South Korean fraud cut ABB profit

7 years ago - Published in Finance, Fundamental Analysis

Swiss-based power and automation group ABB cut its 2016 profit report by $64 million after saying that internal controls failed to catch suspected fraud in South Korea. 

It revised net income to $1.89 billion, ABB said in its annual report, down from $1.96 billion reported in February. The pre-tax impact was $73 million, less than the roughly $100 million previously reported, due to insurance recoveries.

ABB has said a South Korean treasurer engaged in a "sophisticated criminal scheme" to embezzle millions from the company before disappearing. The treasurer, identified as Oh Myeong-se, is still being sought by authorities.

Auditor Ernst & Young concluded "ABB Ltd. has not maintained effective internal control over financial reporting as of December 31, 2016," according to the annual report.

Managers failed to maintain sufficient segregation of duties in the treasury unit of its subsidiary in South Korea, and did not provide enough oversight of local treasury activities, ABB CEO Ulrich Spiesshofer and Chief Financial Officer Eric Elzvik said.

ABB also failed to keep the signature seals of the South Korean unit secure. As a result, the company became "bound to unauthorized financial contracts, resulting in undetected financial obligations," they said in the report.

Last month, the Swedish-Swiss corporation announced it had "uncovered a sophisticated criminal scheme" at its South Korean subsidiary. ABB only noticed that huge sums of money were missing after an employee disappeared.

The employee is suspected of forging documents and working with individuals outside the company to steal the money, according to ABB and South Korean police.

A police investigation is ongoing in South Korea and Hong Kong, the head of the South Korean investigative team told CNNMoney on Monday. Last month, a local police spokesman said that the suspect was believed to have fled to Hong Kong and that they were working to bring him back to South Korea. The embezzlement and misappropriation of funds is limited to South Korea, where ABB employs about 800 staff, the company said.