Lee Jae-sul Deloitte Korea CEO

By Kim Tong-hyung

As financial authorities enter year two of a “one-year plan” to purge the country’s toxic savings banks, there is deafening criticism over how these secondary lenders were allowed to continue their irresponsible lending behavior when their debt levels were turning cancerous.

The Financial Supervisory Service (FSS), in response, is willing to put at least some of the blame on the ineptitude of accounting firms that failed to express alarm over the banks.

Regulators slapped six-month business suspensions on four additional lenders Sunday, including market heavyweight Solomon Savings Bank, extending their hit list to 20 banks since they started the clean-up process early last year.

Kwon Seung-hwa Hanyoung CEO

Numerous sources at the FSS confirmed that authorities are considering punishing the accounting firms that were supposed to monitor the financial health of these troubled banks.

Solomon and Hanju Savings Bank, which was also suspended, were audited last year by Deloitte Korea. The other two suspended lenders, Korea Savings Bank and Mirae Savings Bank, were audited by Ernst & Young Korea and Shinhan Accounting Corporation, respectively. The finances at three of the banks were rated as appropriate, although Deloitte raised a red flag on Hanju.

According to auditing records, Solomon had around 5.135 trillion won in assets as of June last year, about 160 billion won more than the 4.87 trillion won measured by the FSS six months later.

Papers show Korea Savings Bank had 2.35 trillion won in assets at the end of June, which was 300 billion won more than the 2.24 trillion won measured by the FSS at the end of that year.

It could be said that the savings banks either endured dramatic changes that eroded their assets rapidly during that six-month span or their accounting firms could have done a better job in assessing their financial health.

``There will be a thorough review on whether these accounting firms audited the banks appropriately based on the standards required by law,’’ said a FSS official.

``If any irregularities are found to have existed between these banks and accounting firms, we will respond with action.’’

Authorities are concerned that the problems at savings banks, which account for around 3 percent of Korea’s financial services industry, could eventually blow up and shake the country’s financial stability.

Savings banks indulged in a lending spree over the past decade, principally funding property investment to exploit the rampant speculative demand.

All this came tumbling down in the economic turmoil in 2008, which had banks running for cover and calling in loans. Many borrowers were unable to repay, which led to crises at many of these banks before regulators mercifully pushed them to the sidelines.