arrested on charges of creating a secret fund by listing family members as fake advisors and paying them salaries from company accounts. He also allegedly ordered the sale of company-issued securities at below-market prices and used false disclosures to hide his activities while under investigation for fraud. Authorities also found evidence that he manipulated financial records to embezzle hundreds of billions of won.
In February, the Korea Exchange decided to delist three Ewha’s affiliates—EID, Ewha Electric, and Etron—after suspending their stock trading. A financial regulatory official said, “If a company’s real owner used their influence to encourage fraudulent accounting, it makes sense for them to be fined as well.”
Financial regulators are also planning to impose heavier fines for accounting fraud. Companies that intentionally falsify financial records or commit fraud over multiple years will face penalties higher than those currently set by law.
The rules for internal auditors, who were previously subject to lighter penalties compared to CEOs and CFOs, will also be revised. If auditors make efforts to prevent fraud, they may receive reduced penalties, but if they ignore or allow fraud to continue, they will no longer be eligible for leniency.
The authorities aims to speed up these changes by revising enforcement rules rather than passing a new law. A Financial Services Commission official said, “We plan to finalize the reforms in the first half of the year and implement them in the second half.”
Meanwhile since 2019, S. Korea has offered financial rewards for whistleblowers who help uncover accounting fraud.
Last year, the government paid out a total of 407 million won (about $278,000) in whistleblower rewards, a 1.6-fold increase from $172,000 the previous year. The average reward per case also rose to about $39,840, nearly double the previous year’s $21,450.
