April 26, 2024

• 

[THE INVESTOR] Foreign luxury brands are expected to face tougher scrutiny in Korea, one of their most lucrative markets, as the local financial authorities are seeking to require them to get external audits.

A bill pending at the National Assembly could make it obligatory for even unlisted and limited firms to undergo external audits, with the aim of improving accounting transparency. Currently, the local units of global firms operating as limited firms are exempt from external audits and regulatory filings.

There has been growing criticism over popular fashion houses such as Louis Vuitton, Chanel and Hermes, which rarely disclose their financial information to the public but have the upper hand in talks with local retailers and customers, thanks to their robust sales. 

Louis Vuitton Korea and Gucci Korea switched to a limited firm in 2010 and 2014, respectively, while Chanel Korea has never revealed its financial and operational information since its entry here as a limited firm in 1991.

Due to loopholes in accounting rules, their business practices, including overpricing and making few donations, have not been properly monitored thus far.

“In Europe, a company with more than 500 employees is obliged to reveal even nonfinancial corporate information to the public. But in Korea there are no regulations,” said Rep. Hong Il-pyo of the Bareun Party at a parliamentary audit session in November last year.

“Foreign firms are abusing these loopholes, applying double standards in Korea and their home country,” he said, urging more socially responsible business activities on donations and investments.

According to industry data compiled by the lawmaker, Burberry, Ferragamo, Prada, Bvlgari and Swatch transferred a combined 111.7 billion won (US$97.13 million) to their head offices in the form of dividend payouts in 2015. Prada, in particular, was found to have made no donations between 2010 and 2015.

The Financial Services Korea announced the revision last month to get final approval from the parliament.

Under the bill, a limited firm that is engaged in accounting fraud will be slapped with a fine worth 10 percent of the total fraud amount or up to 2 billion won. In such a case, even the head of the accounting firm is to face penalties such as indictment and the suspension of duties.

In Korea, the number of limited firms surged from 17,450 in 2010 to 26,858 in 2015.

By Lee Ji-yoon (jylee@heraldcorp.com)