At the turn of the year, Shenzhen Stock Exchange (SZSE) has taken multiple measures to constantly strengthen the supervision over listed companies’ profit bump-up adjustment at the year end. In so doing, SZSE is to improve the quality of listed companies’ financial information disclosure and protect the legitimate rights and interests of investors, especially the minority.
With regard to the issues concerning listed entities’ suspected acts of profit adjustment and relevant accounting treatment, SZSE has intensified its “inquisitive” supervision. Its focus will be on companies that make unusual adjustment to their profits at the end of 2017 by means of asset disposal, sudden debt structuring or other transactions. It will impose strict supervision over cooperate actions that lack commercial substance, including asset sale, sudden debt structuring, accounting estimate or policy changes, and accrual and reversal of asset impairment provision. In addition, it will pay special attention to the high-risk companies that may suffer steep performance losses or delisting risk warning or may incur performance questions over themselves in the market, thus preparing for the identification of high-risk enterprises when the 2017 annual reports are disclosed.
The supervisory measures SZSE has taken mainly include the following: First, 49 letters of various kinds, such as inquiry letters and letters of concern, are issued to ask the companies of interest to detail the aims and commercial substance of asset sale, the conditions of transaction counterparties, the existence of connected relation, the pricing principles and fairness of transaction price and the compliance of accounting treatment while requiring relevant accounting firms, lawyers offices and other intermediaries to release special verification opinions. Second, 17 letters of license reminder and concern are issued to the 2017 accounting firms and annual audit firms for listed companies to notify them the important accounting issues which SZSE focuses on and should be stressed on in the 2017 annual report audit. In addition, SZSE has earnestly reminded these firms that they should strictly abide by the auditing standards for Chinese certified public accountants, play due diligence, prudently design and implement audit procedures and acquire sufficient and appropriate audit evidence to ensure audit quality. Third, listed companies are required to provide insiders and strictly examine whether there are abnormal conditions in the companies’ stock trading before suspension or whether the insiders have directly or indirectly involve in the companies’ stock trading. Fourth, 11 letters are issued to the securities regulatory commissions under SZSE’s administration to ask for special attention to and investigation assistance in relevant issues. Fifth, individual companies and intermediaries of severe conditions are reported to CSRC for inspection and excluded from the range of companies qualified for direct registration, upload and submission of corporate information for disclosure at SZSE or other specified channels. Rigid proactive supervision will also be imposed on the information disclosure of these companies.
An SZSE principal expressed that SZSE, through active supervision, has been transferring supervisory requirements to the market and specifying its supervision attitude. As a result, the market order has been maintained and the capital market has been purified, which takes sound effect on maintaining the stable and healthy development of the capital market. For example, in the reply to SZSE’s letters of concern, the annual audit firms of some listed companies stated that the companies of interest do not have sufficient reasons for the writing-off of large-amount payable and cannot confirm the non-operating revenue thereof and that their inclusion of the remaining removal compensation into the current-period profit and loss is not up to the accounting standards, which accordingly necessitate the adjustment to accounting treatment method. In another example, a company sold the loss-making assets at high premium to its related parties at the year end, which results in questions in the commercial substance of transaction, the rationality of transaction and the fairness of transaction price. When relevant letters of concern are disclosed, the said transaction is not approved at shareholders’ general meeting due to minority investors’ objection.
The SZSE principal said that SZSE will continue to implement the guiding principles of the 19th NPC, the CPC Economic Work Conference and the National Financial Work Conference to greater depth, stick to comprehensive strict law-based governance and do a good job in the difficult task of preventing material risks. In the posterior review of annual reports, SZSE will keep on strengthening the supervision over listed companies’ suspected profit manipulation actions and urge them to practically perform their obligation of financial information disclosure in accordance with the law and strictly put into practice the corporate accounting standards and the rules for financial information disclosure in capital market. Moreover, SZSE will further intensify efforts in accounting audit supervision to urge intermediaries to practice diligently and improve their awareness of duties, thus truly letting them play their role as an inspector and guard.
