How Listed Companies of Communist China Misstated Financial Statements in 2019

Image Source: timesofindia.indiatimes.com

It was reported by ESNAI on 24 September that the Accounting Department of CSRC of the Chinese Communist Party (CCP) reviewed 924 listed companies’ financial statements for the year ended 31 December 2019 in Communist China. After the review, the CCP concluded that the quality of application Enterprise Accounting Standards of Communist China (CAS) and presentation of financial information of listed entities were fine, although it found so many misstatements.

Auditor’s opinion

3,847 companies published annual reports, among which 1 company was given adversary opinion,45 companies were given disclaimers of opinion, 126 companies were given qualified opinions and 102 companies were given unqualified opinions with emphasis of matter paragraph. Two companies failed to publish annual reports, while one company delayed publication to 30 September 2020.

CCP virus’s impact on annual reports publication and financial performance

Because the coronavirus pandemic was made, delivered, and covered up by the Chinese Communist Party intentionally, the coronavirus was renamed as “CCP virus”. On 23 September 2020, the fiscal budget and performance reports of the entities mentioned by Li-Meng Yan’s report concerning the CCP virus couldn’t be found on their websites after I spent the whole day searching despite those entities being funded by fiscal funds.

118 companies decided to suspend publishing annual reports and they could publish key operation performance indicators ahead of the publication of annual reports after getting CSRC’s approval.

The CCP virus affected annual financial statements presentation and auditor’s work in the following ways.

The impact of CCP virus on auditor’s opinion was more obvious in the companies suspending publication of annual reports. There were 71 companies which were given unstandardized audit opinions as follows

52 listed companies disclosed CCP virus’ impact on operations in the annual reports. The disclosed effects were divided into three classes as below.

12 categories misstatements

1.There were 5 kinds of misstatements CSRC reported as far as financial instruments were concerned

2. There were five problems in applying lease CAS.

3.Some listed companies misapplied revenue CAS to overstate revenue by not reducing revenue for the consideration withheld due to quality problem but charging into non-operating loss and by including purchasing discount granted by suppliers in revenue rather reducing the cost of inventory or cost of goods sold. It was also discovered that some included value-added tax which was collected from customers for the third party the CCP regime in a contract liability account.

4.Some listed entities made mistakes in the account for merger and acquisition by falsely defining merger under common control, mismeasuring intangible assets and goodwill recognized on the acquisition, the misadjusting acquisition cost for consideration reduction incurred after 12 months measurement period, measuring contingent assets on acquisition amortized cost rather at fair value through changes in profit or loss and performing wrong subsequent measurement of contingent consideration.

5.Some listed companies applied consolidation CAS falsely by misjudging consolidation scope, accounting for trade between a parent company and non-controlling interest and disposal of subsidiaries improperly, and failing to fully disclose judgements applied in determining control scope.

6.Some companies accounted for investment in associate and joint ventures falsely, such as misclassification of investment, incorrect cancellation of related party transactions, etc.

7.Some companies covered up impairment loss of long-term assets. For example, assets group or groups were not applied consistently despite no change of circumstances, impairment loss was not allocated into other assets in the assets group after being fully charged against goodwill. What made matters worse was that impairment loss didn’t represent faithfully gradual deterioration of businesses and corresponding assets over time, the terrible condition of commercial houses in work stoppage and unable to be delivered legally to owners, the developers of which and the controlling shareholders thereof were insolvent, and construction in process unable to be used for production because of a shortage of fund, the constructor to which had gone bankrupt.

8. Some listed companies recognized deferred tax assets despite insufficient future taxable income available to reverse the assets or in relation with initial recognition of financial assets and also recognized deferred tax liabilities incorrectly, such as by not considering taxable temporary differences arising from fair value appreciation of assets.

9.Some companies applied fair value CAS incorrectly by applying false valuation method or by classifying input value into false levels.

10. Some companies accounted for share-based payment improperly or misclassified between post-period adjusting events and non-adjusting events or among changes in accounting policies, changes in accounting estimate, and prior period errors modification.

11. Some companies included improper items or omitted items in non-recurring gains and losses such as gains on disposal of financial products or long-lived tangible and intangible assets, misleading investors on their operation performance in normal situation.

12. There were some other obvious misclassifications such as between current assets and non-current assets, or between current liabilities and non-current liabilities. The misclassifications between current assets and non-current assets, or between current liabilities and non-current liabilities didn’t impact the amount of the totaled assets or totaled liabilities amount but it affected operating capital significantly. Operating capital, which was current assets minus current liabilities, was important to short-term solvency indicators. Misstated operation capital arising from misclassification thereof mislead debts investors if investors didn’t carry out some due diligence to identify such mistakes.

Subsequent measures of CSRC

CSRC tried to comfort the readers shocked by so many financial statements misstatements by announcing that it would enhance emphasis on financial information quality, direction, rules making and enforcement.

Background information of CAS

The Ministry of Finance of Communist China (MOF) issued CASs which MOF claim were converging with International Financial Reporting Standards (IFRS) issued by the International Accounting Standards Board. But there were many differences between CAS and IFRS. There was a comparison about IFRSs application in listed entities.

ComparisonRepublic of China (Taiwan)People’s Republic of China enslaved by CCP
CompositionTranslated IFRSs into Traditional Chinese1.Made CASs by removing much information in IFRSs and translating into Simplified Chinese language 2.Separately published application manual 3.Separately published application points by MOF and CSRC
Websitehttps://www.twse.com.tw/IFRS/aboutIFRShttps://www.casc.org.cn/qykjzz/
http://kjs.mof.gov.cn/zhengcefabu/
http://www.csrc.gov.cn/pub/newsite/kjb/  

Translator’s views:

These measures didn’t answer the systematic questions inherent under CCP’s ruling.

Why not directly adopt IFRSs without modification as Republic of China did?

Why not require MOF to evaluate the performance of accounting industries communication among Taiwan, Hong Kong, and China mainland in improving accounting regulation in recent years? Just for applying the BGY plan (i.e. Blue techs, Gold and Yellow of sex) to influence accountants of Hong Kong and Taiwan working in the sectors of government service, financial service, property development, defense, etc?

So many mistakes, discovered only by CSRC review rather than US PCAOB inspection, indicated that the corporate governance and internal controls in those listed companies under the CCP regime failed and their board directors including independent directors, whose compensation was paid out from investors’ interests in those companies, weren’t competent and didn’t exercise due care and skepticism. Given that listed companies under extensive public spotlight committed so many mistakes, the financial statements of debenture issuers which got much less spotlight were more unreliable. It’s rational to divest debts and shares of entities of Communist China and make a donation to The Rule of Law Foundation which aims at taking down the CCP to pave the way for a better investment environment.

Resource: http://news.esnai.com/2020/0924/208955.shtml

Translator: CPA Jim

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