ABB ABB Ltd

By Brian Blackstone 

ZURICH-- ABB Ltd. said lax controls played their part in the fraud and embezzlement at its South Korean unit which cost the Swiss company an estimated $73 million in lost pretax profit, some $30 million less than first signaled.

ABB "failed to provide adequate management oversight and review of the local treasury activities," the Swiss power-equipment and automated-technology company said on Monday

"Management has concluded that these deficiencies in the operation of ABB's internal controls constituted a material weakness," the company said in its annual report.

ABB that the fraud would have the impact of knocking pretax profit $73 million lower last year, down from its previous estimate of around a $100 million financial hit, on expected payouts from its insurance policies.

Last month, ABB disclosed that it had uncovered a "sophisticated criminal scheme" that it said was orchestrated by the treasurer of its South Korean unit, who went missing.

The company suspects that the treasurer--identified last month by a person familiar with the matter as Oh Myung-se--forged documents and colluded with third parties to steal from it, before disappearing on Feb. 7. ABB uncovered the theft on Feb. 9 and subsequently delayed publication of its latest annual report. The investigation, which involves both internal and external parties, "is progressing well," ABB said.

"ABB failed to safeguard physical access to the signature seals of the subsidiary in South Korea and prevent the company from being bound to unauthorized financial contracts, resulting in undetected financial obligations," the company said Monday.

"We have started implementing disciplinary consequences and will continue to do so as appropriate." ABB didn't specify what steps it has taken, citing the continuing investigation.

A police officer at the Cheonan Seobuk Police Station declined to comment. Cheonan, which is south of Seoul, is where ABB Korea's plants are located.

The alleged theft marked a setback for ABB after the company had announced a string of large orders in its power-grid unit, including a $640 million project to deliver an electricity-transmission link in India. ABB had come under pressure from some investors last year to sell the unit.

Reflecting its confidence in that segment of its business, ABB on Monday upgraded its earnings target margin for power grids by 2 percentage points to between 10% and 14%, effective 2018.

In its 2016 report released Monday, ABB pegged the amount of funds misappropriated by the South Korean unit's treasurer at $103 million in cash.

Also Monday, ABB said its orders fell about $3 billion last year to $33.4 billion. Net income was largely unchanged at $1.9 billion.

The company's share price was little changed Monday, up 0.1% from Friday.

--In-Soo Nam in Seoul contributed to this article

Write to Brian Blackstone at brian.blackstone@wsj.com

(END) Dow Jones Newswires

March 13, 2017 06:17 ET (10:17 GMT)

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