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(News Focus) Daewoo shipyard ruined by combination of mismanagement, accounting fraud, moral hazard

All Headlines 15:13 June 16, 2016

By Choi Kyong-ae

SEOUL, June 16 (Yonhap) -- An industry-wide slump has definitely caused trouble for South Korean shipbuilders. But Daewoo Shipbuilding & Marine Engineering Co. is looking at two other major causes that deepened its financial woes: mismanagement and accounting fraud.

In what clearly shows a lack of control and widespread moral hazards at the world's second-largest shipbuilder, accounting fraud reached 1.5 trillion won (US$1.3 billion), a former employee stole tens of billions of won from the company's coffers, and shipyard workers suffered from an unfair salary system, analysts said.

Most recently, a 46-year-old former employee in the offshore facilities division of the builder's Okpo shipyard in Geoje, South Gyeongsang Province, embezzled nearly 18 billion won over eight years through October last year, according to the company and the Geoje Police Station.

"As it seems difficult for a single employee to continue to steal company money for such a long period, we are looking into the possible involvement of the company's upper-level executives in the embezzlement case," the police said.

During the eight years, the employee mainly inflated the purchasing prices of products and the contract prices for residential houses needed for engineers in the company and foreign supervisors sent by shippers that placed ship orders, it said.

"With the stolen money, he invested in stocks and bought an apartment, a commercial building, luxury cars and goods. Some of the luxury products went to his secret mistress," the police said.

In February, months after the employee voluntarily retired in November with 100 million won in severance pay and compensation, Daewoo Shipbuilding belatedly filed a suit against him. Early this month, he was arrested.

"Daewoo Shipbuilding is an ownerless company. As its executives focused on making the company's earnings figures look good during their terms, they didn't care much about monitoring and cross-checking inside the company," said LG Economic Research Institute economist Cho Young-moo.

The company's management made decisions on major projects without legitimate procedures, often resulting in hefty losses in overseas energy and shipyard projects. "They should be held accountable for the current predicament facing the Geoje-based shipyard," he said.

Prosecutors recently banned two of the company's former CEOs -- Nam Sang-tae and Ko Jae-ho -- from leaving the country for questioning over possible mismanagement.

Management is not the only party responsible for Daewoo Shipbuilding's current woes. State-run Korea Development Bank, which owns a 49.7-percent stake in the shipbuilder, cannot avoid accountability due to a lack of oversight into the company as the main creditor bank, analysts said.

For years, Daewoo Shipbuilding cooked the book to conceal its snowballing losses from creditors and shareholders.

The country's state audit agency has found that the company inked an operating loss of 1.5 trillion won from 2013-2014 but the company didn't release the figure. Instead, it falsely reported 912 billion won in combined operating profit for the two years.

In corrected calculations, the shipbuilder posted 1.5 trillion won for the two years and 2.9 trillion won last year in operating losses.

On top of mismanagement and accounting fraud, internal conflict among employees over wages is another problem to be tackled.

At the Geoje shipyard, field workers involved in labor-intensive welding, cutting and painting jobs have been paid less than their colleagues in charge of menial non-production jobs.

About 55 percent of 7,000 workers are directly involved in building ships but the remaining 45 percent help control traffic when steel plates are moved by vehicles, exchange signs with crane operators when they move assembled vessel blocks, or repair tools.

Most of the non-production workers are paid higher than their production counterparts as the salary system is not based on performance but on seniority as is still the case with many Korean companies.

Under its broader self-help programs, the company plans to readjust the unfair salary system and introduce a performance-based pay system. Also, the company invited criticism by handing out incentives worth 198 billion won to its workers from 2013-14.

Additionally, it aims to reduce its overall workforce by 20 percent to 10,000 and production facilities by 30 percent by 2020.

The country's Big 3 shipbuilders -- Hyundai, Samsung and Daewoo -- are under strict restructuring programs they promised to their creditors to complete in the next two and a half years by shedding jobs and selling assets. Last week, their creditors approved rehabilitation plans worth a combined 10.35 trillion won that were filed by the three.


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