Why do state-owned enterprises have financial fraud? Because once senior executives become addicted to fake trade, they can't quit

Introduction

In the past, there were many financial frauds committed by private enterprises, and in recent years, financial frauds in state-owned enterprises and state-owned listed companies have also continued to appear. Sorting out the financial fraud and performance thunderstorms of these state-owned listed companies, almost all of them have an important reason, all because they have carried out false trade and financing trade. This business accounted for a very high proportion in those years, and in recent years, due to the bad environment, the thunder of false trade in state-owned enterprises has exploded one by one.

Recently, Shanghai Industrial Development Co., Ltd. (hereinafter referred to as "Shanghai Industrial") announced that it received the "Prior Notice of Administrative Punishment and Market Prohibition" (hereinafter referred to as the "Notice") issued by the Shanghai Regulatory Bureau of the China Securities Regulatory Commission, which was alleged to have failed to timely disclose the expected loss in operating performance, the suspected failure to timely disclose the conclusion of important contracts, and the suspected false records in the annual reports from 2016 to 2021. Among them, there were false records in the financial statements of SIIC Development from 2016 to 2021, with a total inflated revenue of 4.722 billion yuan and a total inflated profit of 614 million yuan.

First, the ins and outs

(1) Shanghai Industrial received the "Notice" from the CSRC on suspicion of failing to timely disclose the expected loss in business performance, the suspected failure to timely disclose the conclusion of important contracts, and the suspected false records in the annual reports from 2016 to 2021

According to the Notice, the facts of SIIC's suspected violations mainly include the following three aspects:

First, it is suspected of failing to disclose the expected operating performance in a timely manner. SIIC was informed no later than December 15, 2021 that it may incur a loss in operating performance due to the risk of unrecoverable accounts receivable of its holding subsidiary, Shanghai SIIC Longchuang Intelligent Technology Co., Ltd. (hereinafter referred to as "SIHL"). However, SIIC did not disclose the above matters in the interim announcement until January 12, 2022.

Second, it is suspected of failing to disclose the conclusion of important contracts in a timely manner. In September 2020, SIIC Development and Shanghai Gaoyang Hotel Co., Ltd., a wholly-owned subsidiary of SIIC, signed relevant agreements with Shanghai Hongkou District Land Development Center to preliminarily agree on the scope of land acquisition and storage, with the total compensation price tentatively estimated at 930 million yuan and the amount of profit generated was 903 million yuan, accounting for 67.19% of the company's total audited profit in the latest period (1.344 billion yuan before adjustment). The above-mentioned parties shall complete the receipt and storage framework agreement with their seals no later than 9 September 2020. SIIC failed to disclose in a timely manner as required.

Third, the annual reports from 2016 to 2021 are suspected of having false records. From 2016 to 2021, Cao Wenlong, then chairman of SIIC Longchuang, a subsidiary of SIIC Development, organized, instructed and acquiesced to the relevant personnel to falsely increase the revenue and profit of SIIC Longchuang from 2016 to 2021 by means of fictitious contracts, inflated business implementation progress, implementation of idling self-circulation trade, and participation in military-civilian integration trade, resulting in false records in the financial statements of SIIC from 2016 to 2021, with a total of 4.722 billion yuan of inflated revenue. The total inflated profit was 614 million yuan.

At the same time, the financial fraud of SIHL led to an understatement of goodwill impairment of RMB220 million in the 2017 annual report, accounting for 18.31% of the total disclosed profit of SIIC Development in the current period, and an underprovision for bad debts of RMB809 million in the 2021 annual report of SIIC, accounting for 52.36% of the total disclosed profit of SIIC in the current period.

According to the Shanghai Securities Regulatory Bureau, SIIC is suspected of violating the relevant provisions of the Securities Law, and that persons other than directors, supervisors and senior management have evidence to prove that their actions have a direct causal relationship with the illegal acts of information disclosure.

(2) Determination of the responsibility of the senior executives of the company involved

The Shanghai Securities Regulatory Bureau intends to decide to give warnings to SIIC Development, Zeng Ming, Cao Wenlong, Yuan Jixing, Xu Xiaobing and others and impose a total fine of 25.45 million yuan on SIIC Development for its suspected failure to timely disclose the expected loss of operating results and the conclusion of important contracts, as well as the suspected false records in the annual reports of SIIC from 2016 to 2021.

Zeng Ming, as the legal representative and chairman of SIIC Development at the time, presided over the overall work of SIIC Development, and acted as the secretary of the board of directors from October 2019 to September 2022, and had the obligation to ensure the truthfulness, accuracy and completeness of the company's information disclosure in accordance with the law. He was well aware of the risk of irrecoverability in the accounts receivable of SIHL, and participated in the approval of important contracts in the Framework Agreement on the Acquisition of State-owned Land Use Rights at No. 815 (Part) and No. 879 Dongdaming Road. After the CFO of SIIC Development dispatched to SIIC Longchuang reported the abnormal situation, he failed to pay due attention and failed to perform his duties diligently in signing and confirming the company's annual reports from 2017 to 2021. Zeng Ming was the person directly responsible for the company's failure to timely disclose the loss of expected operating results, the conclusion of important contracts, and the false records in the annual reports from 2017 to 2021.

As the then president and director of SIIC, Xu Xiaobing presided over the daily operation of SIIC and was the person in charge of accounting, and had the obligation to ensure the truthfulness, accuracy and completeness of the company's information disclosure in accordance with the law. It was aware that there was an unrecoverable risk in the accounts receivable of SIL Longchuang. After the CFO assigned by SIIC to SIIC failed to pay due attention to the abnormal situation and failed to perform its duties diligently in signing and confirming the company's 2020 and 2021 annual reports. Xu Xiaobing is the person directly responsible for the company's failure to timely disclose the loss of expected operating results and the false records in the 2020 and 2021 annual reports.

As the then president and director of SIIC, Tang Jun presided over the daily operation of SIIC and was the person in charge of accounting of the company, and had the obligation to ensure the truthfulness, accuracy and completeness of the company's information disclosure in accordance with the law. He participated in the approval of important contracts of the "Framework Agreement on the Acquisition of State-owned Land Use Rights at No. 815 (Part) and No. 879 Dongdaming Road", and failed to perform his duties diligently in signing and confirming the company's 2016 and 2019 annual reports, and was the directly responsible person in charge for the company's failure to timely disclose important contracts and the false records in the annual reports from 2016 to 2019.

Yuan Jixing, as the then vice president and chief financial officer of SIIC Development and the head of the company's accounting institution, has been assisting the office of the board of directors of the company to perform part of the duties of the secretary of the board of directors since March 2020, and has been a supervisor of SIIC Longchuang since April 2016, responsible for the financial management of SIIC Development, and has the obligation to ensure the truthfulness, accuracy and completeness of the company's information disclosure in accordance with the law. Yuan Jixing was aware of the risk of irrecoverability in the accounts receivable of SIHL, and participated in the approval of important contracts of the "Framework Agreement on the Acquisition of State-owned Land Use Rights at No. 815 (Part) and No. 879 Dongdaming Road". After the CFO dispatched by SIIC to SIIC failed to pay due attention to the abnormal situation, and failed to perform its duties diligently in signing and confirming the company's annual reports from 2016 to 2021. Yuan Jixing is the person directly responsible for the company's failure to timely disclose the loss of expected operating results, the conclusion of important contracts, and the false records in the annual reports from 2016 to 2021.

Wang Liangjun, as the vice president and director of SIIC Development at the time, was in charge of the work of SIIC Longchuang and had the obligation to ensure the truthfulness, accuracy and completeness of the company's information disclosure in accordance with the law. After the CFO dispatched by SIIC to SIIC failed to pay due attention to the abnormal situation, he failed to perform his duties diligently in signing and confirming the company's annual reports from 2018 to 2021, and were other persons directly responsible for the false records in the company's annual reports from 2018 to 2021.

Guo Weimin, as the then vice president of SIIC Development and a director of SIIC Longchuang, has the obligation to ensure the truthfulness, accuracy and completeness of the company's information disclosure in accordance with the law. After the CFO dispatched by SIIC to SIIC failed to pay due attention to the abnormal situation, he failed to perform his duties diligently in signing and confirming the company's 2020 and 2021 annual reports, and was other directly responsible for the false records in the company's 2020 and 2021 annual reports.

Cao Wenlong, as the chairman of SIIC Longchuang at the time, was responsible for the production and operation management of SIHL, and since the year when SIHL was acquired as a holding subsidiary by SIIC, he adopted a variety of ways and means to make decisions, organize and implement financial fraud, and instructed, directed, and acquiesced to the relevant personnel of SIIC Longchuang to falsely increase the revenue and profit amount of SIIC Longchuang from 2016 to 2021 by fictitious contracts, inflating business implementation progress, implementing idling self-circulation trade, and participating in military-civilian integration trade, etc., and the financial fraud spanned a long period. The large amount resulted in a total inflated revenue of RMB4.722 billion and a total inflated profit of RMB614 million in the financial statements of SIIC Development from 2016 to 2021. There is a direct causal relationship between his behavior and the illegal information disclosure of SIIC, which led to the false records in the company's annual reports from 2016 to 2021, and the circumstances are more serious, and he is the other person directly responsible for the false records in the company's annual reports from 2016 to 2021.

Cao Wenlong's violation of the law was more serious, and he was banned from the securities market for 10 years. From the date of the announcement of the decision, during the prohibition period, in addition to continuing to engage in securities business in the original institution or serving as a director, supervisor or senior management of the original listed company or unlisted public company, it is also prohibited to engage in securities business in any other institution or serve as a director, supervisor or senior management of other listed companies or unlisted public companies.