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On August 16, the China Securities Regulatory Commission fined Tianzhi International Certified Public Accountants (Special General Partnership) (hereinafter referred to as Tianzhi International) more than 27 million yuan and suspended it from engaging in securities services for six months. The main reason was that Tianzhi International failed to perform its duties diligently and forged, tampered with, and destroyed the audit working papers in the audit of Qixin Shares' annual report.

In this regard, Baker Tilly International also publicly issued a statement saying that it was deeply ashamed, saddened and remorseful for the administrative penalty decision of the CSRC. This administrative penalty reflects that our internal management still has deficiencies and defects when we assume a heavier historical mission and face greater challenges in the new situation. We deeply apologize to the customers and partners affected by this incident, and express our deep gratitude to all friends from all walks of life who have given Baker Tilly International support and trust.

The audit report issued by Baker Tilly International contained false information

According to the China Securities Regulatory Commission, Qixin's annual reports from 2015 to 2019 contained illegal and irregular information disclosure, such as inflated revenue and total profit. Baker Tilly International provided audit services for Qixin's financial statements, with a total audit revenue of 3.6792 million yuan (after tax). Baker Tilly International issued standard unqualified audit reports, which contained false records.

The CSRC believes that Tianzhi International failed to perform its duties diligently in the audit of Qixin Shares' annual report, which is mainly reflected in four aspects:

First, the risk identification and assessment procedures were not properly implemented. For example, the audit working papers did not include audit procedures for identifying and assessing the risk of material misstatement at the financial statement level, nor did they include audit procedures for determining whether the identified risks were special risks based on professional judgment. The relevant audit procedures were not conducted based on the assumption that there was a risk of fraud in revenue recognition. Accounts receivable and bad debt reserves were both identified as having a risk of fraud, but they were not considered special risks.

Second, there are defects in the substantive procedures for monetary funds. For example, the audit procedures such as obtaining bank statements on site that were not actually performed were falsely recorded, and due attention was not paid to the large number of obvious anomalies in the transaction information, seals, and formats in the obtained statements. The bank deposit confirmation letter opened by the company at the Shenzhen Branch of Ningbo Bank had abnormal situations such as the sender of the reply letter was a company employee, and the sender unit and address of the reply express letter were blank, and professional suspicion was not maintained. The large-amount fund flow inspection could not meet the audit requirements of accounts receivable in terms of sampling scale and inspection content, and could not provide sufficient evidence for the audit of accounts receivable.

Third, there were deficiencies in the substantive procedures for bills payable. For example, professional suspicion was not maintained regarding the large and frequent issuance of commercial bills between Qixin Shares and companies with which it had no business dealings, the accounting of accounts payable related to the main business in the "other accounts payable" account, the accounting of negative credits when other accounts payable decreased, and obvious anomalies in bank receipts in some sample vouchers.

Fourth, there were defects in the audit procedures for executing engineering costs. For example, Qixin Co., Ltd. entered and controlled all the company's engineering projects through the "engineering management system" it developed, but Tianzhi International did not fully understand the relevant engineering project management situation and did not conduct relevant IT audits on the "engineering management system", so it did not discover that the company had a large number of internal contracting projects with low gross profit margins, and the actual gross profit margin situation was seriously inconsistent with the company's disclosure. Professional suspicion was not maintained for abnormal situations such as Qixin Co., Ltd.'s rapidly growing labor cost expenditures and the large difference between the planned cost of direct labor and the actual cost structure. Inventory inspections were not carried out in accordance with the inspection scope planned in the "Inventory Inspection Plan".

Baker Tilly International forged, tampered with, and destroyed audit working papers

In addition, the CSRC also found that Tianzhi International forged, tampered with, and destroyed audit working papers. In January 2022, the Shenzhen Securities Regulatory Bureau delivered a "Supervision and Inspection Notice" to Tianzhi International, requesting the audit working papers of Qixin Shares' financial statements. After receiving the notice, relevant personnel of Tianzhi International's Shenzhen branch forged, tampered with, and destroyed the audit working papers of Qixin Shares' relevant financial statements. Tianzhi International submitted the aforementioned working papers to the regulatory authorities and made false guarantees about the authenticity, accuracy, and completeness of the working papers.

The acts of forgery, tampering and destruction mainly include: tampering with the materiality level and the sampling and confirmation standards of various detailed tests, deleting or modifying the confirmation letter records, falsifying audit procedures that are not actually performed, deleting or modifying the sampling records in the inspection of large-scale funds collection and payment, and deleting the formal audit instructions in the audit working papers.

Therefore, the CSRC decided to order Tianzhi International to correct its mistakes, give it a warning, confiscate its business income of 3.6792 million yuan, impose a fine of 23.3962 million yuan, and suspend it from engaging in securities services business for 6 months.

Regarding the administrative penalty decision of the CSRC, Baker Tilly International also publicly stated at the first time that we fully respect and sincerely accept the penalty decision of the China Securities Regulatory Commission. Baker Tilly International will take this as a lesson, face the problem, conduct in-depth reflection across the firm, formulate targeted rectification measures, further enhance risk prevention awareness, strengthen internal management, and sincerely accept supervision and guidance from all sectors of society. In the future, we will continue to adhere to Baker Tilly International's brand, continue to adhere to highly integrated management, continue to adhere to high standards of audit quality, serve the public, capital markets, customers and partners, and jointly promote the healthy development of the CPA industry.

Data from the official website of the Shanghai, Shenzhen and Beijing Stock Exchanges show that currently, Tianzhi International has more than 30 projects under review, of which more than 20 are IPOs. According to relevant regulations, if an intermediary institution is suspended from business qualifications, the exchange or the China Securities Regulatory Commission will suspend the review or registration of the issuer. As of press time, the public offering and listing projects under review by the Beijing Stock Exchange have been collectively suspended.

The China Securities Regulatory Commission strengthens the responsibility of "gatekeepers"

On August 16, the CSRC released a summary of its administrative enforcement in the first half of 2024. In the first half of the year, the CSRC investigated 489 securities and futures violation cases, made more than 230 penalty decisions, an increase of about 22% year-on-year, punished 509 responsible entities, an increase of about 40% year-on-year, banned 46 people from the market, an increase of about 12% year-on-year, and fined a total of more than 8.5 billion yuan, exceeding the total amount of last year.

One of the measures is to strengthen the "gatekeeper" responsibility and severely punish intermediary institutions for illegal acts of not being diligent and responsible. The CSRC said that on the one hand, "double penalties" will be imposed on institutions and responsible individuals in accordance with the law. Zhongxing Caiguanghua Accounting Firm and relevant responsible personnel did not maintain reasonable suspicion of abnormal signs during the audit process, did not obtain sufficient audit evidence, and had defects in the confirmation procedures. The accounting firm and relevant accountants were punished in accordance with the law, with a total fine of more than 6.1 million yuan.

On the other hand, we will resolutely impose "qualification penalties" on seriously derelict and illegal entities. In the first half of the year, we banned six intermediary agency practitioners who failed to perform their duties. Dahua Accounting Firm was fined five times for its failure to perform due diligence in the annual audit of listed companies, including major defects in risk assessment and internal control testing procedures, failure to take appropriate audit measures to deal with fraud risks, and major defects in substantive procedures. It was also suspended from securities business for six months, and three responsible persons were fined and banned from the market for the corresponding years.

It is worth mentioning that on the same day, the CSRC also imposed administrative penalties on Ruihua Certified Public Accountants (Special General Partnership) (hereinafter referred to as Ruihua). The CSRC found that Hu Moulin, the second largest shareholder and general manager of Yangzi New Materials at the time, misappropriated the funds of Yangzi New Materials and its holding subsidiaries in 2018. Ruihua was the auditing agency for Yangzi New Materials' 2018 financial statements and charged 566,000 yuan for the audit of Yangzi New Materials' 2018 financial statements. The signing registered accountants were Li and Chen. However, Ruihua did not perform its duties diligently in the audit of Yangzi New Materials' 2018 annual financial statements and the audit report it issued contained false records.

The CSRC decided to order Ruihua to make corrections, confiscate its business income of 566,000 yuan, and impose a fine of 1.1321 million yuan. Li and Chen were given a warning and fined 30,000 yuan each.

Investment is risky, independent judgment is important

This article is for reference only and does not constitute a basis for buying or selling. You should bear the risks of entering the market at your own risk.

Reporter Chen Chen, Editor Ye Feng

Cover image source: Photo by Liu Guomei of Daily Economic News (file photo)

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