Today I will talk about the biggest “melon” on the market recently: Kangmei Pharmaceutical was fined for financial fraud.
I want to emphasize that this is an analysis based on public information from the standpoint of the “eating melon” masses.
Let’s talk about the background and timeline of the story first. On the evening of October 15, 2018, some articles appeared on the Internet, questioning the authenticity of Kangmei Pharmaceutical’s monetary funds and thinking that the company may have financial fraud. The next day, the company’s stock once fell by its limit and closed down by 5.97%. In the following three trading days, the company closed at a falling price, and the decline was significantly deviated from the trend of the broader market and the pharmaceutical industry.
On December 29, 2018, the company issued an announcement claiming that it had received a notice of investigation from the China Securities Regulatory Commission. Eight months later, on August 17, 2019, the company and related parties received the “Advance Notice of Administrative Penalties and Market Banning” from the China Securities Regulatory Commission. Nine months later, on May 25, 2020, the company received the “Administrative Penalty Decision” from the China Securities Regulatory Commission. The core content is that the company has fraudulent behavior, and the company and related directors and supervisors were fined with varying amounts. The directly responsible persons such as the chairman, vice chairman, secretary of the board, and chief financial officer were also punished by market bans.
Subsequently, on February 18, 2021, the China Securities Regulatory Commission issued an announcement stating that Kangmei Pharmaceutical’s annual audit accountants had defects in their audit work during the period involved All signing accountants and related staff were punished.
So far, the work of the China Securities Regulatory Commission has come to an end. But only administrative penalties were imposed on the falsification of financial statements. The highlight of the story is that some people think that the new “Securities Law” has been implemented in March 2020, and you dare to falsify it. It’s lawless. Sorry, just take it. You have an operation.
After the China Securities Regulatory Commission issued administrative penalties, first 11 investors found two representatives and took the company and the directors and supervisors involved in the case to court. Add the punished office and related personnel as the defendant. Next, the China Securities Small and Medium Investor Service Center Co., Ltd. (ie, the Investment Service Center) also claimed to have accepted the special authorization of 56 right holders and applied to the court to participate in the lawsuit as a representative. At this time, the nature of the incident has changed, because the original 11 investors filed suits, regarded as “ordinary representative” suits, and now the investment service center intervenes, and the “special representative” suits under the new securities law are applicable.
One of the biggest differences between the two is that “ordinary” representatives can only claim rights on behalf of the right holder when the right holder “explicitly” accepts the representative. For example, the two representatives have 11 representatives. Investors are looking for them. If other investors want to ask these two representatives to help with the litigation, I’m sorry, you have to make a statement, preferably something in writing.
” The “special” representative is different. This is one of the highlights of the new Securities Act in 2019. It is similar to the “class action” system in the United States. “You don’t need his representative. If you don’t say it, it’s “default” that the Investment Service Center represents you. This is the fundamental reason why the number of shareholders in this lawsuit has reached a record 55,326. The operation is fierce. By 2021 On November 12 of 2010, the court made a first-instance judgment. The investor’s losses during the period involved totaled 2.459 billion yuan. The company was liable for compensation. The directors, supervisors, accounting firms, and the signing partners respectively bear 5% according to the magnitude of the liability. , 20% or even 100% of joint and several liability.
So the market froze, and people from all walks of life who watched the excitement did not think it was too big to eat melons all expressed their opinions and shouted for joy. Yes, there are unfair roads, especially independent directors who have received tens of thousands or hundreds of thousands of allowances. This time they were sentenced to joint liability of 5% and 10%. Everyone was shocked. They had to accompany at least 123 million. If calculated according to the allowance, you may not be able to pay it back after 1000 years of work.
As an accounting practitioner, I am also fortunate to be asked about my opinions. Many people around me My relatives and friends expressed their concern about me. Some people asked how and why the company falsified.
How did they falsify? The Empirical Supervisory Committee has made a clear statement, First, there are false records in the 2016-2018 annual reports, including misstatements of income, interest income, profits, monetary funds, fixed assets, construction in progress, investment real estate and other accounts; second, insufficient disclosure, that is, failure to disclose controlling shareholders as required Related party transactions involving non-operating capital occupation by its related parties.
According to my understanding, Kangmei Pharmaceutical’s fraud is simple and rude, and it is directly the fraud of currency and funds, with public information It shows that in the 2017 annual report alone, there were 29.9 billion in cash that was imaginary. What we have to ask is: where does the money come from and where is it used?
Theoretically, money can be earned through business activities, it depends on how the company’s business is going. In fact, the penalty announcement of the China Securities Regulatory Commission shows thatDuring the three years involved in the case, U.S. Pharmaceuticals’ revenues and profits have also been fraudulent. Especially if you have so much cash in your account, there must be interest in the bank, so the company’s interest income is also fraudulent. Of course, if people question that your company’s cash is fake, the company has to check it too, right? The result is that the money is really gone, where did it go? It has become stocks of Chinese medicinal materials and ginseng (facts later proved that these stocks are also seriously misnamed), and have become construction in progress, fixed assets, investment real estate, and so on. Of course, it is indispensable to be embezzled by related shareholders. In other words, tens of billions of cash have already been spent. It is not clear where exactly it was spent, whether it was true or not.As for why it is fraudulent, that is really a problem. Have you seen the Titanic? Sank, why? Hit an iceberg. Why hit the iceberg? If you can make it clear, I will give you a thumbs up. As far as Kangmei’s fraud is concerned, we can theoretically infer that one of the reasons for the implementation of planned and premeditated long-term fraud may be that major shareholders are short of money and need to be realized through listed companies. It’s not possible to take it directly from a listed company (because there are independence requirements and disclosure requirements, although the majority shareholder actually took it, but the operation is sneaky), there is another way to mortgage the stock to the bank, from the bank take money. The major shareholder pledged the stock to the bank. The bank is professional. Is the value of the stock you pledged worth that much money? How much the stock is worth is determined by the performance and the market, so the company began to falsify its performance to deceive the market and create a prosperous company.
Talk about your feelings.
The first thought after seeing relevant news is that accounting knowledge is useful, at least in legal The above is recognized. Why? Look, the verdict clearly stated that it was because the listed company’s annual report and interim report contained false records, which caused the right holders to suffer losses in securities transactions. Liability.
The usefulness of accounting knowledge, at least in form, has also been recognized by the market. You see, after the media questioned the fraud of the listed company, the market immediately responded. The company’s stock price fell sharply the next day, followed by three lower limits, and there was a clear departure from the trend of the market and the industry. Within that short window of time, without interference from other information, the downtrend of Kangmei’s individual stocks can at least be largely caused by the possible risk of report fraud. Obviously, accounting information, especially the authenticity of accounting information, is an important factor affecting investors’ decision-making. LawThe court’s judgment also showed that after the online analysis report came to light on October 16, 2018, on December 4, just 30 trading days later, the turnover rate of the listed tradable stocks of Kangmei Pharmaceutical reached 100%. That is to say, the investors who got the news ran out in more than a month, which fully reflects the characteristics of “voting with their feet”.
The second idea is that there is still room for improvement in the professional capabilities of directors, supervisors, and certified public accountants. The fuse of this case was that the media broke the news that the company was fraudulent, especially the speculation that questioned the fraud of monetary funds, which was confirmed in the penalty announcement issued by the Securities Regulatory Commission. Think about it, a “people who eat melons” who are not involved in the daily management of the company can draw a basic judgment on the risk of fraud in the financial report based on the public information disclosed by the listed company. The directors, supervisors, and accountants that the company spends money on Professionals, however, failed to “early warn” or detect and correct these misrepresentations in a timely manner, which to a certain extent reflects the fact that “the masters are in the private sector”. Experts ask and learn to master some basic analysis methods and financial knowledge.
In fact, fraud in financial statements has always been a “cancer” in the capital market, not only in China, but also in developed markets such as the United States, Japan, and Europe. Enron, WorldCom, and Global Fortune 500 companies such as Telecom, Merck Pharmaceuticals, Olympus, Toshiba, and Tesco have all exposed financial fraud scandals. Looking at the annual report of Kangmei Pharmaceutical, some indicators should indeed be questioned. For example, in the 2018 semi-annual report, corporate deposits were 39.9 billion yuan and loans were as high as 34.7 billion; in 2017 annual reports, corporate deposits were 34.2 billion yuan and loans were 315. The problem is that the interest rate of deposits is very low, and the interest rate of loans is very high. The spread between deposits and loans is between 4-6%. As a rational decision-maker, paying off the deposits can save nearly 2 billion. Expenses can make the company’s performance more beautiful. What reason does the company have to borrow heavily from the bank while letting tens of billions of funds lie on the account? If there is no reasonable reason, the directors, supervisors, and investors should question whether there is something tricky.
The third idea is that small and medium investors in the Chinese capital market are still lucky. Because the law chooses to protect the interests of small and medium investors, through the amendment of the “Securities Law” and other top-level designs, the introduction of a “special representative” litigation system with Chinese characteristics allows investors to receive a certain amount of compensation for their losses. With the continuous improvement and improvement of the capital market system, especially the effective connection of administrative punishment, civil compensation, and criminal liability, it is believed that the market will develop more healthily.
Of course, Kangmei’s punishment is only a case, or just a starting point. As far as financial report providers such as actual controllers, controlling shareholders, listed company directors, supervisors, and certified public accountants are concerned, take this as a warning. In today’s severe criminal law of the capital market, under the background of zero tolerance for financial fraud, the main responsible person for financial reporting should know and abide by the law, take honesty and trust as the bottom line, take diligence and conscientiousness as the criterion, and learn at least a little financial knowledge , The company must participate in meetings, fully understand the company’s daily operations and financial information, and have a skeptical attitude towards the annual report, especially the directors, must be truly “sensible” and participate in the governance of the company. Exempt from responsibility if you don’t know about fraud. In terms of diligence and due diligence, the directors, supervisors, and senior executives have to bear the responsibility of “inverting evidence.” When signing, at least think more about it.
Finally, talk about letting the bullet fly for a while. The bullet has been shot out, and the carriage is still running; Medicine’s civil lawsuit has been judged in the first instance, but there are still many uncertainties.
First, the first-instance judgment is currently open, and it is doubtful whether it will take effect. According to the law, if the defendant decides to appeal within 15 days of serving the judgment, then the judgment is invalid. The current news is that the Investment Service Center, which is the representative of the plaintiff, has decided not to appeal, but the Investment Service Center is only a “representative.” If the more than 50,000 investors represented are dissatisfied with the verdict, they still have the right to appeal. In addition, this time the directors, supervisors, supervisors and senior executives were severely punished. If all or part of the defendants choose to appeal, the judgment of the first instance will not take effect. In other words, whether the plaintiff and the defendant agree with the result of the first instance remains to be verified by time.
Second, there is uncertainty as to whether the award of compensation can be effectively implemented. According to the judgment, it is the listed company, Kangmei Pharmaceutical, that bears the liability for compensation. The problem is that the latest quarterly report for 2021 shows that the company’s owner’s equity is -11.4 billion yuan, which means that the company is already insolvent. In fact, on June 4, 2021, the company has been ruled bankrupt by the Jieyang Intermediate People’s Court. Reorganization. In the previous 2019 and 2020, due to litigation, the company set aside a reserve of 1 billion yuan, in other words 2.459 billion yuan in compensation, and the company has estimated that it has accounted for 1 billion yuan. However, in the context of bankruptcy and reorganization, the compensation of 2.459 billion yuan can only be used as one of the liabilities and be paid off in accordance with the law.
Kangmei isA “limited liability” company assumes the liability for compensation based on the amount of capital contributed. In the case of insolvency, it is not certain how much the company can repay the right holder. Of course, there are also the actual controllers, directors, supervisors, executives, firms, and signing partners. The court has frozen related assets, and related parties have returned some of the funds. The firm also has a professional risk fund. The question is, for individuals, at least a nominal debt of more than 100 million yuan, can the independent director personally repay it? Listed companies can claim rights against these jointly and severally liable persons, but there are uncertainties as to whether they will receive them, when they will receive them, and how much they will receive.
Third, the independent director received tens of thousands of yuan in allowances and was fined hundreds of millions. Is he injustice? This can actually be discussed. Independent directors’ participation in corporate governance must reflect “independence”. They cannot receive wages from the company, at most they will receive “allowances”, otherwise they will not be independent. How much responsibility should be assumed should be determined by the law.
The current judgment is the first case in which independent directors of China’s capital market bear civil compensation. Whether it is a “best practice” or not is difficult to say. Among them, the proportions are 5% and 10%. There is a certain degree of discretion. In fact, looking at the history of the international capital market, it is rare for independent directors to be punished so severely. Take the US capital market as an example. This type of case is usually the first evil. The CEO and CFO are basically punished, and independent directors are rarely involved. Even if there are, they are resolved through settlements and directors’ liability insurance. The liability of the company is “limited”, should the liability of independent directors also be “limited”? Whether to introduce a personal bankruptcy system? Whether it can be reconciled, etc., can all be discussed.
Fourth, whether the CPA should be killed with a stick? This is also open to discussion. A firm, even if there is an error, has not found a false financial report of a listed company, but it still needs to distinguish between negligence and deliberate negligence. The negligence also needs to distinguish between general negligence and major negligence. If something goes wrong with a listed company, and the firm and its partners involved are beaten to death indiscriminately, then I believe it is not a good thing for the market.
The capital market is a good thing. Through the invisible hand of the market, resources can be well allocated and both investment and financing parties can benefit. The long-term healthy development of this market requires trust. As a low-cost institutional arrangement to relieve trust, the authenticity of accounting information is crucial, and strict supervision is even more indispensable. The Kangmei case tells everyone that false statements are not necessary.
(This article isThe fifteenth series of the exclusive column “Accounting Jianghu” of the Business School, the author Yuan Min is a professor at Shanghai National Accounting Institute and a doctorate in accounting. Research direction: internal control, credit rating, etc., published “Research on the Function Inspection and Quality Control of Credit Rating” , “Enterprise Internal Control Regulations and Cases” and other works. )