A few days ago, the Ministry of Finance revised the Law of the People's Republic of China on Certified Public Accountants, forming the Draft Amendment to the Law of the People's Republic of China on Certified Public Accountants (Draft for Solicitation of Comments) (hereinafter referred to as the Draft for Solicitation of Comments), and solicited opinions from the public. In order to strengthen the supervision of the CPA profession, improve the quality of auditing, and promote the healthy development of the industry, it is obviously very necessary to revise the CPA Law, which will further force the club and related personnel to fulfill their responsibilities. Since the stock issuance registration system has been piloted on the Science and Technology Innovation Board and the ChiNext Board, and will be fully rolled out in the A-share market in the future, this is also of very positive significance to the capital market.
In recent years, the overall scale of China's CPA industry has continued to grow, and the industry has also shown a good development trend. For example, as of August 2021, there are more than 110,000 practicing certified public accountants and more than 8,800 accounting firms (excluding branches) in China, and the business income of the industry in 2020 exceeds RMB110 billion. Despite this, in the process of seizing market resources and sharing the interest cake, the relevant accounting firms have produced various chaos and have not played a good role as "gatekeepers".
The problems are mainly manifested in the fact that the practitioners' risk awareness and responsibility awareness are not strong, and the awareness of compliance is poor; the phenomenon of practicing in a name, selling audit reports online, practicing beyond the ability to do so, operating without a license, and unfair competition is prominent; the accounting audit of the capital market is not diligent and conscientious, and even the problems of violations of laws and regulations are more prominent. It is also in this context that after a gap of seven years, the CPA Law ushered in a new round of revision.
The revision of the CPA Law is also quite interesting, and the most important feature is that there are many provisions involving a wide range of aspects and amendments. The Draft for Comments has corresponding measures for the problems and pain points in the industry. For example, in view of the phenomenon of unfair competition such as low-price competition that has emerged in recent years, the Draft for Comments clearly requires the client to select and hire firms in a way that can fully understand the professional competence of accounting firms such as competitive negotiations, and the selection and evaluation criteria should highlight quality factors and limit the weight of quotations.
It is indispensable to rectify the chaos in the industry and significantly increase the cost of violations. One of the highlights of the new securities law is to significantly increase the cost of violations, like the previous credit phi violation penalty of only 600,000 yuan, and now it has been raised to 10 million yuan, which has also led to a great increase in the deterrent power of the new securities law.
Like the new Securities Law, the Draft for Comments seeks a breakthrough in this regard. On the one hand, accounting firms and responsible personnel who violate the rules may face huge fines. For example, if the accounting firm and the responsible personnel violate the law, the illegal income will be confiscated and a fine of not less than one time but not more than ten times the illegal income may be imposed; if the circumstances are serious, the accounting firm may be revoked from practicing license, and the certified public accountant or the certificate will be revoked, that is, its professional qualification will be revoked.
On the other hand, the accountability mechanism has been improved. The Draft for Comments clarifies that accounting firms and certified public accountants need to bear corresponding compensation liabilities due to their faults. For example, Article 89 of the Draft for Comments stipulates that if an interested party uses an audit report issued by an accounting firm with false records, misleading statements or major omissions due to reasonable trust, the accounting firm shall bear the liability for compensation in accordance with law. The improvement of the accountability mechanism is conducive to increasing the cost of violations.
The revision of the Certified Public Accountants Law will also have a positive impact on the capital market. One is in the IPO. Previously, a large number of enterprises in the A-share market achieved listing through fraudulent issuance, and in addition to the malicious concealment and deliberate fraud of the issuer, the failure of intermediaries and personnel, including accounting firms, to be diligent and conscientious was also an important factor that could not be ignored. Since the Draft for Comments significantly increases the cost of non-compliance, and accounting firms and certified public accountants also need to bear the liability for compensation, if they are not diligent and conscientious in the course of practicing, they will undoubtedly pay a huge price.
The second is reflected in the periodic reports issued by listed companies. In recent years, the phenomenon of financial fraud in the annual reports of listed companies has become a dazzling scenery, among which in addition to the factors of listed companies, there are also reasons for the failure of auditors such as certified public accountants to be diligent and conscientious, and there may also be problems such as insufficient professional competence of responsible personnel, of course, there may also be problems in professional ethics and other aspects. The Draft for Comments has greatly increased the cost of violations, which will invisibly force intermediary institutions and responsible personnel to fulfill their responsibilities, improve their own business level, and keep the moral bottom line. Moreover, in a sense, this will also help improve the quality of disclosure of listed companies' annual reports.