Recently, an announcement by CITIC Guoan, an A-share listed company, left stockholders’ jaws dropped.
A news about a listed company’s seven consecutive years of financial fraud has been splashed all over the internet.
CITIC Guoan’s financial fraud for seven consecutive years
Recently, an announcement by CITIC Guoan, an A-share listed company, left stockholders’ jaws dropping.
After less than ten months of investigation, the case of CITIC Guoan’s alleged illegal letter disclosure violations has been investigated by the Securities Regulatory Commission (SFC), and on the evening of March 3, CITIC Guoan announced that the company received the SFC’s “Notice of Prior Administrative Punishment”.
It was found that CITIC Guoan allegedly had false records in its annual reports for seven consecutive years from 2009 to 2015. In this regard, the SFC intends to decide: to order CITIC Guoan to make corrections, give a warning and impose a fine of 600,000 yuan; to give warnings to nine persons responsible and impose fines ranging from 50,000 yuan to 300,000 yuan respectively.
Come to see the details.
- False records in the disclosed 2009 Annual Report, 2010 Annual Report, 2011 Annual Report, 2012 Annual Report, 2013 Annual Report and 2014 Annual Report
CITIC Guoan’s subsidiary, Qinghai CITIC Guoan, held a special sales meeting in April 2009 and decided to complete its performance by means of pre-sales in order to accomplish the sales target of 1 billion yuan, while paying interest on prepayments to customers at 10% price concessions and commercial loan interest rates for the same period, when the sales revenue for the year was expected to be about 400 million yuan ( The actual interest rate implemented is subject to the final settlement data of both parties to the contract).
After CITIC Guoan received the advance payment from the customer, it debited the bank deposit (or note receivable) and credited the pre-receivable amount, while fictitiously increasing the revenue by falsely recording the sales contract of the goods and the warehouse receipt, debiting the receivable in the accounts and crediting the main business income, and hedging the pre-receivable amount and receivable at the end of the month for write-off.
As a result, during the period from 2009 to 2014, when Qinghai CITIC Guoan was included in CITIC Guoan’s consolidated financial statements, the cumulative inflated operating revenue was 506 million yuan, the cumulative understatement of financial expenses was 507 million yuan, and the cumulative inflated total profit was 1.012 billion yuan.
In this way, Qinghai CITIC Guoan used the two methods of inflating revenue and under-accounting financial expenses in a two-pronged manner, and during the period of 2009-2014, the cumulative inflating operating revenue was 506 million yuan and the cumulative under-accounting financial expenses was 506 million yuan, so that the total cumulative inflating profits in one positive and one negative way would be 1.012 billion yuan in total.
- False records in the disclosed 2015 Annual Report
In addition, CITIC Guoan also signed transfer agreements with CITIC Guoan Investment on December 24, 2014 and January 23, 2015 for its 51% and 49% equity interests in Qinghai CITIC Guoan, respectively. After the first transfer of 51% equity interest, CITIC Guoan changed the accounting for the remaining 49% equity interest from cost method to equity method. CITIC Guoan Qinghai booked inflated revenues and underestimated financial expenses during the period from January to June 2015, and inflated net profits by RMB 68,326,100 for that period, which resulted in an overstatement of investment income of RMB 33,479,800 in 2015, accounting for 6.24% of CITIC Guoan’s investment income and 8.56% of its total profits for that year.
- According to the facts, nature, circumstances and degree of social harm of the illegal acts of the parties, in accordance with the provisions of Article 193 of the Securities Law of 2005, the SFC intends to decide:
I. To order the correction of CITIC Guoan Information Industry Company Limited, issue a warning, and impose a fine of 600,000 yuan.
- to give a warning to Sun Yalei, Li Hongcan and Sun Lu and impose a fine of 300,000 yuan each.
iii. giving a warning to Wu Yiqun and imposing a fine of 100,000 yuan
Fourth, Li Shilin, Luo Ning, Yan Fengxia, Li Xiangyu and Yan Haoyu were given a warning and fined 50,000 yuan each.
What kind of company is CITIC Guoan?
CITIC Guoan Information Industry Co., Ltd. is a subsidiary of China CITIC Group Corporation and has been listed on the Shenzhen Stock Exchange since October 1997. The company’s main business is the investment and construction of cable TV networks and satellite communication networks in the information network infrastructure business. 2020 semi-annual report shows that CITIC Guoan’s main business is information and services, real estate development and property management, accounting for 99.44% and 0.56% of revenue respectively.
On January 30 this year, CITIC Guoan disclosed its “2020 Annual Results Forecast”, which showed that it expected a loss of 1.85 billion yuan to 2.2 billion yuan in 2020, and the net profit after deducting non-recurring gains and losses was expected to be 1.94 billion yuan to 2.29 billion yuan. The reason for the change in performance is the provision for impairment of long-term equity investment in Henan Cable TV Network Group Co., Ltd. of 1.480 billion yuan, the decline in profits of the company’s investment in joint venture companies, and the increase in losses due to restrictions on the business development of the company’s subsidiaries.
In response to this performance forecast, the Shenzhen Stock Exchange issued a letter of concern to CITIC Guoan, requesting a detailed explanation of the circumstances surrounding the provision for asset impairment and the specific reasons for the loss, etc.
On May 17, 2020, CITIC Guoan announced that a case had been filed by the SFC, and on May 18, the company’s share price was halted upon resumption of trading. In the following trading days, the share price continued to fall, reaching a low of 2.26 yuan per share on May 25.
As of the latest data, CITIC Guoan’s share price was reported at RMB 2.22 per share, with a market value of $8.7 billion. 2016 has so far seen a downward trend in CITIC Guoan’s share price as a whole. It fell from nearly 30 yuan in July 2016 to 2.2 yuan, a drop of up to 90 percent.
And there are still 190,000 shareholders behind CITIC Guoan.
The same auditor for these seven years
All standard and unqualified
From 2009 to 2015, when the company was detected by the SEC for financial fraud, the company’s financial reports from 2009 to 2011 were audited by Kyoto Tianhua CPAs, and the last four years were audited by Zhitong CPAs, all of which gave standard unqualified opinions.
It is worth mentioning that the predecessor of Zhitong was Kyoto Tianhua, and in 2011, Kyoto Tianhua absorbed and merged with Tianjian Zhengxin CPA firm, and finally changed its name to Zhitong.
In addition, CITIC Guoan has used four accounting firms since its listing, and in fact the same accounting firm has gone through a series of restructuring and name change.
Recent Comments