Kakao inspects SM Entertainment’s management   

Kakao Corp. has embarked on a special inspection of SM Entertainment Co.'s financial reporting for the first time since the South Korean internet giant acquired the country’s pioneering K-pop entertainment agency less than a year ago, heralding a possible rupture in their relations.

Kakao confirmed on Thursday that a law firm has been commissioned to examine SM’s financial statements upon the request of its board of directors’ audit committee.

It is specifically looking into SM’s investments, which have been made without consultation with the mobile platform parent since its takeover, according to the company.

It is also said that the investigation includes digital forensics of devices owned by SM’s key senior executives such as Chief Executive Officer Jang Cheol-hyuk, Chief A&R Officer Lee Sung-soo and Executive Director/Chief Operating Officer Tak Young-jun.

The special auditing is said to have invited strong protests from SM management, which was promised independent, full control of the K-pop pioneer after Kakao’s takeover in March last year.

Kakao became the largest shareholder of SM, securing a 39.87% stake for 1.2 trillion won ($900 million) after winning a takeover bid against the union of HYBE Co. and SM’s founder Lee Soo-man.

During the proxy battle, Kakao and SM management joined forces.

KAKAO AT THE CENTER OF CONTROVERSIES

But the former allies are about to turn against each other -- at a time when the Korean top mobile platform company is embroiled in multiple scandals, facing the toughest time in its 13-year history.

Kakao CEO Hong Euntaek and other executives have been under a government probe over alleged stock manipulation in the company’s acquisition of SM. Its Chief Financial Officer Bae Jae-hyun and two unidentified senior investment managers of the company were already arrested for it.

Kakao founder and Chairman Kim Beom-soo, known as Brian Kim, is also under state scrutiny for the allegation as well as the tech giant’s monopolistic business practices.

Facing criticism over the company’s poor governance, Kim has fully returned to the company’s management to take grip of the situation, last year warning of a management reshuffle for reforms.

The special audit of SM is suspected to be part of such business reforms, some industry observers said, adding that Kakao may replace SM’s current board of directors with Kakao officials in a general shareholders meeting in March.

Rumors are also circulating that Kakao may put SM back on the market. But Kakao has denied this.

In December, Kakao appointed Chung Shina, CEO and managing partner of its wholly owned subsidiary Kakao Ventures Corp. as its new chief executive. She will replace current CEO Hong if she is approved at the shareholders meeting in March.

Write to Jun-Ho Cha at chacha@hankyung.com


Sookyung Seo edited this article.