The China Securities Regulatory Commission (CSRC), the country's securities regulator, will conduct its own investigations into the accuracy of the financial reports of companies in line to launch initial public offerings (IPOs) at mainland stock exchanges, according to statements from the commission Friday.
The CSRC will require companies in the mainland IPO pipeline, as well as their listing sponsors and accounting partners, to carry out self-examinations to ensure that the financial information they are disclosing ahead of their public float is authentic, accurate and objective, according to the statement. Self-inspection reports are to be sent to the CSRC before the end of March 2013, the commission stated, with random spot checks to follow from there.
Specifically, regulators will be looking for companies that are manipulating their profits or carrying out illicit maneuvers to dress up their balance sheets - such as self-deals, paying expenses under the name of related parties or marking down employee salaries on paper - the CSRC said.
The intensified regulatory scrutiny comes after a string companies posted dramatic drops in their profits soon after listing. According to statistics from Wind, a financial information provider, over one third of the 155 firms which launched IPOs on mainland boards in 2012 experienced falling profits at some point during the first three quarters, with 28 seeing their profits sag by more 20 percent year-on-year over the period.
Such sudden declines are mainly due to exaggerated financials as well as fraud, although the slowing domestic economy may have also contributed to the phenomenon to some extent, Zhou Yu, a financial expert at the Shanghai Academy of Social Sciences, told the Global Times.
"Chinese regulators have to have stricter supervision over the financial reports of IPO candidates to boost investor confidence and enhance the long-term development of the stock market," Zhou said.
In late November, the Shenzhen Stock Exchange publicly censured Wanfu Biotechnology (Hunan) Agricultural Development Co - a ChiNext-listed company engaged in the research, development, production and sale of rice products - for artificially inflating its earnings and profits in its financial reports, a punishment that could lead the company to be delisted if it receives another two censures within 36 months.
Listing sponsors CITIC Securities and Guotai Junan Securities also received warning letters recently from regulators after two of the firms they sponsored saw their performances suddenly and sharply weaken soon after their public trading debuts.
The increasingly crowded IPO pipeline has also created an incentive for regulators to get tough with listing candidates, Zhou said. Currently, there are over 800 companies waiting for a decision on their IPO plans, according to data from the CSRC.
"Given the bearish stock market, regulators can never permit so many companies to enter the market, which makes them more determined to carry out stricter check on the companies' qualification," Zhou said.