Caixin
Jun 22, 2016 05:47 PM

Leading Chinese Accountant Censured For Obstructing Bond Default Probe

(Beijing) – China's leading homegrown accounting firm has received stiff punishment from an industry body for obstructing a probe of one of its clients whose subsidiary defaulted on 2 billion yuan ($303 million) worth of bonds, amid a broader crackdown on financial shenanigans by big companies.

Ruihua Certified Public Accountants, LLP. was censured and ordered to suspend services related to bond issues for a year, according to a June 21 announcement by the National Association of Financial Market Institutional Investors (NAFMII), an industry body that helps the central bank regulate the 51 trillion yuan market.

Ruihua was punished for refusing to cooperate with NAFMII's probe of two projects related to Greenland Holdings Corp., whose subsidiary Shanghai Yunfeng Group Co., the company at the center of the default, has defied NAFMII investigators who have been examining the firm's bond defaults and apparent inconsistencies in key financial statements, according to several people close to the situation.

NAFMII started investigating Yunfeng and Greenland in April, after Yunfeng missed repayments on two privately placed bonds worth a combined 2 billion yuan. The defaults sent shockwaves through the interbank market, since investors thought the bonds were safe because Yunfeng's parent company is owned by the Shanghai government.

"Ruihua was the bottleneck that got the investigators stuck," a person close to NAFMII said. He added that Ruihua had submitted some of the requested documents shortly before the punishment was announced.

Ruihua released a statement on June 12 rejecting NAFMII's punishment as "unacceptable" and said it would seek to repair the damage caused by the decision through legal means. As a non-government body, NFMII has no formal powers to enforce its punishments, and has often been called "toothless" by observers.

Ruihua is also among six accounting firms and asset appraisal institutions facing scrutiny by the Chinese securities regulator on suspicion of helping listed companies commit fraud in their financial statements.

Ruihua is China's top homegrown accounting firm, and was ranked fourth nationally behind only the Chinese arms of global leaders Deloitte, PwC and Ernst & Young, according to a survey last year by the Chinese Institute of Certified Public Accountants.

Caixin has found what finance experts say are "highly suspicious" discrepancies between how Yunfeng's profits and debts were reported by Greenland on two separate occasions for the same period.

Ruihua was auditor for Greenland when it went public on the Shanghai Stock Exchange last June, and again when it issued a bond three months later. In both instances Greenland issued audited financial reports that included Yunfeng's contributions in 2013. But one report showed a net profit of 176 million yuan for Yunfeng that year, while the second reported a net loss of 490 million yuan.

Yu Chunbo, a Ruihua accountant who signed both reports, told Caixin the 176 million yuan loss figure was provided by Haitong Securities, Greenland's financial consultant, and they "do not know where the securities firm's data came from."

Haitong told Caixin it received the data from BDO China Shu Lun Pan CPAs, another accountant, which performed checks on Greenland's annual financial reports.

Experts say the discrepancy may have resulted from different methods of calculating the value of assets, but that a gap so large should have raised red flags for Ruihua.

Instead of relying on data fed to it, Ruihua should have "insisted on the accounting principle of prudence" and sought out the original financial documents for re-examination if necessary, a financial analyst said.

An accountant who works at a foreign-invested firm also said the gap is suspicious and may even indicate an attempt to exaggerate Greenland's assets before its initial public offering.

In another Greenland financial report audited by Ruihua, Yunfeng's debt-to-asset ratio at the end of 2014 was 98.2 percent. In its own financial report, Yunfeng said the ratio was only 83.6 percent. The two firms' financial reports also conflicted sharply on Yunfeng's net assets as of June 2015.

(Rewritten by Wang Yuqian)

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