By Kim Jung-hwan and Choi Mira
South Korea’s second largest tire maker Kumho Tire Co. that avoided heading to bankruptcy court has been cleared to stay on the country’s main stock market after it received a clean report on its financial statements from its auditor.
Ernst & Young Han Young, auditor of the debt-stricken tire maker, issued an “unqualified” opinion on the company’s financial statements on Tuesday, the extended deadline for submitting the audit report.
An unqualified opinion by an auditor means that the financial statements are reliable and fairly presented. The original deadline for the company’s submission of its financial statements was March 23, but the auditor postponed the submission as the company’s fate was hanging in the balance due to the union’s persistent rejection of its plan to go under China’s Doublestar Tyre. Its management and unionized workers reached a mutual agreement at the last minute on the planned sale to the Chinese rival after a majority of the workers voted in favor of the plan.
The validity allows the stock to remain on the country’s main Kospi market. If a Kospi-listed company receives an adverse or disclaimer of opinion from its auditor, or a qualified opinion for two years in a row, the company becomes ousted from the market. If it gets a qualified opinion just once, it would be put on the Korea Exchange (KRX)’s list of administrative issues. A qualified opinion means that there are some misrepresentations on the financial records and an adverse opinion means that they are extremely misstated. A disclaimer of opinion is issued when the auditor is unable to complete the audit report due to insufficient information.
However, the unqualified opinion on Kumho Tire’s financial statements doesn’t mean that its financial status has been improved as this just means that the statement is incompliance with basic auditing rules. To enhance its financial soundness and regain investors’ trust, the company has more to do onwards.
The tire maker recorded operating loss of more than 150 billion won ($140.7 million) last year. The company should immediately seek for measures to recover sales from its Chinese subsidiary, restore domestic sales networks and cut high production cost to get back on track, industry observers advised. After the planned acquisition, Doublestar Tyre plans to implement aggressive marketing in the Korean market for the firm’s high-performance original equipment (OE) tires.
Doublestar Tyre has agreed to invest 646.3 billion won in Kumho Tire’s new share through third-party allocation to become the largest shareholder with a stake of 45 percent. The plan had been strongly opposed by the union fearing massive job cuts and technology leakage, but was finally cleared when a majority of 60.6 percent of the unionized workers voted in favor of the plan last week.
Shares of Kumho Tire closed Wednesday down 2.01 percent at 6,340 won.