An investor (the “Plaintiff”) who acquired KRW 10 billion worth of redeemable convertible preferred shares of a non-listed company filed a lawsuit for damages against the company’s external accounting firm (the “Defendant”) for losses incurred due to the company’s poor performance. The Plaintiff’s claim was based on the company’s alleged failure to detect two types of accounting fraud: (i) inflating revenue through manipulated project progress rates (“progress rate accounting fraud”) and (ii) inflating revenue by not deducting the costs of raw materials purchased from vendors from the revenue (“fraudulent gross method accounting”). The company’s representative director was convicted for the above mentioned progress rate accounting fraud, but not for the fraudulent gross method accounting.

Representing the Defendant, Kim & Chang argued that despite adhering to auditing standards for progress rate accounting fraud, the company could not detect intentional accounting fraud due to false submissions and obstruction from the non-listed company. Regarding the alleged fraudulent gross method accounting, we argued that the fraud itself could not be recognized. Subsequently, the Courts, including the Supreme Court, accepted our arguments and rejected the Plaintiff’s claims in their entirety.

Recent court decisions have been rigorously holding accounting firms accountable for failing to detect accounting fraud. Despite the fact that the Defendant failed to identify the fraudulent activities, the Court ultimately recognized that if there were no indications of financial statement irregularities or suspicions of errors, holding the accounting firm responsible solely for failing to detect the fraud is not justified. By effectively asserting this argument, we were able to convince the Court and successfully defend the Defendant.