A retail investor sits in a brokerage house in Shanghai on February 21, when the stock market saw a major fall. Photo: CFP
The China Securities Regulatory Commission (CSRC) recently issued the most severe punishment ever handed down in the country for financial intermediaries in an IPO fraud case. It has been seen as a warning to companies and an effort to restore professional ethics.
In an announcement on its website Wednesday, the regulator said that Shenzhen PengCheng Certified Public Accountants Co had failed to conduct due diligence during its audit of Yunnan Green-Land Biological Technology Co, which was found to have fabricated details of its assets and income when it was preparing for an IPO in 2007.
Two other companies involved in the case were IPO underwriter United Securities (now Huatai United Securities) and Sichuan Chengtianmen Law Firm, which also failed to conduct due diligence, according to the regulator.
As the case has seriously impaired investors' legal interests, the CSRC said it would hand down the highest punishment for the intermediaries according to the Securities Law, including revoking Shenzhen PengCheng's securities business license. The individuals found to have been responsible in the case will also be barred from any business involving the stock market.
Kunming Intermediate People's Court ruled on February 7 that Yunnan Green-Land had committed IPO fraud, fabrication of financial statements and intentional destruction of accounting documents. The company was fined 10.4 million yuan ($1.7 million), the court said on its website on February 18.
Chairwoman He Xuekui was also sentenced to 10 years in prison and was fined 600,000 yuan, the court said.
The company overstated its assets by 70.1 million yuan and its income by 296.1 million yuan between 2004 and 2007. It also cheated investors out of 346.3 million yuan in its IPO in December 2007, the court said.
In late January, the Shenzhen Institute of Certified Public Accountants (CPA), a supervisory body of locally registered accountants, issued a circular on its website, calling for professionals to strengthen their self-discipline and maintain financial probity.
"Since the CPAs are the links between the transfer of benefits, they are likely to take commercial bribes," and commercial bribery is a "tumor" in the profession that must be clamped down upon, the Shenzhen institute warned.
The question of professional ethics and whose interests the accountants really represent have become topical both in China and abroad, after the exposure of cases of stock market fraud.
The Association of Chartered Certified Accountants (ACCA), a UK-based global trade body for professional accountants, published the results of two surveys of 1,500 members of the public and 261 accountants around the world in August 2012.
While "almost three-quarters of the surveyed accountants believe that the general public considers accountants to be trustworthy… just over half (55 percent) of those polled (public members) agreed," the report said.
On a list of trustworthiness of 13 different professions as perceived by the public, "accountants were ranked eighth, behind architects, professors, engineers, various medical professions and pilots," it said.
The low ranking has worried ACCA president Barry Cooper, who admitted that the conflict of professional integrity and commercial interests poses a "serious problem," and urged accountants to take the lead in "encouraging ethical and socially responsible behavior."
Meanwhile, in an effort to revive investors' confidence in the Chinese stock market, the CSRC handed down punishments in February for three other accounting firms - RSM China CPA, Jiangsu Gongzheng Tianye Group and Ascenda CPA (now part of Grant Thornton China) - for giving false auditing opinions about three listed companies during their IPOs in 2011 and 2012, Securities Times reported on February 23.
Fraudulent accounting practices are not confined to those seeking a stock market listing, as a recent finding by US machinery maker Caterpillar Inc during its internal investigation in China indicated.
Caterpillar found that several senior managers of Zhengzhou Siwei Mechanical & Electrical Manufacturing Co, a subsidiary of its recently acquired ERA Mining Machinery Ltd, engaged in "deliberate, multi-year, coordinated accounting misconduct," beginning several years prior to Caterpillar's acquisition of the company.
This deliberate misconduct "will result in a non-cash goodwill impairment charge of approximately $580 million, or $0.87 per share, for the fourth quarter of 2012," Caterpillar said in a press release on January 18.
Caterpillar said it removed several senior managers at Zhengzhou Siwei who were responsible for the misconduct and a new leadership team has been put in place.
"In terms of China, as with other major markets, it is critical that the business world focuses on its ethical responsibilities and on prioritizing the recruitment of senior executives and financial staff with strong ethical compasses," Cooper said in an e-mail to the Global Times Tuesday.
"Boards should demand a lot more from due diligence for Chinese acquisitions, particularly where the target was audited by a small firm and came to the market through a reverse merger," Paul Gillis, a professor at Peking University, wrote in his China Accounting Blog in January.
Cases of financial malpractice by some Chinese companies listed in the US have also prompted the US Securities and Exchange Commission (SEC) to seek joint inspections with the Chinese authorities on auditors operating in China last year.
The Chinese affiliates of the global Big Four auditing firms - PricewaterhouseCoopers, Deloitte Touche Tohmatsu, Ernst and Young and KPMG - refused to cooperate with the SEC's investigation, citing Chinese regulations, so the SEC accused these affiliates of breaking US securities laws in December.
Meanwhile, China's State Council has not yet responded to a recommendation on solving the joint regulation impasse sent by the CSRC and the Ministry of Finance in January.
Gillis said Thursday that he will urge the US Public Company Accounting Oversight Board (PCAOB) to "change its rules, deregistering all firms that it cannot inspect."
Gillis, who is also a member of the PCAOB's Standing Advisory Group, will testify before the US-China Economic and Security Review Commission in Washington DC on Thursday.
The Chinese affiliates of the Big Four auditors "are faced with having to decide whether they breach US or Chinese rules," and "it highlights the need for international collaboration between regulators when establishing rules that are designed to address international business," Cooper said.
"The quality of the Chinese auditors' work cannot be doubted," Zhang Qinglong, a professor at Beijing National Accounting Institute, told the Global Times Tuesday.
"It should suffice that the US issues its auditing standards, but there is no need for joint inspection," Zhang said.