China Securities Regulatory Commission suspended 43 initial public offerings as China’s second-largest accounting firm is under investigation for falsifying financial data.
CSRC regulators in early June temporarily halted three of China’s top ten auditing firms—BDO China Shu Lun Pan Certified Public Accountants, Ruihua China Certified Public Accountants and China Dahua Certified Public Accountants—from handling mergers and acquisitions involving any of their publicly listed clients.
The suspension was described as growing pains for China’s accounting sector whose 2018 revenues broke though the 100 billion yuan ($14.8 billion) level as the 7,862 firms with 109,352 professionals provided certified public accounting and consulting services to over 3,000 publicly traded companies and 4 million other enterprises, according to China’s Ministry of Finance.
But on July 29, CSRC formally accused Ruihua Certified Public Accountants—China’s second largest CPA firm and responsible for auditing about 1,000 Chinese public companies—for being complicit in a scheme over a three year period to inflate profits by $1.7 billion for struggling chemical producer Kangde Xin Composite Material.
In a move that could have devastating financial repercussions, CSRC also suspended 43 initial public offerings (IPO) that relied on Ruihua CPAs for plans to list on Shenzhen’s ChiNext stock exchange or Beijing’s new NASDAQ-style STAR Market.
The STAR Market that launched on July 22 with 25 IPOs is designed to attract foreign venture and risk-taking capital. Chinese authorities have referred to the new venue as “experimenting with loosening its grip on mainland equity markets” to enable new ventures and young start-ups to go public without formal government approval.
Shares of the 25 homegrown technology share prices jumped by an average of 140 percent on the frenzied first day of STAR trading. Prices fell back over the next eight days of trading, but the initial success of the project allowed Chinese investment banks to capture seven of the top 10 slots for Asian initial public offerings this year.
Bloomberg reported that China’s CITIC Securities is number one in Asia by capturing 9 percent of all IPOs, followed by China International Capital Corp. that captured a 7.4 percent market share. China bank trading profits are expected to spike up this quarter.
CSRC alleged that Jiangsu Province-based Kangde Xin Composite Material created billions in fictitious sales, exaggerated operating costs and faked expenses on research, commercial development and sales. Kangde Xin had reported 15 billion yuan of balance sheet available cash at the end of September 2018, but the company defaulted on commercial paper payment of 1 billion yuan on Jan. 15, 2019, when Kangde Kin admitted the cash reserves were fictional.
Under the current securities law, a listed company that makes false disclosures can only be fined up to 600,000 yuan ($87,232), while Chinese criminal law allows those who conceal or intentionally destroy accounting records can be imprisoned for up to five years and fined up to 200,000 yuan ($29,077).
Ruihua CPAs issued a press release on July 30 denying any wrongdoing and stating that it has fully performed its Kangde Xin auditing duties.
Ruihua Certified Public Accountants joined the Crowe Horwath Global network—the sixth largest accounting network in Asia—in November 2018. The company has 41 branch offices and nearly 10,000 employees in major cities across mainland China.
Chriss Street is an expert in macroeconomics, technology, and national security. He has served as CEO of several companies and is an active writer with over 1,500 publications. He also regularly provides strategy lectures to graduate students at top Southern California universities.