Kakao conducts intense audit of SM Entertainment
Kakao is conducting an intense audit of SM Entertainment’s key management, with market insiders hinting at the possibility of a management reshuffle at the K-pop entertainment agency, depending on the outcome of the audit.
A Kakao official told The Korea Times on Monday that the bigtech firm’s internal audit committee, consisting of company board members, is looking closely into SM management to see whether their external investment decisions were made properly.
“Kakao is currently undergoing a financial statement audit on SM Entertainment through an external law firm, as requested by the audit committee. This is in accordance with Article 21 of the Act on External Audit of Stock Companies, under which the audit committee finds it necessary to review the consolidated financial statements of Kakao and its subsidiaries,” the Kakao official said.
“The investigation is concerning the appropriateness of investment decisions made by SM management without holding prior consultations with Kakao, after Kakao became the largest shareholder of the entertainment firm.”
Yet, the IT giant urged caution against interpreting the investigation as a signal to sack members of SM’s management, explaining that the board’s audit committee has yet to even reach a conclusion concerning the audit inquiry.
Despite Kakao’s restraint over hinting at the possibility of replacing SM’s current management, such a scenario is not far-fetched, market insiders say, given that any inappropriate investment actions taken by SM’s management could potentially impact the financial situation of Kakao, the parent company of SM. This is more so since Kakao’s board of directors may even face charges of breach of duty for not taking effective action, in case the audit uncovers wrongdoings on the part of SM’s management.
Kakao is said to have initiated the audit earlier this month by conducting forensic investigations through Kim & Chang, Korea’s top and largest law firm.
The core of the audit investigation is whether the entertainment company’s high-priced acquisitions of 10x Entertainment, The Hub and Studio Klone — all of which hold special ties with some of SM’s key management officials — were appropriate investment decisions, by closely looking into the investment process of the acquisitions.
Depending on the audit findings, SM’s Chief Administrative Officer Lee Sung-soo, a nephew of SM founder Lee Soo-man, along with CEO Jang Cheol-hyuk and COO Tak Young-jun might be ousted from the entertainment agency. These were the key people who succeeded in driving out the founder Lee from SM early last year over his pursuit of personal interests over the entertainment firm’s overall profits.
Last March, Kakao became the largest shareholder of SM Entertainment by acquiring a 39.87 percent stake in the firm, surpassing its main competitors like HYBE.
While the acquisition was intended for the goal of maximizing synergy through collaboration between the two companies, Kakao has been under the prosecution’s investigation over charges of stock price manipulation during last March’s power struggle for management control of SM Entertainment.