ZURICH (Reuters) - ABB said on Monday that suspected fraud in South Korea cut its 2016 net income by $64 million in a case that prompted the Swiss power and automation group and its auditor to conclude the company failed to maintain effective internal controls.
It revised net income to $1.89 billion, ABB said in its annual report, down from $1.96 billion reported in February. The pre-tax impact was $73 million, less than the roughly $100 million previously reported, due to insurance recoveries.
ABB has said a South Korean treasurer engaged in a “sophisticated criminal scheme” to embezzle millions from the company before disappearing. The treasurer, identified as Oh Myeong-se, is still being sought by authorities.
Auditor Ernst & Young concluded “ABB Ltd has not maintained effective internal control over financial reporting as of December 31, 2016,” according to the annual report.
ABB acknowledged the shortcomings, citing inadequate management oversight of the Korean subsidiary’s treasury activities that failed to uncover the fraud before the damage was done.
“ABB did not maintain adequate segregation of duties in the treasury function in its South Korean subsidiary and failed to identify certain inappropriate access levels to the local enterprise resource planning system,” Chief Executive Ulrich Spiesshofer and Chief Financial Officer Eric Elzvik wrote in a joint letter to shareholders.
“ABB’s internal control over financial reporting was not effective,” they said.
Elzvik is being replaced by former Nokia CFO Timo Ihamuotila, a move announced by ABB last year.
Spiesshofer’s compensation package rose to 9.3 million Swiss francs ($9.2 million) in 2016, the annual report said, from 9.1 million francs the previous year.
Elzvik’s pay package fell to 3.1 million francs from 3.3 million francs.
($1 = 1.0107 Swiss francs)
Reporting by John Miller; Editing by Michael Shields