SEOUL, South Korea (AP) -- A South Korean regulator said Wednesday Samsung Biologics Co. breached accounting rules in a preliminary finding that could deal a big blow to the company and other Samsung affiliates if finalized.
Financial Supervisory Service wrapped up its one-year probe into Samsung Biologics and notified the company of the violation. It declined to confirm details of its interim conclusion pending a review at the Financial Services Commission. The notification gives Samsung Biologics a chance to defend itself.
Samsung Biologics is denying the accounting breaches.
Despite its defense, its stock price tanked, finishing 17.2 percent lower.
If the finding is upheld, authorities can review whether to delist stocks of Samsung Biologics, which went public in November 2016.
At stake is whether Samsung Biologics accurately evaluated the value of its affiliate Samsung Bioepis before its initial public offering in 2016.
Samsung Biologics was in the red since its founding in 2011 for years. But in 2015 it suddenly reported a net profit of 1.9 trillion won ($1.8 billion) even as it posted an operating loss. The sudden profit stemmed from how Samsung Biologics changed the way it estimated how much its majority stake in Samsung Bioepis was worth.
Activists argued that Samsung Biologics' value was inflated when it changed its accounting methods to reflect Samsung Bioepis' market value instead of its book value. Samsung Bioepis is a joint venture with U.S. pharmaceutical company Biogen.
Samsung Biologics said on its website that there was no problem in the way the value of Samsung Bioepis was reflected, which was reviewed by outside auditors and conducted in line with accounting standards.
The stake is high because the value of Samsung Bioepis and Samsung Biologics are at the heart of the controversy over the highly contended merger between two Samsung companies in 2015.
When shareholders at Samsung C&T opposed the merger with Cheil Industries, arguing that the merger was unfair and it favored Cheil shareholders including the Samsung founding family, Samsung justified the merger ratio citing the high potential of Cheil's stake in Samsung Biologics.
Samsung Biologics is a biopharmaceutical company that makes copycats of biological drugs from living cells, unlike typical drugs manufactured through chemical synthesis.
Samsung invested big in the biologics business as part of its plan to find a future cash cow when profit from its existing businesses dwindles.
Samsung C&T controls a 43.4 percent stake in Samsung Biologics and Samsung Electronics controls a 31.5 percent stake in the company. Lee Jae-yong, Samsung Electronics vice chairman and the only son of Samsung chair, is the biggest shareholder in Samsung C&T with a 17.1 percent stake.