The supervisors and independent directors of a leading enterprise, without participating in or knowing the company's concealed financial fraud, signed and confirmed the audited annual report with unqualified opinions, and not only suffered administrative penalties, but also faced civil compensation of more than one million yuan after 8 years. The case went through the first instance, the second instance and the retrial, and although the appeal continued, the judgment still supported the plaintiff's claims. The risk of directors, supervisors and senior executives performing their duties caused by information asymmetry exists not only among enterprises and investors, but also within enterprises. It is the basic duty of directors, supervisors and senior executives to sign and confirm periodic reports, but it is difficult to identify hidden financial fraud, and it is impossible to avoid liability simply by relying on unqualified audit reports. Independent directors have to "pay out of their own pockets" to avoid the inevitable risk of performing their dutiesThe circumstances of the caseQingdao XX Co., Ltd. *** Enterprise) and Beijing XX Investment Management Center (Limited Partnership) in 2015 to negotiate the private placement, and determined that after the first investment, Beijing XX Investment Management Center invested 4 million yuan in Qingdao XX Co., Ltd. in the form of currency, and subscribed for 500,000 shares. In December 2018, the Qingdao Supervision Bureau made an "Administrative Penalty Decision" to Qingdao XX Co., Ltd., determining that the company from 2014 to the first half of 2016, there were inflated income, inflated bank deposits and other behaviors, involving the falsification of annual reports and false statements and failure to disclose information in accordance with regulations, and the company's 9 directors and 4 supervisors signed and confirmed on the above-mentioned annual report, which is the directly responsible person in charge and other directly responsible personnel who should be held responsible for the company's information disclosure and false records. In the end, a fine of 600,000 yuan was imposed on Qingdao XX shares, and a fine ranging from 30,000 to 300,000 yuan was imposed on the above 13 directors, supervisors and senior executives. On August 15, 2019, Qingdao XX shares were delisted. The case is disputed1. Whether the fixed increase falls under the category of false statementAccording to the judgment of the second instance, "this case is a false statement that occurred in the market, although it belongs to the category not provided for at the beginning of the law, but its essence is still a dispute over the liability for false statement, and it can be tried with reference to the spirit and principles determined by the Several Provisions of the Supreme People's Court on the Trial of Civil Compensation Cases of False Statements in the Market". First of all, the national small and medium-sized enterprise share transfer system is a national first-class trading venue approved by the first country, so it belongs to the first market. Secondly, the private placement is a kind of raising funds from a specific entity through a private placement, and does not belong to the "transfer by agreement" in the excluded circumstances. Therefore, this case is a dispute over misrepresentation. 2. The benchmark date and benchmark price of the suspended enterpriseIn view of the fact that Qingdao XX shares have been suspended before the disclosure date of the false statement, and have not resumed trading until the delisting in 2019, it is not feasible to confirm the basic date and the basic price according to the usual method. The court of first instance took the day before the suspension as the basic date, and the court of second instance corrected its determination. The court of second instance held that the base date, also known as the digestion date, refers to the starting time when the market digests the adverse effects of misrepresentation and returns to fairness. Qingdao xx** has been suspended before the disclosure date of the false statement, so the impact of the false statement on the market on the day before the suspension has not been released nor digested, and it is determined that this date is the base date, which is inconsistent with the purpose determined on the base date. The court of second instance held that this case could not determine a clear benchmark date and benchmark price, so Qingdao XX shares failed to actively apply for resumption of trading after the suspension, and did not disclose the annual report on schedule, and should bear the adverse consequences of failing to provide evidence. 3. How to determine the responsibilities of directors, supervisors and senior executivesSome of the directors, supervisors and senior executives involved in this case argued in the appeal: 1He did not know about or participated in the financial fraud of the company involved in the case;2.He signed the audit report out of trust in the audit institution, and could only express his opinion on the basis of the materials provided by the company involved in the case and the third-party institution, and lacked the ability to identify financial fraud3.Some independent directors argued that they could not be ordered to bear civil compensation because of administrative penalties, and that it was unfair for independent directors to attend the board of directors diligently and have not received a penny, but should bear compensation. In the second-instance judgment, the principle of attribution of civil liability for directors, supervisors and senior executives of listed companies is clearly defined as the "principle of presumption of fault": unless it is proved that there is no fault, fault is presumed from the fact of damage itself. 1.Failure to participate is not the same as fulfilling responsibility, and trusting a professional organization is not the same as not being responsibleThe supervisors and independent directors failed to prove that they had carried out necessary and effective inspection and supervision of the information disclosure of Qingdao XX shares, and did not put forward the requirements for further communication and verification, and could not prove that they were not at fault. The accounting responsibilities of directors and supervisors of listed companies to the company and the audit responsibilities of external institutions are two different responsibilities, and directors and supervisors cannot be exempted from liability on the grounds that the audit institutions have not discovered or pointed out. 2.Part of the joint and several, rights and responsibilities correspondConsidering that the supervisors and independent directors did not participate in the fraud, and that the independent directors did not participate in the daily operation of the company, did not perform specific business, or even "did not receive a penny", the second instance determined that the supervisors were jointly and severally liable within 50%, and the independent directors were jointly and severally liable within 5%. 3.Risks are inevitable and can only be transferredAfter the second instance, the supervisors and independent directors in this case submitted a request for retrial to the Supreme People's Court in 2022, but the retrial determination remained unchanged. After the first trial, the second trial, and the retrial, the supervisors and independent directors probably really felt "more wronged than Dou E" in their hearts. Indeed, the second-instance judgment described that the financial fraud of Qingdao XX shares was "hidden", and the accounting institution did issue an audit report with an "unqualified opinion", because it was unable to detect the concealed fraud, coupled with the trust in the professional opinion of the accounting institution, and signed and confirmed the annual report, and the behavior of the supervisors and independent directors seemed to be blameless. If the company is not finally found to have committed fraud, who will question the annual report without grounds?Moreover, for directors, supervisors and senior executives who are not accounting majors, how can they discover financial fraud that even professional audit institutions cannot see?Case implications
First, there must be a risk of performing duties, and it is unavoidableAs mentioned at the beginning of the article, the risks caused by information asymmetry also exist within the enterprise. The lack of effective identification means for hidden financial fraud is a real problem for directors, supervisors and senior executives who are not accounting majors, and there have been countless cases where directors, supervisors and senior executives have paid the price of real money. Directors, supervisors and senior executives need to be responsible for the authenticity and completeness of information disclosure, but in the face of the deliberate concealment of a small number of core personnel, how to be responsible to avoid liability is a topic that has no standard answer so far. Judging from past cases, financial fraud can be achieved with only a few core personnel, while those who need to pay for financial fraud may cover the entire huge group of former and current directors, supervisors and senior executives of the enterprise. Relying solely on internal professionals to fulfill information disclosure obligations is, to a certain extent, a high degree of risk uncertainty for directors, supervisors and senior executives to hand over their own performance risks to others. Even professional accounting firms may be deceived by fraudulent methods, and directors, supervisors and senior executives who are not accounting professionals may face the dual dilemma of lacking both the ability to identify and the means of control when facing the risk of financial fraud. Second, do a good job of risk transfer to avoid "choking and wasting food".On the other hand, it is the duty of an enterprise to publish periodic reports on time, and it is the basic duty of directors, supervisors and senior executives to sign and confirm the periodic reports. Only by improving the performance risk of directors, supervisors and senior executives in advance, conforming to policy guidance, and using insurance means to cover the high risks of directors and supervisors, can we form a win-win situation for enterprises, directors, supervisors and senior executives and investors: enterprises win: directors, supervisors and senior executives do not need to be afraid of the end, reduce the internal friction of internal processes in the approval of information disclosure documents, promote the efficient development of enterprises, and attract excellent managers to join in corporate governance. D&O and Senior Executives: From the perspective of compensation, "intentional" and "negligent" are distinguished, and directors, supervisors and senior executives are no longer "wronged" when faced with a dispute over misrepresentation, and their negligent and negligent acts can be transferred through D&O insurance. Investors win: Insurance funds are backed up to establish the last line of protection and defense for investors to be compensated. On the other hand, in this case, unsuspecting investors suffered losses, directors, supervisors and senior executives who were kept in the dark faced compensation, and deliberately fraudulent companies were delisted. Conclusion
Finally, we would like to remind you that although the "Administrative Measures for Information Disclosure of Unlisted Public Companies" and the "Rules for Information Disclosure of Listed Companies" stipulate that enterprises shall apply differentiated information disclosure provisions according to their market level, the overall principle of information disclosure is consistent with that of the main board, that is, "timely and fair disclosure of material information to ensure truthfulness, accuracy and completeness", and at the same time, the obligations of directors, supervisors and senior executives of enterprises for information disclosure are also the same as those of the main board, that is, "faithfully and diligently perform their duties". * It is also a "board", the information disclosure obligation is not a lot, and the information disclosure requirements are not low.