Company makes “mutual authorization” trading, allegedly failing to make financial statements properly

【Background】：
Investors made written accusations to the Center in August 2007, saying that Company B allegedly published information in favor of it on the Market Observation Post System of the Taiwan Stock Exchange Corp. (TWSE) and that led to sharp fluctuation in the Company’s share price. They requested the Center to pay attention to it and protect their interest in this case. In February 2008, the Center received investors’ another complain about the Company which allegedly made “mutual authorization” with a foreign party in 2004-2007 during which the Company classified the royalties earned from that party as the Company’s revenue but classified the royalties paid to that party as invisible assets, allegedly failing to make its financial statements properly.
【Reactive actions】：
1. After receiving investors’ accusation against the Company, the Center has made investigation on this case and reported it to the regulatory agencies.
2. As for the Company’s practice of “mutual authorization” with an overseas party and failure to make its financial statements properly, the Center has made a report to the regulatory agencies and meanwhile requested the Accounting Research and development Foundation (hereafter refers as the Foundation) to give explanation for common accounting practices of a biochemical drug maker which makes “mutual authorization” with an overseas party.
3. The Foundation replied in May 2008, clarifying that “mutual authorization” should be treated as a case of drug-making technology transfer, so Company B should not classify the collected royalties as company’s revenue and classified the royalties it paid to the same party as invisible assets in this case. The regulatory agency, after receiving the Center’s inquiry letter, has requested Company B to re-compile its financial report. Company B accordingly re-compiled its financial reports for the period from 2004 to the first quarter of 2008, and published it as significant companies new in June 2008.
【Follow-ups】：
1. Company B has followed the Foundation’s advice to re-compile its financial reports for the period from 2004 to the first quarter of 2008, turning its EPS (earrings per share) from a positive figure to a loss. The correction is involved with changes of as much as several hundred millions of NT dollars in the Company’s accounting book. It seriously influenced investors’ judgments on this Company’s performance and thus caused sharp fluctuations in the Company’s share price.
2. When a company compiles its financial report, it should follow the applicable accounting principles. The Foundation’s reply to the Center’s inquiry letter only stated that the practice of “mutual authorization” should be subject to the existing accounting principles applicable to assets exchange, but it didn’t make new accounting principles for the Company’s case involved with transfer of biochemical drug technologies. Concerning the case’s serious influence on the interest of investors and the Company’s failure to make its financial statements properly, the Center has convened consulting meetings and invited experts to express their opinions on this issue. Meanwhile, the Center proposed reactive measures regarding how to protect investors’ interest in this case as well as how to maintain market order and induce public companies to properly make financial statements.