Another "qualification penalty" was seen. This accounting firm was suspended from business for 6 months
2024-08-22
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Another capital market intermediary institution was fined. The administrative penalty decision recently disclosed on the official website of the China Securities Regulatory Commission shows that the China Securities Regulatory Commission ordered Tianzhi International Accounting Firm (Special General Partnership) (hereinafter referred to as "Tianzhi International") to make corrections, issued a warning, confiscated business income of about 3.6792 million yuan, imposed a fine of about 23.3962 million yuan, and suspended its securities service business for 6 months.
On the evening of August 16, Tianzhi International issued a statement on the company's official WeChat account, saying that it had recently received the "Administrative Penalty Decision" from the China Securities Regulatory Commission regarding the Qixun incident. The company fully respects and sincerely accepts the penalty decision of the China Securities Regulatory Commission.
This is the second accounting firm to have its securities business suspended after Dahua Certified Public Accountants (Special General Partnership) (hereinafter referred to as "Dahua") had its securities business suspended in May.
The case involved the financial fraud of Qixin Shares
In April 2023, Jiangxi Qixin Group Co., Ltd. (hereinafter referred to as "Qixin Shares", which has been delisted) announced that it had received the "Administrative Penalty and Market Ban Advance Notice" issued by the China Securities Regulatory Commission. In August 2023, the China Securities Regulatory Commission issued an administrative penalty decision to Qixin Shares and relevant responsible persons. According to the announcement, Qixin Shares has been committing financial fraud for 8 consecutive years, throughout the period before and after its listing, with a cumulative false increase in profits of 2.6 billion yuan. The amount of fraud is huge and the social impact is bad.
Specifically, the period of financial fraud of Qixin Shares was from 2012 to 2019, spanning 8 years. Before listing, on December 11, 2015, Qixin Shares disclosed its IPO prospectus, which contained false records. From 2012 to 2014 and the first half of 2015, Qixin Shares inflated its profits by 224 million yuan, 251 million yuan, 370 million yuan and 181 million yuan respectively by signing false or exaggerated engineering contracts and understating the costs of internal contracting projects, accounting for 127.21%, 131.96%, 162.94% and 157.56% of the total profits disclosed in the period, respectively. After listing, Qixin Shares continued to commit financial fraud, and there were false records in its periodic reports: from 2015 to 2019, the inflated profits were 371 million yuan, 325 million yuan, 397 million yuan, 379 million yuan and 312 million yuan respectively.
As the auditing agency of Qixin Shares, Tianzhi International has issued standard unqualified audit reports for its annual reports. Tianzhi International's auditing misconduct continues to cause discussion. Recently, the administrative penalty decision on Tianzhi International disclosed by the China Securities Regulatory Commission showed that Tianzhi International did not perform its duties diligently in the audit of Qixin Shares' annual report, and the audit reports it produced and issued contained false records. According to another case, Qixin Shares' annual reports from 2015 to 2019 contained illegal and irregular information disclosure behaviors such as inflated revenue and total profit. Tianzhi International provided audit services for Qixin Shares' financial statements, and the audit business income totaled approximately 3.6792 million yuan (after tax). Tianzhi International has issued standard unqualified audit reports, which contain false records.
The CSRC stated that Tianzhi International failed to perform due diligence in the audit of Qixin Shares' annual report, which was mainly reflected in the following aspects: First, it failed to properly implement risk identification and assessment procedures. 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. It did not conduct relevant audit procedures based on the assumption that there was a risk of fraud in revenue recognition. It determined that there was a risk of fraud in accounts receivable and bad debt reserves, but did not treat them as 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".
Forging, tampering with, or destroying audit working papers
Tianzhi International’s illegal acts also include forging, tampering with, and destroying audit working papers.
In January 2022, the Shenzhen Securities Regulatory Bureau served a "Supervision and Inspection Notice" to Tianzhi International and requested the audit working papers of Qixun Co., Ltd.'s financial statements.
After receiving the notice, the relevant personnel of Baker Tilly International Shenzhen Branch forged, tampered with, and destroyed the audit working papers of Qixin Shares' relevant financial statements. Baker Tilly 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 and modifying the confirmation letter records, forging audit procedures that were not actually performed, deleting and modifying the sampling records in the inspection of large-amount funds receipt and payment, and deleting the formal audit instructions in the audit working papers.
Tianzhi International’s securities business qualification suspended for 6 months
The CSRC believes that the above-mentioned actions of Tianzhi International violate the relevant requirements and provisions of the Securities Law, constitute illegal acts, and the circumstances are serious.
The CSRC decided, in accordance with relevant provisions of the Securities Law, to order Tianzhi International to correct its failure to perform its duties diligently in the audit of Qixun Shares' annual report, confiscate its business income of 3.6792 million yuan, and impose a fine of 18.3962 million yuan; for Tianzhi International's forgery, tampering with, and destruction of audit working papers, it was given a warning, fined 5 million yuan, and suspended from engaging in securities services business for 6 months.
On August 16, Baker Tilly International issued a statement saying that it was deeply ashamed, saddened and remorseful for the administrative penalty decision of the CSRC. The penalty reflected that there were still deficiencies and defects in its internal management. It would take this as a lesson, face the problems, conduct in-depth reflections throughout 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.
According to the official website, Baker Tilly International was founded in December 1988 and is a large-scale comprehensive consulting firm focusing on audit and certification, consulting services, tax services, M&A financing services, legal affairs and liquidation, and corporate valuation. As one of the first professional consulting firms to obtain securities and futures-related business qualifications, Baker Tilly International has multiple business qualifications including audits of state-owned large enterprises, financial-related audits, information system audits, accounting judicial appraisals, and audit consulting services for domestic and overseas listed companies. The company has more than 8,000 professionals, including more than 1,200 certified public accountants, and nearly 300 listed company clients.
Strong regulatory signals continue
What does it mean when an audit firm is suspended from engaging in securities services? Analysts said that it is a heavy penalty for an accounting firm to be suspended from engaging in securities services. During the suspension period, the accounting firm’s team and clients are likely to leave due to the business restrictions. Referring to past cases, the “qualification penalty” means that refinancing, major asset restructuring and IPO clients will be affected.
On the evening of August 16, six Beijing Stock Exchange IPO projects that Tianzhi International was responsible for were suspended, including Ningbo Nengzhiguang New Materials Technology Co., Ltd., Aomesen Intelligent Equipment Co., Ltd., Zhejiang Jinhua New Materials Co., Ltd., etc.
Before Tianzhi International, there were accounting firms that were “qualified” this year. In May this year, the Jiangsu Securities Regulatory Bureau announced an administrative penalty decision showing that Dahua was ordered to make corrections, confiscate business income of 6.8868 million yuan, impose a fine of 34.434 million yuan, and suspend securities services for 6 months because it failed to perform due diligence in the audit of Jintongling’s annual financial statements from 2017 to 2022 and issued false records in the audit report. Since then, A-share companies have successively announced the end of cooperation with Dahua.
In fact, in recent years, the CSRC has severely cracked down on financial fraud, repeatedly tightened the "gatekeeper" responsibilities of intermediary institutions, and severely punished intermediary institutions for failing to perform their duties diligently and illegally. Under the new regulatory requirements, "having fangs and thorns" has become a new form of supervision.
According to the summary of the administrative law enforcement of the CSRC in the first half of 2024 reported by the CSRC recently, in the first half of this year, the CSRC has tightened the responsibility of "gatekeepers" and severely punished the illegal acts of intermediaries who failed to perform their duties diligently. On the one hand, the institutions and responsible individuals are "double-penalized" in accordance with the law. Zhongxing Cai Guanghua Accounting Firm and relevant responsible personnel did not maintain reasonable suspicion of abnormal signs during the audit process, the audit evidence was not sufficient, and the confirmation procedures were defective. The accounting firm and related accountants were punished in accordance with the law, with a total fine of more than 6.1 million yuan. On the other hand, the "qualification penalty" was resolutely imposed on the serious dereliction of duty and illegal subjects. In the first half of the year, 6 intermediary agency practitioners who failed to perform their duties were banned from the market. Dahua Accounting Firm was "confiscated five times" for its failure to perform its duties diligently, such as major defects in risk assessment and internal control testing procedures in the annual report audit of listed companies, failure to take appropriate audit measures to deal with fraud risks, and major defects in substantive procedures, and was suspended from securities business for 6 months. The three responsible persons were fined and banned from the market for the corresponding years.
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