[THE INVESTOR] South Korea’s state audit agency has discovered accounting fraud amounting to 1.5 trillion won ($1.27 billion) at Daewoo Shipbuilding & Marine Engineering Co., with its main creditor not appropriately surveilling and managing the firm. 

South Korea’s Board of Audit and Inspection said Daewoo Shipbuilding’s management also carried out business projects without legitimate procedures, which caused its financial losses to snowball. The shipbuilder posted an operating loss of 5.5 trillion won last year.

While Korea Development Bank was obligated to conduct inspections on the management of Daewoo Shipbuilding, the main creditor did not conduct the necessary investigation.

The BAI said its own study shows the shipbuilding company held the most risky grade of five.

The BAI added that Daewoo Shipbuilding overestimated its operating profit in 2013 and 2014 by 44 billion won and 1.09 trillion won, respectively.

The agency also pointed out that Daewoo Shipbuilding handed out incentives despite its lackluster earnings report.

The company had decided to provide each employee with 9.46 million won on average as incentives last year, however, KDB did not take action despite ongoing financial losses. As a result, the company paid out incentives worth 87.7 billion won.

The latest crisis from Daewoo Shipbuilding has emerged as one of the major drags on the South Korean economy, as the shipbuilding industry has been a major growth engine for the country.

Politicians have also been keeping an eye on the issue as the crisis is feared to spark massive layoffs at the shipyard and its subcontractors.

theinvestor@heraldcorp.com