Check it out and withdraw it?What did the on site inspection that made the IPO company frightened ?

Mondo History Updated on 2024-01-28

In November 2023, the China Securities Regulatory Commission (CSRC) solicited public comments on amending the Provisions on On-site Inspection of Initial Public Offering Enterprises.

It is pointed out that in the current inspection, there are still situations such as individual inspection subjects arbitrarily withdrawing their issuance applications or passively cooperating with the inspection work, and it is necessary to further strengthen the requirement of "reporting and taking responsibility" to consolidate the responsibilities of issuers and intermediaries.

Strengthening the "declaration is responsible" is a more important change in the revision of the "on-site inspection regulations".Stricter institutional restrictions have been imposed on behaviors such as withdrawal of applications after inspections, repeated occurrence of similar problems during inspections, and refusal to obstruct inspections. The amendment officially deletes the 'exemption period' provision, and even if the IPO is withdrawn, the CSRC will conduct inspections and deal with the problems found, which further restricts the problem of individual inspection subjects withdrawing their issuance applications at will, and improves the binding force and enforcement of enterprises' reporting responsibilities.

In addition, in the past 24 months, the inspection object, sponsor, ** service organization or its relevant responsible personnel have been subject to administrative supervision measures or self-regulatory measures due to violations of laws and regulations found in on-site inspectionsIf the on-site inspection finds similar problems and are serious in nature, the CSRC and the exchange can deal with them heavily.

This also means that pre-IPO companies need to further understand the relevant requirements of on-site inspections and pay more attention to on-site inspections.

The on-site inspection of IPOs once made IPO companies and intermediaries "frightened", and even "withdrawn as soon as they were checked".

According to public information, the proportion of voluntary withdrawal and termination of on-site inspections in the past three years has remained high. As of November 15, 2023, the China Securities Regulatory Commission has conducted on-site inspections of a total of 105 companies planning to IPO since 2020, of which 50 companies have withdrawn materialsaccounted for 4762%, nearly half of the enterprises were "withdrawn" after the declaration.

Judging from the comprehensive analysis of the CSRC's circular, the main reasons for a large number of enterprises to withdraw their IPO applications after being selected for on-site inspection involve the following categories:

Significant deficiencies in internal controls:There are major deficiencies in the internal control system of the enterprise, which cannot effectively prevent financial misconduct or errors, there are personal card income and expenditure, the actual controller's capital occupation, etc., and the enterprise is worried that the internal control quality defects will cause greater problems, so it withdraws the IPO application for rectification.

2.Financial Issues:During the inspection, there were financial deficiencies in the company's financial reports, such as failure to fully verify key revenue and cost financial data, improper accounting treatment, or financial irregularities. Businesses choose to withdraw their applications to avoid greater scrutiny and potential penalties.

3.Insufficient information disclosure:In order to avoid legal liability, some issuers have failed to truthfully disclose material matters such as VAM agreements, incomplete disclosure of major litigation and violations of laws and regulations, and the actual situation is insufficient to meet the listing requirements or is not transparent enough.

Other questions:Enterprises may also withdraw their applications due to internal problems such as management changes, unstable operations, and changes in the market environment, such as a significant decline in performance during the IPO application process, and it is not suitable for an IPO at present, so it is not suitable to withdraw and wait for a more favorable time.

In addition, some projects are not afraid of inspection because of how big the "hard injury" of the enterprise is, but because many sponsor institutions lack confidence in the quality of practice and are afraid of taking responsibility after finding out the problem, so they choose to withdraw the application materials.

However,With the revision of the "On-site Inspection Regulations", the "withdrawal after inspection" of enterprises may have become a thing of the past, and the following will be based on the establishment of on-site inspection objects, on-site inspection content, process and enterprise preparation matters, etc., and the on-site inspection will be carried out in detail, so that the pre-IPO enterprise can further understand the relevant requirements of on-site inspection.

According to the "On-site Inspection Regulations", there are two ways to determine the inspection object: random selection and problem-oriented

Randomly drawn

In principle, the registration department of the Securities and Futures CommissionExtraction is organized every three monthsAll accepted enterprises should be included in the scope of a sampling (except for those that have been listed as problem-oriented inspection objects before extraction).

In accordance with the relevant regulations, the China ** Industry Association determines the random selection of inspection objects by drawing lots, and the lottery process accepts independent third-party on-site supervision. After the inspection object is determined, the China ** Industry Association will publish the results of the sampling in a timely manner through its **.

2.Problem-oriented

The object-oriented inspection object shall be determined by the review department of the exchange or the registration department of the China Securities Regulatory Commission. InDuring the issuance and listing review or registration stage, the IPO company has major doubts or abnormalities related to the issuance conditions, listing conditions and information disclosure requirements, and fails to provide reasonable explanations that affect the review and judgment, which can be listed as a problem-oriented inspection by the audit or registration department. If the IPO enterprise in the review stage of the exchange has the above circumstances, the registration department of the CSRC may list it as the subject of problem-oriented inspection.

After the inspection object is determined,The audit department of the exchange shall notify the inspection object, the sponsor and the service institution in writing within three working days.

(1) On-site inspection time

Within 2 months after the project submission is accepted, it may be randomly selected for on-site inspection, and then, the supervision will issue a "notice of on-site inspection", and on-site inspection after 3 months after the list is announced, the on-site working time is about 1 month, and there are more than 10 inspectors, composed of professionals from the securities regulatory bureau and external appointments.

(2) On-site inspection methods

According to the "On-site Inspection Regulations", when carrying out inspections, the inspection team may take the following inspection methods as needed:

1.Check the production, business, and management sites that are subject to inspectionRelated Places

2.Get the inspection objectIndustrial and commercial materials, accounting vouchers, accounting books

Financial statementsand production, sales, warehousing records, etc.;

4.Walk-through tests are carried out on the main business cycles and key information systems of the inspection object;

5.Ask about the checkTarget controlling shareholders, actual controllers, directors, supervisors, and senior managersand related procurement, production, warehousing, sales, financial personnel, etc.;

6.Visit the important customers and businessmen who are the objects of inspection;

7.Get interested partiesFlow

8.Verification of the guaranteeRecommender, ** service organization working papersto ask the person involved;

9.Such other means as the Inspection Team deems necessary.

In an interview with reporters, the person in charge of the on-site inspection team of an enterprise said that before the entrance inspection, the inspection team willCarefully study the relevant clues and the company's prospectus and audit report, and collect and sort out relevant public opinion information on the InternetCollectively discuss the key points of the inspection, formulate the inspection plan, and determine the members of the inspection team according to the inspection plan, and do a good job in confidentiality, integrity education and other training work. After entering the field,Timely conduct bank account transactions, monitor important assets, conduct interviews, and review issuers' account books and intermediary working papersand other work, and visit the partners involved in the company's sales promotion expenses.

The following is based on the main reasons for withdrawing the IPO application after being selected for the on-site inspection, and analyzes the issues concerned in the on-site inspection one by one.

(1) Internal control deficiencies

According to Article 24 of the Listing Management Measures, "the issuer's internal control system is sound and effectively implemented, which can reasonably guarantee the reliability of financial reporting, the legality of production and operation, and the efficiency and effectiveness of operation." ”

If an enterprise's internal control system has major deficiencies and is not effectively implemented, the reliability of its financial reporting, the legitimacy of its production and operation, and the efficiency and effectiveness of its operation will not be guaranteed.

When reviewing the internal control of an enterprise, the Issuance Examination Committee usually pays attention to the following aspects:

The degree of perfection of the relevant internal control system。Whether it has established a sound system for fixed assets, subcontracts, bidding, revenue recognition, etc.

2. Whether the internal control system has been effectively implemented。Whether there is confusion in cash management, off-the-books, frequent accounting errors, frequent security accidents or bribery, and whether there is a problem of capital occupation by major shareholders.

(2) Financial data issues

Financial data is a hard lever to measure whether the company meets the listing standards, and in the past, the fraud of IPO companies was usually manifested as financial fraud, so financial issues have always been the focus of on-site inspections, and the main inspection contents include:

In terms of financial authenticity, whether there is inflated profits or adjustments, and whether there are discrepancies between the declared financial statements and the original financial statements of the enterprise. In terms of revenue recognitionand whether the company has adopted the correct revenue recognition method and whether the basis for recognition is sufficient. If a company's revenue recognition method is materially different from that of comparable public companies in the industry, this can also raise questions from regulators.

Share-based payments, whether the company correctly determined the fair value of the share-based payment and recognized the costs associated with the share-based payment. The addition and transfer of shares to employees, consultants, customers, businessmen and other stakeholders should also be based on the principle of substance over form, and whether it constitutes a share-based payment should be comprehensively determined.

(3) Information disclosure issues

In terms of information disclosure, whether the company has committed major violations of laws and regulations, such as violating environmental regulations, intellectual property infringement, etc., or facing major legal action. If the company has these material problems and does not fully disclose the relevant information, deliberately withholding information related to the company's operational risks, it may mislead investors.

Generally speaking, most of the IPO of enterprises has to go through several years of planning, during which the resources, costs, time and energy invested are hugeEnterprises planning to IPO should not leave anything to chance in on-site inspections and put an end to "sick declarations".

At the same time, in response to on-site inspections, it is necessary to start with the following points. First of all,The construction of internal control should be strengthened to ensure that the internal control system is soundto effectively prevent and detect financial misconduct, as well as ensure transparency and traceability of business processes.

Secondly,Businesses need to make sure that important issues have been properly addressedto prepare all necessary documents, financial reports and records in advance to easily respond to regulatory audits. In addition,Financial data needs to be rigorously reviewed to ensure that financial reports are accurate, especially key financial data and important account balances.

Finally,Intermediary due diligence is also a critical step in ensuring a company's financial reporting and operational complianceEnterprises can formulate self-inspection checklists with intermediaries, and organize special personnel to conduct self-inspections on enterprises in advance, so that enterprises can better cope with IPO on-site inspections and improve the chances of successful listing.

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