The plaintiff (represented by Kim & Chang) is an investment management firm, and the defendants (represented by Barun Law) are an accounting firm and its accountants who conducted the external audit of a company (“Company K”) from FY 2010 to FY 2018.

The plaintiffs filed a lawsuit alleging that Company K made false statements in its financial statements by using window-dressing practices, including overstating its sales by approximately KRW 52.8 billion from the fiscal year of 2010 to the fiscal year of 2018, but that the defendants colluded with Company K’s management or were negligent in preparing and submitting an audit report expressing an “unqualified opinion” on the false financial statements, causing tens of billions of won in damages to the plaintiff which invested in Company K in reliance on the audit report prepared by the defendants.

After analyzing the case based on the plaintiff's allegations and evidence, it was found that the plaintiff's initial investment in Company K was made before the defendants became the external auditor of Company K, and that the plaintiff, as the largest shareholder of Company K, had been deeply involved in the operations of Company K, including dispatching its employees to Company K.

In response, we argued that the plaintiff's decision to invest in Company K was based on the plaintiff's own investment judgment to make up for losses after the plaintiff's initial investment, while the plaintiff was aware of Company K's fraudulent accounting practices. The plaintiff could not be said to have relied on or used the audit report of Company K to make the decision to invest. We emphasized that a causal connection to the fraudulent statements in the audit report could not be established.

The court found that (1) the audit reports for Company K’s fiscal years 2011 through 2018 contained material misstatements that were contrary to the objective facts, and (2) the defendants were not liable for damages because the plaintiffs could not be shown to have relied on or used the audit reports to acquire or retain the shares in Company K. The case was affirmed at first instance, with the plaintiffs waiving appeal.

This case is significant in that we clarify the requirements for liability of accounting firms and accountants under the External Audit Act, the Commercial Code, and the Civil Code, based on a sufficient understanding and review of the overall procedures and contents of widow-dressing practices.