12/11/2011

THE CORPORATE SCANDAL DAEWOO GROUP

OF

Course name: Auditing and Taxation Course code: F-209

Submitted to:
Md. Salahuddin Chowdhury Lecturer Department of Finance University of Dhaka

Submitted by:
Farhana Rahman Farha Farzana Md. Rasel Miah Sadia Kamal Marufa Akter 16-004 16-006 16-068 16-070 16-132

16th Batch, Section: B

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Date of Submission: November 12, 2011 LETTER OF TRANSMITTAL

November 12, 2011 Md. Salahuddin Chowdhury Lecturer Department of Finance Faculty of Business Studies University of Dhaka Dear Madam, It is an immense pleasure for us to submit the term report on Procedure of issuance of shares, which is prepared as a partial fulfillment of the requirement of course - Financial Accounting-02 of BBA program under Department of Finance of the Faculty of Business Studies, University of Dhaka. This study has given us the opportunity to learn the usefulness of Financial Accounting & its practices in the practical field, indeed. We would like to convey our special thanks and gratitude to you for patronizing our effort & giving us proper guidance. We have tried our best to cover all the relevant fields. We earnestly request you to call us if you think any further work should be done on the topic of the report. Sincerely yours, Name FARHANA RAHMAN FARHA FARZANA MD. RASEL MIAH SADIA KAMAL SANCHITA
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Roll 16-04 16-06 16-68 16-70

MARUFA AKHTAR

16-132

16th Batch, Sec: B Department of Finance, Faculty of Business Studies, University of Dhaka

Table of Content

NO .
1. 2. 3. 4. 5. 6. 7. Foe 8.

TOPIC TITLE
Introduction Background history Chronicle Corporations Crisis in Daewoo Scandal and collapse in daewoo Why the fraud took place consequences and present status

PAGE NO. 05 06 07-08 09-11 12 13-18 19-20 21-22 23-26 26-27 28 29

How mismanagement analysis 9 10 Cyhj Recommendation

11 How conclusion 12 B Bibliography

Introduction
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Origin of the report:

Kim Woo Choong, founder of South Korea's Daewoo Group, was revered as the man who built a small textile-trading house into Korea's second-largest industrial conglomerate. Since then, revelations of deep losses, corruption, and mismanagement at Daewoo have shredded his legend. Now the last vestiges of respect are gone.

Objectives of the report:

To achieve deep knowledge about the practical application of Auditing standards and

practical error.
To fulfill the partial requirement of our course of Auditing and Taxation.

Methodology:
Information used in this paper we collected from related records & websites. After that we gathered information by meeting with people knowledgeable about corporate scandals and accounting manipulation.

Limitations:
There are some limitations that we have faced during preparing the report. The most obvious limitation is the unavailability of genuine information. Another limitation is lack of available information source related to this topic.

Background History
At the end of 1999, one of the largest conglomerates in the world, the Daewoo Group, collapsed in spectacular fashion. During its peak, Daewoo was a sprawling enterprise with over 320,000 employees in 500 domestic and foreign companies that operated in over 110 countries. Its management received widespread praise and academic recognition for its success. Yet, when the financial crisis hit, it managed to commit 22.9 trillion won ($15.3 billion) in deception that was termed the biggest accounting fraud in history, surpassing WorldCom and Enron. Years later, inner-workings of the conglomerate are finally coming to light. After hiding as a fugitive overseas for over six years, Daewoos chairman, Woo Choong Kim, returned to Korea in June 2005 to face criminal charges. In 2006, he was sentenced to eight and a half years in prison and disgorgement of a staggering 17.9 trillion won ($ 17.9 billion). This juncture serves as an opportune time to assess the ramifications of the Daewoo debacle. Around the world, corporate governance has emerged as a focal point in the reform of companies. In Asia, a consensus exists that failure of corporate governance played a pivotal role in precipitating the financial crisis. Contagion spread largely as a result of inherent weaknesses of conglomerates and banks; for Korea, for instance, problems with family-dominated chaebol1 provoked its collapse. The trials and tribulations of a major Asian conglomerate such as Daewoo offer an understanding of the ramifications of poor corporate governance in an emerging market. The tale of Daewoo, in particular, serves as one of the earliest warning signs of the corporate governance breakdowns that later plagued leading company around the world. It predated Enron, WorldCom, Tyco, Vivendi, Ahold and Parmalat, scandals that devastated confidence in global markets. Daewoo, however, did not remain a case isolated to Korea. Worldrenowned, international financial institutions, investment banks, money managers, financial analysts, accounting firms and credit rating agencies, all failed to react to the situation. Daewoos meltdown was categorized as a remote problem in a faraway region. The wave of policy discussion on the imperatives of having effective reputational intermediaries and gatekeepers, for instance, came later.

1 refers to a South Korean form of business conglomerate

Chronicle
Daewoo (Hangul: . Korean for "Great Universe") or the Daewoo Group was a major South Korean chaebol (conglomerate).The Daewoo Group was founded by Kim Woo-Choong in March 1967. He was the son of the Provincial Governor of Daegu. He graduated from the Kyonggi High School, and then finished with an Economics Degree at Yonsei University in Seoul. It became one of the Big Four chaebol in South Korea. An industrial and multi-faceted service conglomerate, Daewoo was prominent in expanding its global market through joint ventures all over the world. During the 1960s, after the end of the Syngman Rhee government, the new government of Park Chung Hee intervened to promote growth and development in the country. It increased access to resources, promoted exports, financed industrialization, and provided protection from competition to the chaebol in exchange for a company's political support. In the beginning, the Korean government instigated a series of five-year plans under which the chaebol were required to achieve a number of basic objectives. Daewoo did not become a major player until the second five-year plan. Daewoo benefited from government-sponsored cheap loans based on potential export profits. The company initially concentrated on labor-intensive clothing and textile industries that provided high profit margins. The most significant resource in this plan was South Korea's large workforce. The third and fourth of the five-year plans occurred from 1973 to 1981. During this period, the country's labor force was in high demand. Competition from other countries began eroding Korea's competitive edge. The government responded to this change by concentrating its effort on mechanical and electrical engineering, shipbuilding, petrochemicals, construction, and military initiatives. At the end of this period, the government forced Daewoo into shipbuilding. Kim was reluctant to enter this industry, but Daewoo soon earned a reputation for producing competitively priced ships and oil rigs. During the next decade, the Korean government became more liberal in economic policies. Small private companies were encouraged, protectionist import restrictions were loosened, and the government reduced positive discrimination, to encourage free market trade and to force the chaebol to be more aggressive abroad. Daewoo responded by establishing a number of joint ventures with U.S. and European companies. It expanded exports of machine tools, defense
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products (under the S&T Daewoo Company), aerospace interests, and semiconductor design and manufacturing. Eventually, it began to build civilian helicopters and airplanes, priced considerably cheaper than those produced by its U.S. counterparts. It also expanded efforts in the automotive industry and was ranked as the seventh largest car exporter and the sixth largest car manufacturer in the world. Throughout this period, Daewoo experienced great success at turning around faltering companies in Korea. In the 1980s and early 1990s, the Daewoo Group also produced consumer electronics, computers, telecommunication products, construction equipment, buildings, and musical instruments (Daewoo Piano).

Corporations

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There were about 20 divisions in the Daewoo Group, which before the crisis was the second largest conglomerate in Korea after Hyundai Group, followed by LG Group and Samsung Group. Daewoo Group had under its umbrella several major corporations:

Daewoo Motor: the motor vehicles division (sub-branch Daewoo Automotive

Components Co. Ltd., Daewoo Bus Co., Ltd., Daewoo Commercial Vehicle Co. Ltd.)

Daewoo Motor Sales: an auto sales company sold Daewoo but also GM cars and
others in Korea (Sub-branch : Architectural Iaan Div., SAA-Seoul Auto Auction)

Daewoo Electronics: a strong force both internationally and in Korea (sub-branch

Daewoo Electronic Components Co. Ltd, Daewoo Electric Motor Industries Ltd., Orion Electric Co. Ltd.)

Daewoo Precision Industries: produced small caliber firearms and auto parts. It was
spun off in February 2002 and relisted on the Korean stock-market in March 2002. It was renamed S&T Daewoo Co., Ltd in September 2006[1]

Daewoo Textile Co. Ltd. Daewoo Heavy Industries (DHI): which created heavy duty machinery

A wheel-loader produced by Daewoo Heavy Industry

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A Seoul metropolitan car (Seoul Metro Class 3000), by DHI,

Daewoo Shipbuilding & Marine Engineering: produced container ships, oil

tankers and planes. It spun off in 2000 and became an independent company, DSME, relisting on the Korean stock market in 2001

Daewoo Securities: a financial securities company Daewoo Telecom Ltd: It concentrated on the telecommunications (sub-branch
Daewoo Information Systems Co. Ltd.)

Daewoo Corporation: (sub-branch Daewoo Construction, Keangnam Enterprises)

which built highways, dams and skyscrapers, especially in the Middle East and Africa

Daewoo International: a trading organization Daewoo Development Co. Ltd: managing Daewoo hotels around the world and had
the Hilton Hotels franchise in South Korea center

IAE (Institute for Advanced Engineering) : research and development integrated

A further subsidiary was the Daewoo Development Company, funded by cash from the Group, and set up to develop hotels. Seven were built in Korea, China, Vietnam, and Africa. They were personally designed and furnished by Kim Woojoong's socialite wife Heeja who was Chairwoman of the company. The most lavish was/is the 5-star Hanoi Daewoo Hotel which cost US$163 million in 1996 and was decorated by Heeja with fine art, porcelain, sculptures, and marble. She invited 3000 guests to the opening, including Russian President Vladimir Putin. There is an 18-hole golf course in the grounds and a swimming pool which is thought to be the largest in Asia. Kim is believed to have spent time there while "on the run".

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Daewoo motor co. ltd

Daewoo Motor Co., Ltd. was founded when the Daewoo Group purchased Saehan Motor in 1978, but the Daewoo Motor name appeared only in 1983. Daewoo Motor arrived in the UK in 1995. At the time, it was the only manufacturer not using traditional dealerships; it owned and operated its own retail network. It was once considered to be near the top 10 motor companies in terms of production.

Daewoo motors 1997 leganza

Daewoo was forced to sell off its automotive arm, Daewoo Motor, to General Motors in 2001. Since then, GM has been moving to rebadged Daewoo cars as models for many brands, including Chevrolet, Buick, Pontiac, Holden, and Suzuki. The GM Daewoo nameplate was kept only for South Korea and Vietnam until 2011. Daewoo Commercial Vehicles Division was sold to Tata Motors of India.

Former type Fate

Chaebol Bankrupt

Founded

March 22, 1967

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Defunct

August 26, 1999

Headquarters

Seoul, South Korea

Crisis in Daewoo
In the late 1990s, the leading South Korean car manufacturer, Daewoo Motors (Daewoo), was in deep financial trouble. For the financial year ending 1999-2000, Daewoo generated revenues of $197.8 million and a net loss after tax of $10.43 billion (13.7 trillion won). The company's revenues had dropped by 94% since 1999. The loss reported was also three times higher than that reported in 1999, and was ranked as South Korea's largest ever corporate loss. In addition, the company's domestic market share fell from 33% in 1998 to just 23% in 2000. According to analysts, Daewoo's borrowings for its expansion programs were responsible for its losses. The company's domestic and foreign debt amounted to more than $16.06 billion in December 1999. Moreover, its expansion into risky and uncertain markets like Vietnam and its decision to sell products at very low prices to gain market share had negatively affected its financial condition. Labor unrest was also one of the reasons cited by market observers for Daewoo's poor financial performance. The workers at many of its plants went on strike protesting against low wages, layoffs, and lack of job security. The Southeast Asian Financial Crisis of 1997-98 further deepened Daewoo's problems. The company's creditors started demanding repayments. However, some analysts felt that the primary reason for Daewoo's problems was mismanagement and the corrupt corporate governance practices adopted by Kim Woo Choong (Kim), the founder of the Daewoo Group. An analyst commented, "The ill management and inability of Daewoo companies resulted in bankruptcy. The run-away irresponsible previous owner, Kim is now hiding somewhere in the world." Analysts commented that because of his financial mismanagement, not only Daewoo but also the entire Daewoo Group was deep in debt. In November 2000, the Korean government officially announced Daewoo's bankruptcy and its assets were put on sale. Amid controversies and almost a year of negotiations with the Korean
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government, GM signed a preliminary agreement in September 2001 to buy Daewoo's assets for $1.2 billion. However, this agreement ran into problems when GM reported a discrepancy in Daewoo's overseas accounts. With so many skeletons in Daewoo's closet, market observers wondered when the company would find a buyer and when its problems would be solved.

Scandal and collapse in Daewoo

Tragic Hero: Chairman Woo Choong Kim
Daewoo cannot be separated from its legendary founder, Woo Choong Kim. He not only established it, but determined its course, dominated decision-making and handpicked executives. In terms of business strategy, he maintained the same management perspective until the end: seize market share first, quash competition and seek collection later. His global perspective on the need for Korean companies to develop overseas markets was visionary, particularly given reclusive tendencies of Koreans. He deserves the most credit for the conglomerates success but remains primarily responsible for its meltdown. Kim built the Great Universe of Daewoo into a multinational conglomerate in less than two decades. Recognized as one of the worlds most successful businessmen, he was profiled in leading business magazines everywhere. In 1984, he received the International Chamber of Commerces coveted International Business Award Politically, Daewoo benefited from Kims instincts and apparently his personal relationship with President Chung Hee Park, the controversial autocrat who ruled Korea from 1961 until 1979. Although a latecomer compared to other established conglomerates, Daewoo blossomed under Parks industrial policy during the 1960s and 1970s. Kim managed to extract concessions from the government, especially when taking over distressed companies. While the government would engage in predation of its own, time and time again, they would succumb to Kims requests for support. After Park died, Daewoo continued to rely on Kims political acumen to steer them out of difficulties.
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During the financial crisis, Kims political wherewithal and managerial judgment faltered, leading Daewoo to catastrophe. By the summer of 1999, he departed the country in self-imposed exile. He returned after six years of hiding on his volition to receive an eight-year prison sentence in 2006, with numerous civil trials still pending. In his own words, he claimed that my big mistake was being too ambitious, especially in autos. I tried to do too much too fast. Fundamentally, Kim failed to follow basic legal and managerial principles such as accounting, internal controls and financial discipline, placing too much emphasis upon generating sales and marketing. Corporate governance was unobserved. He did not heed warnings to retract and instead chose to expand through unprecedented accounting and loan fraud. In the end, ultimate responsibility for the catastrophe lies with him.

Accounting Fraud
While pursuing its expansion strategy through excessive borrowing, Daewoo chose to commit unprecedented fraud, particularly by manipulating its overseas accounts. Many chaebol shared a legacy of accounting opacity, but what distinguished Daewoo was its scale, its manner and how it remained undetected. The size sealed their fates in the annals of corporate scandals. Executives violated disclosure laws, accounting laws and foreign exchange laws. The staggering fraud could be attributed corporate governance breakdowns on multiple levels. The biggest accounting fraud in history occurred as a result of Daewoo companies inflating assets by a total 22.9 trillion won ($19.1 billion). Daewoo Corp., Daewoo Motor and Daewoo Electronics together accounted for 90 percent of the conglomerates impaired capital. In perpetrating the fraud, Daewoo Corp., which was responsible for 14.6 trillion won ($12.2 billion), used its trading and management departments and its accounts in London. In 1997, for example, they deflated assets by 10.1 trillion won ($6.7 billion) and liabilities by over 22.9 trillion won ($15.3 billion), and inflated equity by over 12.8 trillion won ($8.53 billion) to conceal 10.1 trillion ($6.73 billion) in impaired capital. This transpired while net losses for the company climbed from 11.8 trillion won ($7.87 billion) in 1997 to 12.1 trillion won ($8.64 billion) in 1998. On the domestic side, most of the fraud stemmed from reduction of debts, manipulation of export returns and utilization of affiliates. Some of the largest violations involved fifteen trillion won ($12.5 billion) in off-balance sheet liabilities. Related-party transactions were also used for asset swaps among Daewoo subsidiaries at exaggerated values. Stronger affiliates would prop up weaker companies by purchasing overvalued assets above market prices.
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Furthermore, scam subsidiaries were used to skirt accounting rules. Financial companies such as Seoul Investment Trust Management (SITM) played a key role in the transactions. To a greater degree, Daewoo mobilized its overseas financial network. The primary vehicle for the overseas fraud involved an entity called the British Finance Corporation (BFC). The BFCs intricate accounts acted as the nerve center for most of the conglomerates financial machinations. What began as a construction account was later commingled with trading accounts. The BFC later grew to an amalgamation of thirty-seven foreign accounts. By 1996, annual borrowings from the BFC accounts totaled between six and seven billion dollars. Toward the end in August 1999, the accounts reportedly amounted to over $7.5 billion. The BFC and overseas affiliates were employed in a variety of ways. Foreign subsidiaries, for example, transferred funds borrowed from foreign banks to the BFC. This circumvented foreign exchange laws and skirted reporting requirements. In addition, companies with questionable credit issued new stock that overseas financial institutions would acquire technically as equity investments. The equities would then be secured through redemption agreements with other affiliates. The affiliate would be obligated to repurchase the equity at a given price plus interest, if it failed to reach a certain price level. In essence, the equity investment operated like a loan guaranteed by an affiliate. The scheme allowed Daewoo to avoid prudential regulations that governed chaebol borrowing in foreign currency. Funds that should have been recorded as debt were improperly recorded as equity. When overseas business operations declined and more pressing debts from overseas entities emerged, receivables from exports that should have been credited to domestic affiliates were instead diverted to BFC accounts. Foreign debts held priority over domestic obligations. During this critical period, overseas interest payments to foreign financial institutions alone amounted to $2.49 billion in 1999. Pressure from the BFC exacerbated the financial state of domestic companies. Later when foreign debts could no longer be met BFC-related paper companies were used to construct falsified bills of lading, commercial invoices and packing lists to defraud Korean banks. Daewoo commingled real commercial documents with falsified ones to sustain the deception. BFC personnel meanwhile worked under utmost secrecy. Despite the BFCs meticulous records, the destination of approximately $753 million remains unknown. Speculation abounds that money was used as corporate slush funds for political lobbying purposes. Others believe that Woo Choong Kim and senior managers siphoned off funds for personal enrichment. In 2006, a court in fact held that a special KC (King of Chairman) account established among the BFC accounts was used for personal expenses of Chairman Kim and his family. Overall, operation of the BFC accounts contravened several key laws. First, executives violated accounting laws. Daewoo, for instance, did not record or consolidate approximately five to eight trillion won ($4.17 to 6.7 billion) per year of off-balance sheet liabilities between 1996 and 1999. Second, executives violated the law prohibiting hiding of personal property overseas without appropriate disclosure. They asserted that the BFC accounts were not concealed for any illicit purpose but solely to repay company debts. They repaid foreign loans, for instance, with funds obtained by selling debt locally. Courts rejected the argument because disclosure laws applied irrespective of an intention to repatriate missing funds later. The law required accurate
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reporting so that authorities had sufficient information to make policy judgments. Finally, the BFC accounts violated foreign currency laws. None of the accounts received official Ministry of Finance and Economy (MOFE) approval as required under foreign exchange regulations. Not only did they transfer funds out of the country to cover BFCs debt without permission, but also they fabricated documents to conceal it. When faced with a financial emergency in the midst of its managerial blunders, Daewoo chose to engage in purposeful deceit. They opted to manipulate secretive overseas accounts to avoid detection by authorities and accountants. The scheme violated accounting laws, disclosure laws and foreign exchange laws. Even evidence of personal enrichment surfaced. Overall, the staggering fraud transpired as the result of a breakdown in both internal and external corporate governance.

Role of Representative Directors, Directors and Statutory Auditors

Daewoos boards of directors, representative directors and statutory auditors failed to understand and fulfill their roles as fiduciaries. They did not act to stem the primary conflict that arose out of controlling shareholder taking advantage of non-controlling shareholders, stakeholders and others. Generally, Daewoos directors, representative directors and auditors suffered the same problems that plagued most Korean companies. In practice, boards did not formally function in a legal sense. Boards did not even hold official meetings. Upon receiving instructions from the conglomerates Chairmans Office, the office of planning of each affiliate would draft fictional board minutes tailored accordingly. Minutes would be approved by the board with personal seals of all the directors that the office of planning kept under their care. At best, directors provided input through the representative director who would then relay advice to the chairman. The internal supervisory structure also remained weak because at the time companies did not distinguish between directors and officers and had no outside directors. The director position
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served as the highest possible rung on the corporate ladder for an executive. Senior officers when promoted became directors. Combining the two together into a unitary position weakened their ability to act as checks and balances against each other and, more importantly, over the controlling shareholder. In addition, Korean companies as a general matter did not have any nonexecutive, outside directors until 1998. A more serious problem was that directors and auditors were not answerable to noncontrolling shareholders or other stakeholders in any meaningful way and did not understand their obligations. Shareholder litigation, particularly derivative actions, did not exist until 1997. The lack of civil legal actions meant that fundamental obligations such as fiduciary duty remained unapplied, theoretical exercises. Directors could not develop an understanding or appreciation of fiduciary duties to shareholders because no one was ever held accountable for violating them. The chance of executives being held legally responsible was so low that director and officer liability insurance did not exist. Lack of accountability to shareholders at large therefore left them subject to the dictates of the controlling shareholder. In case of conflict, they had little incentive to defy the wishes of the controlling shareholder and act on behalf of the interests of faceless, silent non-controlling shareholders. Controlling shareholders, on the other hand, made sure to reward loyal directors, executives and statutory auditors. After retirement, they bestowed an array of benefits, hiring them as consultants, using them as suppliers, or giving them outsourcing contracts or transitional support. Having spent an average of twenty years of their lives to rise to senior positions, executives had no motivation to be unfaithful to the chairman, lose these benefits and be ostracized from one of their most important social circles. The defense strategy of Daewoo executives in their criminal trials in particular revealed how they did not understand their duties or responsibilities. They argued that they merely followed Chairman Kims directions as obedient subordinates. They could not question his command, particularly when they received direct instructions to commit accounting fraud. Furthermore, they committed accounting violations for the conglomerate because companies had to repay reoccurring debts. They suggested that their actions should be justified because they did not personally gain from the fraud or expropriate company funds. They failed to grasp that allowing Kim to use the company to defraud others for any purpose could not be justified. They could not exaggerate Daewoos business operations, inflate its status and disguise its actual financial situation to borrow funds and issue corporate bonds. They could not commit accounting fraud to meet reoccurring debts or because they believed it was the best time to expand operations and acquire distressed companies. Under this flawed reasoning, they perpetrated the financial crimes without a guilty conscience. Regardless of whether they personally benefited or whether Kim was a dominating figure, they failed to appreciate their duty to prevent the fraud. In the end, they allowed Daewoo to inflict enormous damage upon the Korean people and the national economy. Furthermore, contrary to their belief, they did derive personal benefit because they would not lose the chairmans favor and could maintain their positions. The ability of Daewoo directors might have been affected more than other conglomerates because so many hailed from a particular schoolKyongi High School, until 1973, Koreas elite
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secondary school. As a Kyongi graduate, Kim surrounded himself with an inordinate number of alumni. In Confucian Korea, high school ties constitute a powerful bond that often forms the basis of a lifelong, vertical social relationship. Senior alumni traditionally have considerable authority over junior alumni. The old, schoolboy tie further consolidated the hierarchy in the upper echelons of management and weakened check and balances. Daewoo directors themselves believed that school background was a much more important factor in being chosen as a director compared to other chaebol. Furthermore, in the late 1980s and early 1990s, Daewoo underwent the generational change where many, original executives who were senior Kyongi alumni comparable in age and status to Kim were replaced. Junior alumni that succeeded lacked the same standing to counterweigh the legendary, domineering chairman. Overall, directors, representative directors and statutory auditors neglected their roles as fiduciaries. They ultimately acted for their personal gain by placing a higher priority in maintaining their executive positions over the duty to obey the law monitor the company and protect the interests of shareholders and stakeholders. Senior executives not only did not prevent but also actively participated in the cover-up and fraud. In the end, they demonstrated a confused understanding of fundamental duties and responsibilities.

Accounting firms: Chong-Un and San Tong

The external auditors inability to provide proper auditing and accounting contributed directly to Daewoos financial scandal. This occurred even though Daewoos accountants were associated with global accounting firms with stellar reputations. When Daewoo collapsed, local firms bore the brunt of the blame while global partners conveniently escaped scrutiny. Daewoos accounting troubles were dismissed as Korean problems that arose out of a combination of ineffective regulatory supervision, a lack of accountability, conflicts of interest and weak selfregulation. In the aftermath, unprecedented liability has helped to establish compliance in the industry. Daewoos primary accounting firms, Chong-Un and San Tong, both leading accounting firms at the time, were associated with Horwarth International and KPMG, respectively. ChongUn served as external auditor for Daewoo Precision, Kyungnam Metal and Daewoo Telecommunications. San Tong, Koreas second largest firm at one point, served as lead accountant for several, major Daewoo companies for over ten years. Market participants, domestic and international, relied upon the global reputations of Horwarth and KPMG when doing business with Daewoo. Horwarth and KPMG in turn extracted benefits for lending their
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credibility. Yet, despite being aware of international auditing and accounting standards, but they did not adequately transplant these practices into their local partners. Although accounting firms claimed that they did not know of the accounting fraud because of Daewoos concealment, many other factors contributed to their inability to function properly. Tolerance to accounting misstatements and opaqueness prevailed. After Daewoos accounting fraud came to light, regulators sent shockwaves throughout the industry when they suspended Chong-Un and San Tong from receiving new business, the most severe sanctions in history. Chong-Un received a one-month suspension of all new business during March and April of 1999, while the FSS issued a twelve-month suspension of new business against San Tong. In addition, two San Tong accountants received the ultimate punishment when their licenses were terminated. Prior to this, even after a string of accounting scandals in 1997 involving Kia Motor, Asia Motor and the Hanbo Group, all companies audited by Chong-Un or San Tong, only individual accountants were suspended and not firms. The sanctions served as death knells for the firms, which collapsed shortly thereafter. KPMG and Horwarth meanwhile avoided any censure while they quietly terminated their relationships.

Why the fraud took place?!

As financial contagion swept across Asia, Daewoo made grave misjudgments, condoned by the government, which sealed its fate. First, it pursued a counterstrategy of expansion with particular focus on the automobile industry that proved too ambitious. Daewoo then over-leveraged itself with $ 20 billion in debt to try to meet its financial burdens during the crisis. They did not appreciate the seriousness of the situation, offering restructuring plans to resurrect the conglomerate when it was too late. In the end, over a two-year period, everyone stood-by as Daewoo transformed into a financial black hole. In late 1997, the Korean won plummeted from 900 won to 1960 won to the dollar in less than four months. The proud country, hailed for its economic miracle, capitulated to a bailout led by the International Monetary Fund (IMF), World Bank and Asian Development Bank, consisting of over $58 billion. The IMFs controversial prescription raised interest rates to over 30 percent in an attempt to stem capital flight. Korea experienced negative 6.7 percent growth in 1998, the worst in modern history. The timing could not have been worse for Daewoo. Daewoo might have weathered the storm had it restructured from the onset in early 1998. Rejecting a contractionary approach, Woo Choong Kim instinctively pursued aggressive growth, particularly in the automobile industry.
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While others retracted, the Daewoo Groups sales therefore increased by 25 percent in 1998, Daewoo Corp.s, by 54 percent. The group spent 10 trillion won ($7.14 billion) in sales promotions during this critical period. Automobile-related expansion in particular overwhelmed the conglomerate. Daewoo Motor acquired Ssangyong Motor in January 1998 at the peak of the crisis, assuming 3.4 trillion won ($2.43 billion) debt. Leading companies such as Daewoo Corp. and Daewoo Heavy Industries bore the burden. All companies pressured employees to purchase Daewoo automobiles. Executives personally marketed cars with sales results linked to their performance evaluations. Daewoos financial balancing act foundered under the weight of the financial contagion. First, debt burden more than doubled due to the plummeting Korean won. At the time, the group had $5.1 billion in foreign currency loans and $1.9 billion in foreign currency debt to foreign bond owners. Second, the spike in interest rates further debilitated the conglomerate, its interest rate burden ballooning from three trillion won ($2.14 billion) to six trillion won ($4.3 billion). Finally, Daewoo reportedly failed to collect payment on several large-scale projects such as $3 billion owed by Libya and $1 billion owed by Pakistan. Relatively constant operating profits aside, the collective financial burden overwhelmed them. To meet the demands, Daewoo issued a flurry of corporate bonds and commercial paper throughout 1998 to cover its maturing debt. Despite high leverage, they still managed to raise 19.7 trillion won ($14.1 billion) in debt issuances at interest rates that averaged 15 percent and reached as high as 25 percent. In the third quarter of 1998 alone, Daewoo issued over 9.2 trillion won ($6.57 billion) in bonds, raising its total debt by 40 percent and accounting for 27 percent of total bond issues at the time. Investment trusts and other institutions recklessly acquired the debt instruments, apparently relying on the assumption that the government would devise a solution. In July 1998, after months of delay, the government finally acted to stem the hemorrhaging conglomerate. Regulators restricted financial institutions from holding more than 5 percent of the commercial paper of a conglomerate. In October, a similar restriction followed for corporate bonds when banks and insurance companies were set to a 5 percent limit per conglomerate while investment trusts, a 15 percent limit. Though they had been in discussion with regulators about their financing woes since June 1998, Daewoo did not or could not -prepare for the austerity measures. The caps on debt severed the financing lifeline that had been sustaining the group. To aggravate matters, Chairman Kim was suddenly hospitalized in November 1998. In December 1998, the government attempted to broker a controversial Big Deal between the Samsung Group and Daewoo Group in which troubled Samsung Motors would be swapped in exchange for Daewoo Electronics. The government believed they needed to intervene to help the rival conglomerates. Merging Daewoo Motor with Samsung Motors could revive the ailing companies through synergy and economies of scale. Policymakers also believed this could force Daewoo to focus its efforts on the automobile industry. Daewoo meanwhile hoped to extract major concessions from the government to consummate the deal, but negotiations collapsed when Samsung withdrew from talks. Twelve months after the crisis erupted, Daewoo made its first serious attempt at restructuring in late December when they entered into a Financial Structure Improvement
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Covenant with its creditor banks. They agreed to downsize 51 companies into ten core entities that would focus on trade and construction, automobiles, heavy industries and finance and services. These efforts, however, were inadequate and overdue and failed to yield substantive results. In February 1999, Kim even became president of the Federation of Korean Industries (FKI), the powerful business organization led by chaebol, yet FKIs influence did little to help Daewoos reorganization. In July 1999, Kim then announced that he would relinquish 1.3 trillion won ($1.08 billion) of his personal equity in Daewoo companies. His final proposal to salvage the conglomerate involved a breakup of the conglomerate and sell-off of its companies with only the automobile company remaining. In return, Kim demanded over ten trillion won ($8.3 billion) in the form of stock, real estate and other assets to use as a last injection to reorganize the group. A year had already elapsed since the government curtailed its financing and began close supervision of the group. Yet, the Financial Supervisory Service (FSS) approved the rollover of six trillion won ($5 billion) of short-term commercial paper for six months and four trillion won ($3.3 billion) in additional funding. The government to no avail tried to sustain the beleaguered conglomerate. Weeks later in August, twelve main companies preceded into court receivership workout procedures. Representative Directors submitted their resignations on November 1 and shortly thereafter Kim left Korea to begin life as a fugitive. When the financial crisis struck, Daewoo misjudged the situation and expanded its way to a meltdown. In the process, they were allowed to issue over 19.7 trillion won ($14.1 billion) in bonds and commercial paper and permitted to extend an additional ten trillion won ($8.3 billion) in loans over a two-year period. All of this proceeded under the shadows of accounting and loan fraud. The collective response to the situation hence was grossly inadequate. The Daewoo Empire had become a financial nightmare.

Consequence
Kim Woo-Choong, who siphoned off tens of billions of dollars from one of South Koreas mightiest industrial giants, was on Tuesday sentenced to 10 years in jail and fined $100,000 for his part in the downfall of Daewoo. Daewoo was at the forefront of South Koreas march to prosperity after the war and its ignominious collapse cut deep. The government pumped in nearly $30bn of taxpayers money and banks made huge write-offs. While public funds have largely been recouped through sell24

offs, credibility remains stretched by ongoing chaebol misdemeanors like embezzlement and slush funds. Mr. Kims sentence, six years after he skipped the country, is insufficient to allay these fears. Certainly, measured against local standards, the punishment is severe. Other chaebol chiefs caught on the wrong side of the law have got away with so-called donations to society. Chey Tae-won, chairman of SK Corp, served just a fraction of his three-year sentence and was soon back running the oil refinery business. By 1999, Daewoo, the second largest conglomerate in South Korea with interests in about 100 countries, went bankrupt, with debts of about 80 billion won ($84.3 million).

Breakup and present status

The group was reorganized into three separate parts: Daewoo Corporation, Daewoo Engineering & Construction and Daewoo International Corporation. They are active in many markets, most significantly in steel processing, ship building and financial services. The corporate entity known as "Daewoo Corporation" is now known as "Daewoo Electronics" and is focused only in manufacturing electronics. Daewoo Electronics survives to this day despite bankruptcy, with a new brand logo "DE", but many of the other subsidiaries and divisions have become independent or simply perished under the "reorganization" of the Korean government under Kim Dae Jung. In North America, Target stores market Daewoo Electronics products under their "Trutech" brand on an ODM basis.

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In 2004, General Motors pulled the Daewoo brand of vehicles out of Australia and New Zealand, citing irreparable brand damage. Later that same year, GM announced that Daewoo Motors in Europe would change its name to Chevrolet on 1 January 2005. In 2005, it was announced that Daewoo cars would have a Holden badge in Australia and New Zealand. In South Africa, Thailand and the Middle East, Daewoo models were already being sold as Chevrolets. Only in South Korea and Vietnam does the Daewoo marquee survive. The Daewoo commercial vehicle manufacturer was taken over by Tata Motors - the world's 5th largest medium and heavy commercial vehicle manufacturer.

Mismanagement analysis
Dictionaries define "mismanagement" as doing something badly, improperly, wrongly, carelessly, incompetently, or inefficiently. Mismanagement could conceivably cover a range of actions from a simple mistake in performing an administrative task to a deliberate transgression of relevant laws and related policies. For Daewoo Motors, the mismanagement was the cause of its bankruptcy. Now we will analyze the mismanagement of Daewoo Motors which led to its 1999-collapse in terms of four essential functions:

1. Unfit Strategy - Reckless Global

Expansion Strategy:

Daewoo Motors had chosen the dangerous strategy - global expansion strategy in 1990s. Its original objectives had been to expand its profit bases and realize its economies of scale. It had planned to enter into one of the ten global car makers in 2000. Daewoo had invested in even 5 billion $ in 134 items overseas up to its bankruptcy from 1994. Large investment in short time might not lead to early realization of profits. Unavoidable continuous investments might
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aggravate foreign financial burden. Large foreign debts might entrap the corporate into bankruptcy. Any serious insufficient forecasting could lead to a dragon's collapse. During its growth, Daewoo was once considered too big to fail. It had continued expanding its territories towards East European countries (Poland, Romania, Ukraine, etc) and developing countries(India, China, etc) through joint investments with foreign partners. But, overseas businesses have been much different from domestic businesses. Daewoo had needed more foreign debts. Compared with its heavy foreign debts (1.5 billion $ in 1999, for group total, 5.0 billion $), overseas investment results in low profits because of host countries' low demand and economic growth. Heavy foreign debts finally resulted in fatal financial blows at the time of foreign financial crisis.

2. Daewoo's Organization:

Korean government protections had not cover the foreign territories sufficiently in the case of Asian financial crisis. Its domestic successes had been due to the government policy and domestic financial support. However, Korean government had not protected Daewoo in the face of the

Daewoo had One Man (Chairman) Oriented Organization and The organization of Daewoo Motors had not played any important role in preventing the corporate from going into bankruptcy. Its financial and planning departments had not worked well. The organization had only worked to dash forward as the implementation gadget for the very few top management, actually one-man (chairman, Kim Woo Choong) system. Its business style was very aggressive and unlimited. From 1993, its debt ratio had run around between 580 % and 740 %. Every time the past crises had come, the chairman had solved them with his abilities to persuade policy makers and financial institutions. The organization had only looked at him with respect and belief. Its organization also followed the chairman at the final moment of its collapse.

3.Monarchistic Leadership - One Man Autocratic Leadership for Both Organization and Personnel:
The leader of Daewoo Motors, Kim Woo Choong, had been the head of the second largest group in Korea until its bankruptcy in 1999. Despite the organizational authority division and institutional supervision, he wielded his power autocratically. The board of directors and other control systems had been only the gadget of approval of his decision. Despite his past successes in audacious expansions of businesses, he had fell down because of 1997 financial crisis. His leadership did not work in the face of foreign financial crisis. His unlimited expansion without financial background had failed in the face of foreign financial crisis and different economic

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situations. The different environment did not allow the autocratic leadership to expand Daewoo towards foreign territories recklessly without its inner fundamental resources. His power-wielding leadership had been an example of the management of Korean Group, socalled Chaebol. Chaebol's traditional behavior was like these :

- Reckless expansion and spreading product scope; - Multiple affiliation (obscuring mounting debts and other obligations); - Cross-subsidization of unprofitable subsidiaries by parent companies; - Weak corporate governance (limited oversight by boards of directors, lack of outsiders, large size, no guidance on duties); - Opaque auditing and accounting practices; 4. Incompetent Control System - Financial and Ethical - Institutional investors unable to influence corporate management Mismanagement:
In the middle of 1997 foreign financial crisis, several prominent chaebols went bankrupt. Additionally, some of Korea's largest banks were threatened by bankruptcies among mid-sized chaebol (although in the event they were largely saved by government bailouts and nationalization). Business scandals dominated the media. The 1999 collapse of the then-second largest chaebol, Daewoo, with debts of 70 billion $, or almost 14 percent of Korea's gross domestic product, placed further burdens on banks and crippled financial markets. Daewoo's debt problems were compounded by its accounting fraud.

Daewoo group had mainly used five ways to do many irregularities: first, inflating the amount oforeign constructions ordered. It pretended that it had performed $1 billion of foreign constructions in 1997, including Indian automobile construction and others in 10 countries. Second, forging factories with no more products as normally working factories. Daewoo Motors, leading company of the group, had invested $0.1 billion in Ukrainian motor factory but the factory had stopped. Despite that, it pretended that the factory had manufactured motors afterwards in Ukraine by bringing into Ukraine and reassembling parts of motors which had been already manufactured export revenue overseas without bringing into Korea. Third, taking in Korea. It had taken $1.5 billion of the money from motor sales into its London affiliate, without bringing into Korea.
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Fourth, sending foreign currencies overseas by false documents. It had sent $2.6 billion overseas making false documents pretending that it had imported goods from self-made bogus companies. These had beenhiding liabilities and orders of assets. Core companies of the Fifth, performed by direct inflating top management. group had done window dressing of $34.2 billion in accounting reports. Daewoo Group had used the window dressing to attract investment funds. Window dressing means the deceptive practice of using accounting tricks to make a company's balance sheet and income statement appear better than they really are.

RECOMMENDATIONS
Daewoo, as a very promising and enterprising corporation, collapsed in 1999 in the face of foreign financial crisis. That was great damage to Korean industry in terms of its great growth potential. Not to repeat the same sufferings, we can propose some recommendations for Daewoo, reflecting its previous mismanagement. The recommendations can be inferred from the mismanagement analysis.

1. Setting the Practical and Feasible Strategy:

The results of important strategy determine the success or failure of the corporation. So the important strategy must be set, based on realistic and accurate forecasting for demands and economies. If possible, the risky strategy tries to be objectively assessed to minimize the mistakes. In the case of preparing for the global strategy, the corporation must have sufficient thoroughness and necessary internal financial resources. And the corporation must note the technology and internal substantiality rather than external vacant growth.

2. Activating the Organizational Authority and Personnel:

It is irrational to expect only one almighty leader for vast corporation with complex environment. Only one almighty leader cannot manage such a large organization. The management must utilize its organization sufficiently to achieve its goals. Top management must confirm the organizational authority and encourage performing its authority and make sure its personnel have their own right to do their own work with their own authority and responsibility. And top management must train its personnel in that they should obey rational ness and legitimacy following the formal rules rather than personal authority. Top management must try to encourage forming the living organization and culture

3. Forming the Rational and Responsive Leadership:

There is no more need for one-man dominant leadership for the complex environment. The leader must be able to gather and integrate ideas from organizational structure. The leader must respect others opinion in the organization. There must be a reasonable distribution of decision-making power between the board of directors and the chairman. To balance the power of chairman, members of board of directors must be diversified and the competent and fair
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outside directors must be appointed. Modern leadership must realize that the management need sincerity and ethics for management of large organization.

4. Establishing the Effective and Corrective Control System:

Control system must have the authority to check the wrong and illegal practice and take corrective actions to the organization and personnel including top management. So top management must confirm the authority of internal audit. Supervisory agent must emphasize the legal responsibility of external audit. Top management must pay attention to the exact financial situation for the profit and debt and be able to judge its ability to repay the debt. To encourage ethical behavior and regain shareholders trust, the management must establish the ethical code and emphasize the ethical management, establish the disclosure and transparency of information important for shareholders interest. The management must inform the organization and its personnel that corporations have social responsibilities.

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All of the above factors contributed to Daewoos failures. The onset of the financial crisis then fully exposed Daewoos vulnerabilities as a conglomerate. Ineffective corporate governance led to poor business decisions and eventually malfeasance during the crisis. The lack of proper checks and balances against the controlling shareholder in particular led to the unprecedented accounting and loan fraud. Therefore, the controlling shareholder, Woo Choong Kim, ultimately deserves the most responsibility for Daewoos failure. Korea has henceforth undergone an unprecedented degree of corporate governance reforms. It has moved to strengthen oversight through checks and balances at all level of the corporate structure. General public awareness of the significance of proper corporate governance has substantially improved. Nevertheless, concerns persist that many of Koreas leading companies still remain vulnerable to the excessive concentration of power of controlling shareholders and their families. Korea must continue to persevere to enhance transparency and accountability if it wants to prevent another debacle such as Daewoo and in the hope that it can provide valuable policy lessons for other emerging markets in Asia.

Bibliography

REFERENCES:
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Persons: 1. Md. Salahuddin Choudhury Lecturer Department of finance University of Dhaka

Websites:
1. Scib bd. Com 2. Readessay.com

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