China’s biggest accounting firm Ruihua CPA’s is being investigated by the China Securities Regulatory Commission (CSRC) after one of its clients was found to have infested its profits by RMB 12billion ( US$1.74billion)over four years!
This is not the first time Ruihua was investigated 3 years ago they were barred from handling any IPO work for 6 months. This time they were hit hard with more than 50 of Ruihua’s clients temporarily stoped their IPOs and capital raising,
Additionally, the CSRC decided to hold back the approval of 20 of Ruihua’s clients seeking listing on China’s new technology stock exchange Star Market. Many speculate that Ruihua may have it’s Listing license suspended for a period of 1 to 2 years.
Ruihua was a member of RSM until November 2018 when it joined Crowe Global.
The industry expects now the CSRC to step up and scrutinize the accounts of listed companies more closely and can expect more listed companies and it’s auditors to be investigated. More accounting scandals more heads will grow.
It will be interesting to see if more irregular audited accounts of listed companies will surface and I have always raised doubt on the results of many of the listed companies. It has been a concern of many analysts including myself that these listed companies have been bumping up its profits to ensure they price-earnings ratio and valuation are maintained and they are able to maintain or increase their credit lines.
In Asia, Hong Kong, Singapore, and Malaysia has had a fair share of China companies fake accounts from the period 2009 to 2015 resulting in many of these companies shares suspended and most of them de-listed.
Across Europe -UK AIM market there was a big bonanza when Chinese companies start listing but within a period of 5 years saw all the fake accounts and non-compliance start to emerge. In Frankfurt and the US similar scenarios.
Over the last 5 years in particular less overseas market accepts Chinese companies to their Exchange – as authorities raised the threshold for new admission. Vast numbers still flock to Hong Kong and occasionally on the Korean Kospi market.
It is very relieving to note that the Chinese regulators have begun to investigate and stem out these fake accounts and hold the audit firm accountable. We believe they will next go on to raise the bar and should review the underwriters and sponsors in China their role and responsibilities – it should only admit companies with a genuine operations with a sustainable business model and strong financial reporting and transparency.