Accounting firms that have "lost" in the A-share market over the years

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2024-06-22 10:10Published in Tianjin

Accounting firms that have "lost" in the A-share market over the years

The regulators have once again shouted at the "gatekeepers" of the A-share market.

At the 2024 Lujiazui Forum held on June 19, Wu Qing, chairman of the China Securities Regulatory Commission, said that financial fraud of listed companies is the consistent focus of regulatory law enforcement, encouraging "whistleblowers" to report and consolidating the "gatekeeper" responsibilities of intermediaries such as investment banks and auditors.

"For counterfeiters and those who cooperate with counterfeiters, they will be investigated and dealt with in one piece, and they will be held accountable in an all-round and three-dimensional manner, and those involved in crimes will be resolutely investigated for criminal responsibility." Wu Qing said.

Investment banks, audit and other intermediaries are important participants in ensuring the healthy development of the capital market and safeguarding the interests of investors, but many institutions have frequently defaulted on their responsibilities in recent years, which is also an important reason for the frequent shouting of the regulatory authorities.

Wind data shows that in the first quarter of 2024, there will be more than 5,100 A-share listed companies, and a total of 60 accounting firms will provide audit services, of which Tianjian, Lixin, Dahua and Rongcheng will account for the highest proportion. What is surprising is that there are no familiar "Big Four" in the top ten. According to the data, the "Big Four" only serve less than 7.77% of A-share listed companies.

In terms of IPOs, there will be 299 A-share IPOs with local accounting firms as initial auditors, accounting for 95.5% in 2023. Among them, Tianjian, Lixin and Rongcheng undertake 58, 49 and 38 customers respectively, ranking in the top three, while the "Big Four" account for less than 5%.

It can be seen that the real "Big Four" in A-shares are not the "Big Four Accounting Firms" in the traditional concept.

However, a highly "involutional" market environment cannot be equated with high-quality services. In recent years, there have been many accounting firms that have been held accountable by regulators for financial problems in the companies they serve, the most famous of which are Genzon Pearl River and Ruihua.

Genzon Pearl River issued an audit report with false records for Kangmei Pharmaceutical's annual financial statements from 2016 to 2018, and its internal personnel cooperated with the listed company to intercept the confirmation letter and used the forged visit records as audit evidence.

On February 20, 2021, the China Securities Regulatory Commission (CSRC) issued an administrative penalty decision, ordering Genzon Pearl River to make corrections, confiscating 14.25 million yuan of business income and imposing a fine of 42.75 million yuan. The people involved were also given warnings and fines. On July 21, 2022, the Guangdong Provincial Department of Finance cancelled Genzon Pearl River's practice certificate.

In 2016, the CSRC investigation found that Ruihua failed to exercise due diligence in auditing the 2012 financial statements of Keybridge Communications and issued an audit report with false records. In 2017, the SFC investigation found that the same problem existed in the audit of Asia-Pacific's 2013 annual financial statements.

Later, in the Jianqiao Communication case, Ruihua was confiscated 700,000 yuan of the audit income of the 2012 annual report and fined 700,000 yuan. In the Asia-Pacific Industrial case, 390,000 yuan of business income was confiscated and a fine of 780,000 yuan was imposed. In 2017, the Ministry of Finance and the China Securities Regulatory Commission jointly issued a penalty announcement against Ruihua, ordering Ruihua to suspend undertaking new securities business and rectify it within a time limit.

In recent years, the central government has continuously strengthened its supervision of intermediaries in the A-share capital market.

In 2021, the General Office of the Central Committee of the Communist Party of China and the General Office of the State Council jointly issued the "Opinions on Strictly Cracking Down on Illegal Securities Activities in Accordance with the Law", which requires "strengthening the supervision of intermediaries, and if there are securities violations, the institutions and their practitioners shall be seriously held accountable in accordance with the law, and those who participate in and assist in financial fraud and other illegal acts shall be severely punished in accordance with the law".

In the same year, the "Opinions of the General Office of the State Council on Further Standardizing the Order of Financial Auditing and Promoting the Healthy Development of the Certified Public Accountant Industry" also demanded that "accounting firms and listed companies be strictly supervised, and the audit and accounting responsibilities for financial fraud should be investigated in accordance with the law." Strengthen financial and accounting supervision, big data analysis, and carry out precise crackdowns on financial fraud. ”

In recent years, the China Securities Regulatory Commission has also significantly stepped up its efforts to crack down on financial fraud and other illegal information disclosure, and in the past three years, it has handled a total of 203 cases of financial fraud.

According to information disclosed in the "Administrative Penalties" section of the CSRC's official website, since 2017, at least 15 accounting firms, all of which have been confiscated from business income and fined for financial fraud by listed companies, have been confiscated. Among them, Ruihua Certified Public Accountants was fined 6 times, and Lixin, Dahua, Zhongxinghua, Zhongxing Caiguanghua, and Zhonghua Certified Public Accountants were all fined 3 times.

Yijian Finance noticed that the main reason for the punishment was that the accounting firm "failed to be diligent and conscientious, and the report issued by it contained false records". But in terms of the specific reasons, different cases are slightly different.

Taking the CSRC's punishment of Ruihua in January 2024 as an example, Ruihua "had problems in the walk-through test, control test, substantive procedures for operating income, and substantive procedures for accounts receivable" when auditing Kangdexin's financial reports. In the case of ZTE's audit of Agras, it was "a problem in the risk identification and assessment stage and the substantive procedure stage. ”

The local regulatory bureaus of the China Securities Regulatory Commission have also frequently issued fines to accounting firms.

A search of the websites of the regulatory bureaus in Beijing, Shanghai, Guangdong, Zhejiang, and Shenzhen found that since 2022, there have been nearly 10 penalties imposed on accounting firms, and the reasons for the penalties are similar to the above, the most well-known of which is Dahua Certified Public Accountants, which was punished by the Jiangsu Securities Regulatory Bureau of the China Securities Regulatory Commission in May this year for Jin Tongling.

Industry insiders told Yijian Finance that the CSRC's punishment of accounting firms is mainly based on the content of the third paragraph of Article 213 of the Securities Law: if a securities service institution fails to be diligent and conscientious, and the documents produced and issued have false records, misleading statements or major omissions, it shall be ordered to make corrections, confiscate business income, and impose a fine of not less than one time but not more than ten times the business income, and if there is no business income or the business income is less than 500,000 yuan, a fine of not less than 500,000 yuan but not more than 5 million yuan shall be imposed; where the circumstances are serious, it shall be suspended or prohibited from engaging in securities service business.

According to the "2022 Securities Audit Market Analysis Report" released by the China Securities Regulatory Commission in September 2023, in 2022, the China Securities Regulatory Commission and its dispatched agencies imposed a total of 21 administrative penalties on 16 accounting firms and their certified public accountants for 51 times. However, the CSRC did not disclose the specific penalties and measures in the report.

In addition, according to the "2022 Annual Comprehensive Evaluation of 100 Accounting Firms Ranking Information" disclosed by the Chinese Institute of Certified Public Accountants in October 2023, after analyzing the data of the column "Criminal Penalties, Administrative Penalties and Industry Disciplinary Situations Received by Firms and CPAs in the Last Three Years", it is found that from 2021 to 2023, 19 of the top 100 accounting firms have been subject to administrative penalties or industry penalties by regulators, all of which are mainland accounting firms. Among them, 4 are in the top 10. However, the "Big Four" accounting firms have no information on criminal penalties, administrative penalties and industry disciplinary actions.

According to incomplete statistics, more than 30 local law firms have had their practice licenses revoked in the past three years.

In 2023, the Ministry of Finance organized local finance departments (bureaus) to inspect 2,161 accounting firms, a year-on-year increase of 16.56%, covering more than 20% of the total number of accounting firms in the country. Among them, 197 accounting firms and 509 certified public accountants were subject to administrative penalties, 9 were revoked from practicing licenses, and 49 were suspended from operating business.

A review of historical announcements found that in 2022, 16 accounting firms with their practice licenses revoked and 44 suspended from operating were suspended, respectively, and 10 and 20 in 2021, respectively.

In the view of Yijian Finance, the annual increase in the number and severity of penalties fully reflects the determination of regulators to promote the high-quality development of the capital market. In the future, in the context of stricter financial supervision, accounting firms must continue to improve the quality of their practice, keep in mind the role of "gatekeeper", effectively maintain market order, and protect the rights and interests of corporate shareholders and investors.

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