South Korea’s financial regulator on Wednesday halted the stock trading of Samsung BioLogics upon ruling that it had intentionally violated accounting rules in 2015 to exaggerate its profits ahead of market listing.

The biopharmaceutical company -- affiliated with the nation’s largest conglomerate, Samsung Group -- will now face an examination that could potentially result in delisting.

“We have concluded that Samsung BioLogics arbitrarily interpreted the accounting rules and intentionally breached them in 2015,” Financial Services Commission Vice Chairman Kim Yong-beom, who leads the Securities and Futures Commission, said in a press briefing.

Imposing an 8 billion won ($7 million) penalty on the biotech company and handing over the case to the prosecution, the regulator also recommended that its CEO, Kim Tae-han, be dismissed from his post.

The two accounting firms in charge of Samsung BioLogics will also face penalties for neglecting their duties, Kim added.

While Deloitte Anjin received a three-year ban from auditing the biotech company, KPMG Samjung got a five-year ban and a 170 million won fine for gross negligence of duty. The SFC also demanded that four KPMG Samjung accountants who handled the case be suspended from practicing.

As opinions were divided over the change of accounting rules in recent years, the key factor throughout the regulatory probe was “intentionality” -- whether the biotech company knowingly manipulated its system for the sake of a favorable market evaluation.

In disputing the verdict, Samsung BioLogics pledged to file an administrative lawsuit challenging the financial regulator’s interpretation of its accounting practices.

“The SFC’s announcement today is very unfortunate. We are still confident that Samsung BioLogics has not breached any accounting rules,” Samsung BioLogics said in a statement.

The company’s claim is that its accounting practices had officially been approved in 2016 by the Korean Institute of Certified Public Accountants and questioning sessions that were attended by the Financial Supervisory Service. It also received an official response from the FSS and affirmative opinions from multiple accounting firms on the soundness of its accounting practices.

“Despite such facts, it is very disappointing that the SFC decided today that Samsung BioLogics intentionally infringed the accounting rules. Therefore, we will file an administrative lawsuit to prove the legality of Samsung BioLogics’ actions,” the company said.

Despite the judgment, the stock price of Samsung BioLogics took an upturn on Wednesday, ending at 334,500 won, up 6.7 percent from the previous session’s closing.

But trading for the biotech company’s stocks will be suspended for 20 days starting Thursday while the Korea Exchange determines the legitimacy of its listing and, if necessary, the level of sanctions, which could range from temporary trading suspension to delisting.

But considering various factors such as impact on the market and investors, observers say the chances of a delisting remains low.

In recent years, Daewoo Shipbuilding & Marine Engineering and Korea Aerospace Industries have faced similar accounting fraud judgments from the SFC but maintained their presence on the market after temporary trading suspensions. In the case of shipbuilder DSME, the disputed amount was a record-high 5 trillion won, and trading was suspended for a year and three months from July 2016 to October 2017.

“In the past cases of DSME and KAI, (the final judgment) was usually focused on the fiscal stability (of the subject company),” said Lee Tae-young, researcher at KB Securities.

After years of losses, Samsung BioLogics suddenly reported a net profit of 1.9 trillion won in 2015 after changing the method of calculating value for Samsung Bioepis, an affiliate established as a venture with the US-based Biogen Inc.

The biotech company was first accused of intentionally violating accounting rules in December 2016 by Rep. Sim Sang-jeung of the minority Justice Party and progressive civic group People’s Solidarity for Participatory Democracy.

In July this year, the FSC ruled that Samsung BioLogics violated accounting rules by failing to disclose the deal with Biogen on a call option for Samsung Bioepis, but held off making a decision on whether the change of calculation method also constituted a violation.

The company’s claim was that the change was in line with international accounting standards.

“I hope that (authorities) will see the essence of the accounting legitimacy,” Samsung BioLogics CEO Kim Tae-han told reporters right before attending the FSC review session earlier in the morning.

By Bae Hyun-jung (tellme@heraldcorp.com) and Sohn Ji-young (jys@heraldcorp.com)