Did Samsung do ‘big bath accounting’? By Tim Kim - April 11, 2019

Samsung leader’s verdict is expected to come out soon Samsung Electronics announced on April 5 that its operating profit for the first quarter of the year stood at 6.2 trillion won ($5.47 billion), down 60.36 percent from
the same period a year ago.

The announcement caught the market by surprise because analysts expected the profits of the country’s biggest company would be at least $7 billion.

Grabbing as much attention as the “earnings shock” was the fact that Samsung presented an official notice later last month that its January-March performance would fail to reach initial projections.

Samsung said that the unprecedented move was aimed at reducing any shock to the market, but observers came up with various explanations to figure out why the Seoul-based company made the extremely rare move.

One theory raised recently is that Samsung was sending a message to the Supreme Court that the world’s top memory chip manufacturer was now in crisis, ahead of a ruling on its de facto head, Vice Chairman Lee Jae-yong.

According to the theory, Samsung was minimizing its reported profit for the first quarter of the year by, for example, writing off certain losses aggressively, which is called “big bath accounting.”

The thinking goes that if the company is suffering from a crisis, the court would not come up with a ruling unfavorable to Vice Chairman Lee so that he would avoid being jailed once more.

In early 2017, Lee was indicted for allegedly paying bribes to former President Park Geun-hye and her confidante Choi Soon-sil in return for their help in certain business deals that helped him bolster his control of the
business empire.

Later that year, a Seoul district court found Lee guilty and sentenced him to five years in prison, though he was set free in early 2018 after an appeals court halved his sentence and suspended it.

The case is now pending at the Supreme Court, and depending on the final verdict, Lee could find himself once again on the wrong side of the bars. This is the worst-case scenario that Samsung does not want to face at a time when Chairman Lee Kun-hee has been hospitalized for years.

Lee Kun-hee, the father of Vice Chairman Lee, collapsed in 2014 after a heart attack and has yet to regain his health.

Recently, there have been reports that the top court could rule on the case soon rather than later, specifically, late this month at earliest.

Reality check
A Samsung official, however, flatly denied such a theory – and the reasoning behind it – saying that the announcement in late March really was purposed so as to give less of a shock to the market.

Observers point out that “big bath accounting” is possible because it is not necessarily illegal, but they are wary of whether Samsung would actually bother to do this.

“It could be possible that Samsung tried to affect the court ruling by understating its bottom line and making a rare announcement to the market,” said an analyst at a private consultancy in Seoul.

“For a reality check on such a rumor, however, you should watch the performance of Samsung’s rival SK hynix. Because SK hynix is expected to show a disappointing performance in the first quarter, I don’t buy into the theory that Samsung attempted to diminish its profits.”

SK hynix, the world’s second-largest memory chip maker, plans to disclose its first-quarter results on April 25. The market consensus is that its profits would be less than $1.5 billion, down up to 64% from last year.Recently, there have been reports that the top court could rule on the case soon rather than later, specifically, late this month at earliest.

Reality check
A Samsung official, however, flatly denied such a theory – and the reasoning behind it – saying that the announcement in late March really was purposed so as to give less of a shock to the market.

Observers point out that “big bath accounting” is possible because it is not necessarily illegal, but they are wary of whether Samsung would actually bother to do this.

“It could be possible that Samsung tried to affect the court ruling by understating its bottom line and making a rare announcement to the market,” said an analyst at a private consultancy in Seoul.

“For a reality check on such a rumor, however, you should watch the performance of Samsung’s rival SK hynix. Because SK hynix is expected to show a disappointing performance in the first quarter, I don’t buy into the theory that Samsung attempted to diminish its profits.”

SK hynix, the world’s second-largest memory chip maker, plans to disclose its first-quarter results on April 25. The market consensus is that its profits would be less than $1.5 billion, down up to 64% from last year.

A source in the semiconductor industry concurred.

“As far as I know, Samsung offered guidance to analysts last month, which prompted them to curtail projections for the first quarter,” said the source who asked for anonymity.

“As more analysts asked for information, the bourse operator requested Samsung to come up with an official stance. That’s why Samsung gave the rare announcement late March.”