China is moving to sharply increase penalties for auditors who sign off on fraudulent corporate accounts, widening a campaign against financial fraud by listed companies.
A draft amendment to the Certified Public Accountants Law – set for a second reading by the National People’s Congress Standing Committee, China’s top legislative body – would raise the maximum fine for issuing false audit reports to 10 times the gains accrued through fraud, double the present limit. It would also allow for business suspensions, licence revocations and practice bans in serious cases.
The current law has been in force for more than 20 years. The draft amendment would further regulate professional conduct, curb audit fraud and bring order to the auditing profession, said Huang Haihua, a spokesperson for the standing committee’s Legislative Affairs Commission.
“Financial fraud by listed companies seriously undermines the fair order of the capital market, and could lead to a misallocation of resources, harm investors’ rights and interests, and even trigger systemic risk,” Huang said.
A key change would extend liability beyond the auditors who sign off on accounts to others in the chain of fraud. The draft would impose legal responsibility on clients, audited entities and other parties that collude with or instigate accounting firms or accountants to issue false reports.
It would also impose penalties on audited entities, as well as related parties that supplied false accounting records or documents to accountants. Those whose violations constituted a crime would face criminal liability.
The revision comes as regulators step up penalties on audit firms. In April, the Ministry of Finance and the China Securities Regulatory Commission (CSRC) fined Zhongxingcai Guanghua Certified Public Accountants 252 million yuan (US$37.2 million) and suspended its operations for a year.
The case was linked to audits of manufacturer Dongxu Group and its subsidiary Dongxu Optoelectronic, which regulators found had inflated revenue by more than 64 billion yuan between 2015 and 2019, in one of the largest accounting frauds on China’s A-share market.
PwC’s mainland auditing arm, PwC Zhong Tian, was previously fined a combined 441 million yuan by the two regulators in September 2024 over audit failures in property developer China Evergrande Group’s fraud case. The firm was suspended from practice for six months and the registration of its Guangzhou branch was revoked.
The CSRC has launched three special campaigns to combat and prevent financial fraud by listed companies, the latest unveiled on April 24.
During the first two rounds, the regulator imposed 107 administrative penalties totalling more than 3 billion yuan. It also cancelled the securities-business registrations of eight accounting firms and 66 valuation agencies, and fined 60 intermediaries a combined 846 million yuan.
In the latest round, more measures have been adopted, including the use of artificial intelligence models to detect fraud and the establishment of a centre to monitor third parties that assist in falsifying accounts.
As of the end of 2024, China had nearly 11,000 accounting firms and about 105,000 practising certified public accountants, according to the Chinese Institute of Certified Public Accountants, an industry organisation and oversight body. -- SOUTH CHINA MORNING POST
