Shanghai Stock Exchange: Warding Off Deliberate Profit Manipulations

At the First Training Course on New Accounting Standards sponsored by the China Securities Regulatory Commission under the auspices of the Shanghai Stock Exchange (SSE), Director Zhou Guoqing of the SSE Listed Company Department said that listed companies must not take advantage of changing accounting policies to manipulate profits for obtaining malfeasant interests.

In Zhou's summary, the possible deliberate profit manipulations include changes in accounting policies, corrections of estimation errors, measurement modes of fair value, disclosure of connected transactions as non-related ones for false debt reorganization and non-monetary assets exchange with no real transaction background. They also cover deliberate change of retaining methods and proportions such as unreasonably excessive retaining of impairment provisions and large-amount switching back after significant impairment provisions are made, capitalizing R&D expenditure by false or untrue information, deliberate change of consolidated statement scope or not fully offsetting transactions between companies within the scope.

Zhou stressed that listed companies must choose measurement methods for investment property by strictly following the new accounting standards and the application guide. They must not change the property usage deliberately or the cost measurement mode into fair value one to manipulate profits. Besides, they must not choose computing parameters deliberately for share-based payment to manipulate profits so as to win management incentives. Furthermore, they must not deliberately change the classifications of financial instruments for profit manipulation.

The new accounting standards, released by the Ministry of Finance this year, will be firstly implemented by listed companies next year and gradually by all large and medium enterprises.

Zhou revealed that the 2006 annual reports of listed companies would still be compiled according to the current accounting standards and system. But listed companies should, by combining the new standards' regulations with their own operation characteristics, nail down and disclose the possible influence on their financial conditions, operating results and cash flows if they implement the new accounting standards. Zhou also said that the implementation of the new accounting standards, a great impact on listed companies' accounting, auditing, internal control and corporation governance, would be a severe challenge for the companies' operation, management and accounting. Listed companies should make prior preparations for various accounts adjustment and abide by the prudence principle. All this aims to ensure that the accounting and financial information disclosure is real, accurate and complete during the transition period of the new and old standards as well as to guarantee the quality of the information disclosure of financial accounting after implementing the new accounting standards.