[Edaily Marketin, Reporter Heo Ji-eun] #KoryoZinc and #Youngpoong have avoided the worst-case scenario of a legal disaster in the final stage of sanctions by financial authorities regarding their accounting audits. As the Securities and Futures Commission’s decision spared them from referral to the prosecution, it is interpreted that they have, for the time being, successfully averted the full-scale spread of critical business risks such as trading suspensions or substantive reviews of their eligibility for listing. In the case of Youngpoong, there are assessments that it received harsher sanctions than Korea Zinc, as it faced penalties equivalent to the dismissal of its CEO and a suspension of audit services for the accounting firms responsible for the work.

According to the financial investment industry on the 11th, the Securities and Futures Commission (SFC), under the Financial Services Commission, held its 11th regular meeting the previous day and resolved to impose the following measures on Korea Zinc for preparing and disclosing financial statements in violation of accounting standards: △ a fine; △ designation of an auditor for three years; △ recommendation for the dismissal of the responsible executive and a six-month suspension of duties; and △ a request for corrective action. For Youngpoong, the same measures were applied, with the addition of a recommendation for the dismissal of the former CEO.

The type of sanctions is noteworthy. Previously, at the Financial Supervisory Service’s Inspection Committee stage, the highest level of sanctions—including penalties for intentional violations—had been discussed in light of the gravity of the matter. Sanctions for violations of accounting standards are determined based on the motive (intentional, gross negligence, or negligence) and the significance of the violation; however, a fierce legal battle between the companies and the authorities over the interpretation of the law has been ongoing for several months.

Initially, there was widespread speculation in the market that measures such as referral to the prosecution or notification might accompany the sanctions, given the gravity of the matter. Considering that, under the sentencing guidelines of the External Audit Act (Act on External Audits of Corporations, etc.), referral to the prosecution is a mandatory additional penalty if the motive for the violation is intentional, it appears that the Securities and Futures Commission adjusted the final level of sanctions while taking into account the companies’ defenses.

Despite Underreporting by Hundreds of Billions… Emphasis Placed on ‘Technical

Errors’
The months-long back-and-forth between the authorities and the companies was fully reflected in the FSC’s decision. The most intense legal debate centered on the allegation that Korea Zinc failed to disclose related-party transactions in its notes. According to the FSC’s findings, Korea Zinc did not include related-party transactions involving its subsidiaries in the notes. The scale of the violation, on a consolidated basis, amounts to approximately 13.8 billion won, with 6.845 billion won in 2022 and 6.92 billion won in 2023.

Under the penalty guidelines in the Enforcement Decree of the External Audit Act, authorities may deem abnormal transactions with related parties as intentional violations if they significantly affect the interests of the company, its shareholders, or its officers and employees. It is understood that, in the final stage, the Financial Services Commission (FSC) determined that this was not a deliberate concealment involving the manipulation or forgery of the books themselves, but rather a technical omission (negligence) where the transactions were reflected in the body of the financial statements but omitted from the notes for disclosure purposes.

It also appears that no intent was found regarding the allegations of underreporting investment losses related to the One Asia Partners fund and the overseas subsidiary Igneo Holdings—another Achilles’ heel for Korea Zinc. According to the FSC’s findings, Korea Zinc understated the valuation losses and impairment losses related to the One Asia Fund on a consolidated basis by 21.228 billion won in 2022 and 139.268 billion won in 2023.

The findings regarding Igneo are also particularly painful. Koryo Zinc acquired Igneo for 582 billion won in 2022, and according to the FSC’s recent ruling, the unrecognized impairment losses on goodwill for the overseas subsidiary amounted to 163.6 billion won in 2022, 166.5 billion won in 2023, and 189.8 billion won in 2024 on a consolidated basis. This effectively means that the authorities have officially confirmed that the value of goodwill—amounting to 30% of the acquisition price—declined in the year Koryo Zinc acquired Ignio, and that similar loss levels have persisted over the past three years.

The situation at Youngpoong, which was reviewed as part of the same package as Korea Zinc, is no different. Youngpoong faced severe sanctions on charges of failing to properly reflect or underestimating environmental liabilities—such as those related to the Seokpo Smelter soil remediation order—and provisions for groundwater remediation in its financial statements. However, it is understood that the severity of the sanctions was adjusted during the review process, as technical uncertainties were acknowledged regarding the difficulty of clearly estimating the specific remediation costs for environmental liabilities at this point in time.

The Financial Services Commission (FSC) pointed out, “Although Youngpoong’s legal obligation to remediate contaminated soil in the areas surrounding the smelter and in forested land is clear, the company failed to recognize or underestimated provisions for such liabilities in the past.” It further noted, “While the company should have recognized the best estimate of all costs expected to arise during the remediation process as a provision, it only underestimated the provision by including only the actual contract amounts paid to remediation contractors.”

Youngpoong was also found to have understated impairment losses on smelter tangible assets by 34.79 billion won in 2022 and 61.424 billion won in 2023, while overstating them by 61.424 billion won in 2024. It was found that in 2022, the company used past estimates of profits and losses from production suspensions when conducting a loss assessment related to the smelter’s suspension of operations, and in 2023, it underreported impairment losses by reflecting future cash flows that arbitrarily excluded the profit and loss effects of production suspensions.

External Credibility Hit by Severe Administrative Sanctions

Consequently, the accounting risks that had weighed on Korea Zinc and Youngpoong did not lead to legal risks, as they avoided criminal prosecution. However, both companies now face the dual challenges of a plummet in external credibility and concerns over a management vacuum due to the severe administrative sanctions.

Some interpret this as the authorities having deferred judicial action but not granted a free pass. This is because, in the case of Korea Zinc, aggravating factors—such as allegations of obstructing external audits by failing to provide key documents related to convertible bonds (CBs) issued by a subsidiary—were combined with the charges. Ultimately, having faced the harshest legal sanctions—a recommendation for the dismissal of executives and a six-month suspension of duties—the prevailing analysis is that both companies have suffered a significant blow to their accounting credibility in the market.

An official from the Financial Services Commission stated, “The imposition of fines on the companies and their related parties is scheduled to be finalized by the Financial Services Commission in the future.”