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This year, SZSE is stepping up efforts in regulation and supervision, and has expanded the scope of disclosure of the letters of inquiry regarding annual reports so as to increase the publicity of the disclosed information and the transparency of the regulatory work. Up to 3rd June, SZSE has publicized in its official webpage 152 letters of enquiry regarding annual reports. During the subsequent examination of annual reports of listed companies, SZSE attached significant emphasis to 6 issues including the authenticity of corporate performance, compliance of accounting and information disclosure, fund occupation, operation of the board, the supervisory committee and the shareholders' meeting, and fulfillment of performance commitments of underlying assets.
Focus 1: authenticity of corporate performance
SZSE will pay attention to whether listed companies have made any prior recognition of costs or asset impairment to give a big bath to their financial statements, whether the sales amount from important clients are genuine, whether there is any profit adjustment via non-recurring profits and losses, or profit increase from asset inventory surplus and etc. In the event that sales revenue from the company’s 5 biggest clients, especially from the biggest client, has increased dramatically year on year, while the Public System of Business Credit and Company Information revealed that the asset scale and revenue of the certain clients fall way short of the amount of purchase from the listed company, SZSE shall send a letter to the listed company enquiring about the discrepancy between the sales amount to and the scale of operation of the client.
Focus 2: compliance of accounting treatment
Special attention shall be paid to the aspects including the reasonability of accounting policies and changes to accounting estimates, the compliance of revenue recognition, prudence in recognition of nom-recurring profits and losses, the basis for judgment of asset sales date, and the appropriateness of special auditing opinions. In case a company changed the bad debt provision ratio for accounts receivable and the changes turn the company from deficits to profit, while the annual auditor had thus issued an unreserved opinion with emphasis in this regard, SZSE shall send an enquiry letter to the listed company requesting explanation on the reasonability of the changes made by the company and the basis for the bad debts provision for accounts receivable. For companies which made a reverse to large bad debt provision or accrued liabilities, SZSE shall send a letter of enquiry requesting elaboration on the basis for the accounting treatment of relevant reverse of profits.
Focus 3: timelessness, accuracy and completeness of the information disclosed
The major focus will be made on whether failures to timely disclose the discrepancy between operation performance and estimated performance as well as the replacement of temporary notices with periodic notices and etc. For companies who, failing to comply with relevant rules for disclosing annual reports or the guidelines for disclosure of industrial information, did not disclose or only disclose minimal information concerning its primary businesses, the general situation of the industry or the company’s standing in the industry, SZSE shall send a letter requesting such information. As regards assets sales or financial assistance during reporting period which satisfy the conditions for making a temporary notice and which were not disclosed timely but only revealed in the annual report, SZSE shall issue a letter of regulation, and relevant punishment proceeding shall be initiated where a serious violation occurs.
Focus 4: occupation of non-operational capital
Special attention shall be paid to the occupation of non-operational capital and the failure to comply with necessary review procedure where transactions are concerned. In case of occupation of non-operational capital by major shareholders or their related parties, SZSE shall issue risk warning on the company in accordance with relevant laws and regulations, and initiate the punishment proceedings for violation. In case of sale of equity of subsidiaries to major shareholders or their related parties during reporting period, SZSE shall verify whether the company have withdrawn the financial assistance and whether the major shareholders or their related parties have made the payment according to the agreement and shall discern whether there is any occupation of non-operational fund uncovered.
Focus 5: the operation of the board, the supervisory committee and the shareholders’ meeting, and internal control of the company
Focus will be on the operation of the board, the supervisory committee and the shareholders’ meeting and the internal control auditing. SZSE shall issue a letter requesting explanation on the fight for the control of the company, the compliance, effectiveness of the operation of the board, the supervisory committee and the shareholders’ meeting, the reasons and risks for vetoing the proposals during the reporting period and whether there is any clauses restricting the voting right and proposal right of the shareholders. SZSE shall also order the company to revise the clauses which impair the legitimate rights of the shareholders. In the event of increase of modified audit opinions on the annual report of the listed company over the last year, special attention shall be paid to the replacement of corporate account with personal account, connected transactions where there is a unidentified party, failure of management decision-making on major project investment, and alleged violations of securities laws and regulations which have been reported and investigated by the China Securities Regulatory Commission.
Focus 6: fulfillment of performance commitment on underlying assets
The fulfillment of relevant performance commitment in major asset restructuring is a hot spot of market focus and a key point in SZSE annual report audit. On the one hand, to the listed companies whose performance commitment falls short of standards, SZSE pays focused attention and urges the companies and relevant parties to fulfill their performance compensation commitment on time. On the other hand, for companies having fulfilled their performance commitment, SZSE pays focused attention to the authenticity of underlying assets performance from their customer change, conditions of abnormal gross profit rate and auditing institution change before and after restructuring.
Relevant principals in SZSE expressed that timely specific measures have been taken to address issues found in annual report audit and that SZSE would urge listed companies to make up the disclosure of major information and fully announce risks. Regarding foul plays, such as illegal fund appropriation, major accounting mistake correction, failure of performing review procedures in major transactions and failure of disclosing connected transactions, SZSE will amplify the supervisory efforts and adopt in time disciplinary punishment and regulatory measures to protect investors' interests. For any found clues of violating laws and regulations, relevant parties are advised to assist in investigation and report such violation to competent departments.
