On January 30, the China Securities Regulatory Commission (CSRC) reported on the progress of the phased investigation into the *ST Zuojiang financial fraud case. It was preliminarily found that the financial information disclosed by the company in 2023 was seriously untrue and suspected of major financial fraud. This "most expensive ST stock in A-shares" resumed trading on the 31st.
* Supervise the "long teeth and thorns", especially the punishment of companies suspected of financial fraud. With the help of a number of recently disclosed prior notices of administrative penalties, administrative punishment decisions, disciplinary decisions, and reports on the progress of case filing and investigation, some details of financial fraud of many companies have been known to the market, and some new features have surfaced.
On the one hand, the financial fraud of some subsidiaries has made many cases more hidden, and in the chain of fraud for many years, the inflated and inflated income statements have alternately appeared; On the other hand, the emergence of counterfeit "shells" has brought challenges to the metabolism and virtuous cycle of the capital market.
The regulatory deterrent effect continues to rise, through the "one case, two investigations" model and three-dimensional accountability, counterfeiters should retreat as much as possible, and although some companies have not touched the mandatory delisting standards for major violations, the cost of violations has also increased significantly.
Under the full registration system, the metabolism of A-shares has advanced, and in order to avoid delisting, individual companies have resorted to financial fraud in order to protect their shells.
The regulator determined that the financial information disclosed by *ST Zuojiang in 2023 was seriously untrue and suspected of material financial fraud, and the final regulatory investigation results have not yet been announced. However, looking back at the company's previous announcements, possible operations and the motives behind them, some clues have already been exposed.
For example, in 2023, the company's 51 million yuan network card contract performance situation, whether the revenue is recognized or not is very important to *ST Zuojiang shell. According to the new rules on delisting, if the audited net profit of *ST Zuojiang last year was negative and the operating income was less than 100 million yuan, the company would face the fate of terminating the listing. Previously, *ST Zuojiang had reported the relevant procurement contract to the exchange and clarified the relevant procurement matters; Later, in the reply to the inquiry letter, it stated that the goods had been delivered as agreed, but the revenue had not yet been recognized. The inconsistencies in information disclosure once aroused doubts in the market.
With the improvement and optimization of A-share delisting indicators in recent years, on the one hand, diversified delisting channels have been smoothed, and the metabolism of A-shares has accelerated; However, on the other hand, individual companies have also achieved positive net assets by reducing liabilities by surprise, and avoiding touching the red line of 100 million yuan of revenue by inflating income, etc., in the process, the financial information disclosure of individual companies is not true, thus forming a fraudulent shell, which brings challenges to the implementation of the A-share delisting system and the virtuous cycle of the capital market.
In fact, there have always been many links between financial fraud and securing or retaining listing, successful financing or refinancing. Judging from the recent cases of financial fraud announced by regulators, many of them point to financing or refinancing.
The most typical case of fraudulent issuance of refinancing under the registration system, the case of Sichuang Medical Benefit. By carrying out false business and other methods, Sichuang Yihui inflated its operating income and profits in 2019 and 2020. In 2021, the company launched a convertible bond financing of more than 800 million yuan.
Regulatory penalties go hand in hand. On the one hand, it is necessary to pay close attention to the key minorities such as Sichuang Medical Benefit and the actual controller, and publicly condemn the "reputation punishment" of Sichuang Medical Benefit and relevant responsible personnel; On the other hand, it was determined that the actual controller was not suitable to serve as a director, supervisor or senior executive of a listed company for 10 years, and severe "qualification penalties" were imposed on the relevant entities that violated laws and regulations. As a result, the company has also become the first case of the Shenzhen Stock Exchange restricting the financing qualifications of listed companies after the implementation of the registration system, which means that the cost of violations of laws and regulations by relevant entities has increased significantly.
The case of fraud, which is more closely adapted to financing and refinancing, is *ST Meishang. There are false records in the IPO prospectus, the 2015-2019 annual report, the 2020 semi-annual report, the 2016 non-public issuance of shares and the payment of cash to purchase assets and raise matching funds and related party transaction reports, and the 2017 public offering of corporate bonds to qualified investors. The time span of the fraud is about nine years, and the hidden fraud methods include early recognition of accounts receivable, recovery of inflated net profits, false recording of bank interest income, non-adjustment of project income according to the approved amount, and inflated income of subsidiaries.
In fact, judging from the cases of more than 30 listed companies that have been punished by the regulator for financial fraud in 2023, a considerable proportion of the companies have varying degrees of financial fraud and performance adulteration at the stage of IPO and refinancing.
The managing partner of an accounting firm in Beijing said in an interview with a reporter from ** Times: "According to logical reasoning, financial fraud during the IPO period points to a smooth initial offering; Post-listing financial fraud is subject to considerations such as maintaining listing qualifications. Only by establishing and improving the review, approval, and supervision systems for IPO companies and listed companies, and at the same time increasing the intensity of punishment, can we tighten the cage and form a deterrent. ”
The financial explosion of subsidiaries has become an important path for some listed entities to commit financial fraud recently, which not only shows the uncertainty of extension mergers and acquisitions and subsequent integration, but also reflects the tendency of financial fraud entities to be concealed to a certain extent.
The most typical is *ST Huichen, which once fell to the lowest market value company on the Science and Technology Innovation Board, with the help of Xintang Puhua, a subsidiary acquired a few years ago, the company's finances have been fraudulent for many years. The methods of inflating revenue and profits include fictitious business with third parties, signing sales contracts with no commercial substance, and inflating revenue and profits by recognizing project revenue in advance. The secretary of the board of directors of the company has made it clear that Xintang Puhua has ceased operation.
In many cases of financial fraud by subsidiaries, it is still the mainstream method to inflate revenue through false business. For example, Sichuang Yihui received the "Administrative Penalty Decision" in January. Sichuang Yihui has been inflating operating income and profits through its wholly-owned subsidiary, Yihui Technology, for many years by carrying out false business and other means. A few days ago, representatives of state-owned shareholders were stationed on the board of directors, and the company's focus is expected to return to fundamentals.
The partners of the above-mentioned accounting firm believe that in the past, some companies have achieved non-fair transactions or profit transfer through related party transactions and other means, and recent cases show that mergers and acquisitions of non-related party transactions may also be a way to transfer profits. Whether there is a transfer of interests behind it is subject to further investigation and disclosure.
The vast majority of financial fraud cases point to the inflated increase in revenue and profits, behind which are demands for large-scale, maintaining market value, and smooth financing. In recent cases, some companies' profits have been inflated and inflated alternately.
An "Administrative Penalty Decision" issued by the Jiangsu Securities Regulatory Bureau in early January uncovered Jin Tongling's financial fraud methods that had lasted for many years. From 2017 to 2022, Jin Tongling and its wholly-owned subsidiaries inflated and reduced the company's operating income and total profit through various means, resulting in false records in the annual reports of the corresponding years. In six consecutive years of false records, the company inflated its revenue in both 2019 and 2020. According to the law of engineering projects, the industry believes that this is most likely due to the fact that there is more confirmation of the previous progress and then brings about a reversal, so as to realize the rebalancing of the relationship between financial report data and collusion.
In terms of the supervision of financial fraud, there is a new trend of early and small supervision, and for "subsidiary-style fraud", it has not escaped the eyes of supervision. *ST Huichen's main subsidiary, Xintang Puhua, is the focus of the exchange's attention, focusing on the relevant shares of Xintang Puhua, the exchange has issued several letters of inquiry, focusing on the large difference in valuation before and after Xintang Puhua, the authenticity of Xintang Puhua's revenue recognition, and the risk that the counterparty will not be able to fully perform the contract.
On January 9, the Shanghai Stock Exchange made a decision to terminate the listing of the veteran wind power company *ST Huayi, and terminated the listing and delisting on January 16. As a result, the company became the "first stock to be delisted" in 2024.
While ST Huayi's financial report falsely recorded that the income statement was "fat", it was also accompanied by the occupation of non-operating funds. From 2017 to 2019, ST Huayi transferred the funds of the listed company to Huayi Group and its affiliates through multiple transfers through the relevant accounts actually controlled by the controlling shareholder Huayi Group and the personal accounts of some employees, and the cumulative amount of non-operating funds occupied by related parties was as high as billions of yuan.
This is not the first time that financial problems have been accompanied by the occupation of non-operating funds. Previously, Tempus International was exposed to a similar situation. Tempus Group has used the financial operations of its small loan company to cause the outflow of funds from the listed company, and through a similar method of "self-financing", under the guise of false loans, the major shareholders have embezzled huge funds of the listed company. With the sharp tightening of non-standard financing after the new regulations on asset management, the main business of listed companies has also been reversed, and finally delisted.
An executive of a listed company close to Tempus said that with the help of small loan companies to embezzle the funds of listed companies, on the one hand, they can contribute revenue to listed companies and make fake income statements bigger; On the other hand, it will inevitably lead to the occupation of funds by related parties. Based on this, there is often a close connection between financial fraud and the occupation of non-operating funds. In the end, the listed company suffered a huge loss or was delisted, and it was the secondary investors who paid the bill. ”
In addition to the occupation of funds, many cases of financial fraud are also accompanied by problems such as illegal guarantees and failure to use raised funds in accordance with the prescribed purposes. The previously delisted *ST Amethystum did not disclose the external guarantee matters in the prospectus as required, and there were many times after the listing that it failed to disclose in a timely manner and failed to disclose the external guarantee matters of up to hundreds of millions of yuan in the annual report as required. There is an analysis that the realization of inflated income and profits through fictitious contracts requires the cooperation of external funds, and the external guarantee of listed companies can become the cultivation soil of external funds.
The partner of the above-mentioned accounting firm said that unlike companies that rely on the expansion of their main business to drive performance growth, the vast majority of fraudulent companies are located in an independent "parallel universe", and the history of financial fraud is several years.
With the implementation of the comprehensive registration system, higher requirements have been put forward for the supervision of the authenticity of the financial information of IPO enterprises and listed companies. For financial fraud, new characteristics such as a large number of cases, a large amount of penalties, and ruthless delisting have also emerged, reflecting the determination of the regulators to severely punish financial fraud and other violations of laws and regulations, and resolutely rectify market chaos.
Judging from the reporter's interviews with a number of market participants, the punishment results in some cases exceeded previous expectations. For example, *ST Huichen's prospectus inflated profits of less than 10 million yuan per year, and the amount of fraud in subsequent years was far from reaching the relevant delisting criteria. However, the company was still fined more than some market participants expected. At the same time, there is also the exchange's top disciplinary action, as well as civil liability. This reflects the "fangs and thorns" of supervision, especially the heavy blow to financial fraudsters.
In response to the cancer of financial fraud, all parties are working together to accelerate the construction of a three-dimensional accountability system, and multiple means such as administrative supervision measures, administrative penalties, civil compensation, criminal accountability, integrity punishment and delisting supervision, and self-discipline management have been offered, all of which have made the regulatory "fangs and thorns" take root.
In particular, the "one case, two investigations" model and three-dimensional accountability are constantly pushing up the deterrent effect of supervision. While increasing the punishment of the controlling shareholders and actual controllers of listed companies, the former has also struck hard at intermediaries such as sponsorship and underwriting, audit and evaluation, and legal services, breaking the financial fraud ecosystem. The latter is embodied in cases such as the Amethystum Storage Fraud Issuance Case, where administrative penalties, civil compensation, and criminal accountability go hand in hand, and the cost of violators continues to rise.
In the view of the above-mentioned interviewed executives, the determination of violations should not only stop at the level of failure to truthfully disclose information after the occurrence of illegal acts, but should also point to substantive illegal acts. As for the cases that have been filed and investigated in the early stage, it is also necessary to further dig into the criminal clues, so that the criminal acts of financial fraud and embezzlement of huge assets of listed companies by the actual controller of the major shareholder can be effectively investigated.
The 2024 system work conference of the China Securities Regulatory Commission made it clear that it will further implement the comprehensive punishment and prevention system for preventing and combating counterfeiting in the capital market, increase the investigation and handling of cases such as fraudulent issuance, financial fraud, market manipulation, insider trading, etc., improve the efficiency of case investigation and handling, and further strengthen the three-dimensional accountability of administrative and civil crimes for those who are bad in nature and cause serious harm, so that violators will pay a painful price.
The above-mentioned accounting firm believes that these are the fundamental measures to purify the capital market, and they are also important measures to vigorously improve the quality of listed companies and prevent and resolve financial risks. At the same time, it is also the embodiment of the "investor-oriented" concept that will run through all aspects of the whole process.
She expressed her support for the timely reporting of the regulator on the progress of the phased investigation of the *ST Zuojiang financial fraud case. "*ST Zuojiang has certain characteristics of Zhuang stocks. At the time of the continuous limit at a low level, the timely announcement of the progress of the phased investigation will avoid more funds, especially small and medium-sized investors, from chasing up, which indicates that the prominent investor-oriented concept will be infiltrated at more levels in the capital market. ”