An administrative penalty imposed by the Ministry of Finance attracted market attention and released a signal of strict management of financial supervision.
On March 3, the Ministry of Finance published the "Ministry of Finance imposed administrative penalties on Deloitte and Huarong in accordance with the law". According to investigations, China Huarong Asset Management Co., Ltd. (hereinafter referred to as "Huarong"), one of China's four state-owned financial asset management companies, had problems such as failure of internal control and risk control and serious distortion of accounting information to varying degrees from 17 to 2014. Deloitte Touche Tohmatsu ("Deloitte"), one of the Big Four accounting firms, had serious audit deficiencies.
According to relevant laws and regulations, the Ministry of Finance imposed a fine of 7,10 yuan on Huarong and its seven subsidiaries, and the relevant responsible persons also imposed fines ranging from 1,5 yuan to 2,12 yuan. Deloitte was warned that the illegal gains were confiscated and fined about 3 million yuan, and the operation of Deloitte's Beijing office was suspended for <> months, and the relevant responsible persons were also punished with the revocation of the certified public accountant certificate and suspension of the execution of the business.
In this regard, Huarong issued an announcement saying that it sincerely accepted the punishment decision of the Ministry of Finance. In this inspection by the Ministry of Finance, the company has recognized credit impairment losses and fair value change losses in the 2020 financial report. It will not affect the company's current and future business activities. Deloitte issued an announcement saying that it respects and accepts the penalty decision of the Ministry of Finance.
Why did the Treasury impose penalties on Deloitte and Huarong? What exactly is the penalty for both? And what signal is behind this?
Special inspections to identify problems
One of the responsibilities of the Ministry of Finance is to manage the national accounting work, supervise and standardize accounting behavior, guide and supervise the operations of certified public accountants and accounting firms, etc.
As early as 2021, Huarong released its 2020 annual report, which estimated that the net loss attributable to the company's shareholders in 2020 would be about 1029.1077 billion yuan, which attracted market attention. This is mainly due to the recognition of credit impairment losses and other asset impairment losses of about RMB6.2020 billion after a comprehensive review and assessment of risks. The serious loss caused by a large number of recognized impairments in <> is a concentrated embodiment of the aggressive operation and accumulation of stock risks during the tenure of former chairman Lai Xiaomin. Lai Xiaomin has been sentenced to death for bribery, embezzlement and bigamy.
The Ministry of Finance said that since 2021, the Ministry of Finance has carried out inspections on the quality of Huarong accounting information and the quality of its auditor, Deloitte, Deloitte. The Ministry of Finance set up a special inspection team to carry out on-site inspections of Huarong and Deloitte, interrogate and interview relevant personnel, review and copy relevant materials, extensively investigate and collect evidence, solicit inspection opinions from Huarong and Deloitte, and conduct several centralized hearings and expert demonstrations on the problems found in the inspections.
Li Baixing, dean of the Huaqiao College and professor of accounting at Capital University of Economics and Business, told First Finance and Economics that due to violations of laws and regulations, Huarong has previously been administratively punished by the former Banking and Insurance Regulatory Commission and other regulatory authorities, and some managers have been severely criminally punished. Under such circumstances, it is the duty of the Ministry of Finance to supervise and inspect Huarong's compliance with the Accounting Law in accordance with its supervisory duties. Deloitte is an accounting firm that provides audit services to Huarong, and when the Ministry of Finance supervises and inspects Huarong, it is necessary to inspect its professional conduct.
"In addition, according to the Measures for the Supervision and Inspection of Accounting Firms (hereinafter referred to as the Measures) issued by the Ministry of Finance in 2022, the Ministry of Finance also needs to supervise and inspect the practice of large accounting firms such as Deloitte." Li Baixing said.
Zhou Hua, a professor at the Business School of Chinese Minmin University, told CBN that the inspection and punishment of Huarong and Deloitte are routine work of accounting supervision. The above-mentioned Measures specify that, in principle, accounting firms above designated size will be inspected once a year, and regular "strict supervision" will be implemented. Financial supervision is an important part of the supervision system of the party and the state, and it is a normal supervision, and the people will become more and more familiar with financial supervision in the future.
After inspection by the Ministry of Finance, Huarong had problems such as internal control and risk control failure and serious distortion of accounting information to varying degrees from 2014 to 2019. Deloitte did not pay sufficient attention to the substance of Huarong's economic business, failed to penetrate the audit of the true status of the underlying assets, ignored the approval compliance of major investment matters, did not properly express audit opinions on identified abnormal transactions, failed to objectively evaluate the status of corporate assets, failed to accurately assess the reasonableness of the expected credit loss model parameters, did not maintain professional skepticism during the provision of audit services, did not effectively implement the necessary audit procedures, did not obtain sufficient and appropriate audit evidence, and had serious audit deficiencies.
Liu Junyong, secretary of the Party Committee and professor at the School of Accountancy of Central University of Finance and Economics, told CBN that Deloitte's problem, generally speaking, is that some aspects of the work are not in place and fail to meet the requirements of auditing standards.
Li Baixing believes that according to the Ministry of Finance, Huarong's problems are mainly due to the lack of relevant controls, Huarong has incurred serious asset losses, and the financial and accounting information disclosed to the outside world is seriously inconsistent with the actual situation of the enterprise. Deloitte's problem, which can be summarized as Deloitte's excessive trust in Huarong, omits some audit procedures that should be done, omits some audit evidence that should be obtained, and finally issues inappropriate audit opinions. The Ministry of Finance determined that Deloitte had "serious audit deficiencies" and did not define it as "audit failure", indicating that Deloitte did not collude or collude with China, which is Deloitte's response that it "did not have any dishonest conduct in the audit process".
What are the penalties?
In accordance with the Accounting Law of the People's Republic of China, the Certified Public Accountants Law of the People's Republic of China and other laws and regulations, the Ministry of Finance adheres to the principle of "proportionate penalties and fair law enforcement", and comprehensively considers the nature, extent, duration and scope of impact of Huarong and Deloitte's illegal acts, and gives corresponding penalties.
In Huarong, the Ministry of Finance imposed a fine of 7,10 yuan on Huarong and its seven subsidiaries, which is the top penalty imposed under the accounting law. According to the seriousness of the case, Huarong and other 19 responsible persons were fined 5,3 yuan, 1,<> yuan and <>,<> yuan respectively.
On the Deloitte side, the Ministry of Finance gave Deloitte Head Office a warning; Suspended the operation of Deloitte Beijing Office for 3 months; Deloitte Beijing Office confiscated the illegal gains and imposed a total fine of RMB 21190,44,<>, and Deloitte Touche Tohmatsu was jointly and severally liable.
In addition, according to the seriousness of the case, the Ministry of Finance imposed administrative penalties of revocation of CPA certificates to two responsible persons, including Jing Moumou, the CPA who signed Deloitte's relevant audit reports. The other 2 responsible persons were respectively punished with suspension of business, warnings, etc.
How to view the severity of this penalty, and what are the legal bases behind the respective penalty amounts?
Li Baixing said that on the whole, the punishment reflects strict supervision. The Ministry of Finance imposed a fine of RMB 7,10 on Huarong and its seven subsidiaries, which is the upper limit of the fine imposed on entities for violating the Accounting Law under the relevant provisions of the Accounting Law; Similarly, the fine of 6,5 yuan per person imposed on <> of the responsible persons is also the upper limit of the amount of the fine imposed on individuals for violating the Accounting Law. Although the amount of the fine imposed on Huarong is too low, it reflects the Ministry of Finance's administration according to law.
"From another point of view, although this penalty has imposed a top fine on Huarong's illegal behavior, the amount of the penalty is indeed too low compared with its illegal acts and the serious consequences caused, so it is recommended that the Ministry of Finance should accelerate the revision of the Accounting Law, significantly increase the illegal cost of units, increase the upper limit of administrative fines, and effectively increase the deterrent force." In addition, it should be noted that before the Ministry of Finance imposed administrative penalties on Huarong, Huarong had already been punished by other regulatory authorities for its violations of laws and regulations, and some of the responsible persons had already received severe criminal penalties. Li Baixing said.
He explained that the administrative fines imposed on Deloitte are based on the Certified Public Accountants Law, and according to Article 39 of the Law, if an accounting firm violates the law, "the financial department will give a warning, confiscate the illegal gains, and may also impose a fine of between one and five times the illegal gains".
Li Baixing said that the reason why the fine imposed on Deloitte was large in this penalty was due to the fact that the Ministry of Finance determined that Deloitte's illegal income was relatively large and imposed a fine of a higher multiple.
Liu Junyong said that the punishment was fair and just. Although in terms of amount, the amount of fines and forfeitures imposed on Deloitte is much greater than the amount of penalties imposed on Huarong, the penalties are the same, that is, the top punishment according to law. However, the amount of penalty imposed on Huarong is much smaller than the penalty on Deloitte, and I share the opinion of most people, it is indeed a bit low, but this is a top penalty in accordance with the accounting law. I believe that the upper limit of fines in the Accounting Law needs to be revised to increase the cost of violation and effectively increase the deterrent force.
Zhou Hua also believes that combined with the current socio-economic environmental conditions, the punishment of 10,2019 yuan on Huarong according to law is relatively limited. Future financial supervision needs to be strengthened through amendments and improvement of legal provisions. The administrative penalty standards of the Securities Law of the People's Republic of China, as amended in <> (such as fines of between one and ten times the business income or illegal gains), are more in line with the current socio-economic environmental conditions and can be used as a reference basis for subsequent amendments to the Accounting Law and the Certified Public Accountants Law. In fact, in recent years, the Ministry of Finance has been promoting the revision of the Accounting Law, the Certified Public Accountants Law and other laws, and our accounting and auditing scholars have participated in the discussion of the amendment of the law many times, hoping that the revision work can complete the amendment process as soon as possible.
In addition to the fine, the Ministry of Finance also imposed administrative penalties on the revocation of CPA certificates to 2 Deloitte signatory CPAs.
Li Baixing said that this is the most severe administrative punishment given by the CPA Law for certified public accountants to violate the law. Of course, the administrative punishment imposed by the Ministry of Finance on Deloitte does not reach the most severe penalty stipulated in the CPA Law, because the CPA Law stipulates that the most severe administrative penalty that financial departments at or above the provincial level can give to illegal accounting firms is "revoke", and the Ministry of Finance this time gave the administrative penalty of "suspending the operation of Deloitte Beijing Office for 3 months", as long as Deloitte can make a painful decision and take strong measures to ensure the quality of practice, its long-term operation will not be substantially affected.
According to the regulations, listed companies should release their audited annual financial reports on April 4, and some people believe that "suspending the operation of Deloitte Beijing for three months" at this time may cause the loss of Deloitte clients.
Li Baixing believes that the Ministry of Finance still has room for this punishment against Deloitte, as long as Deloitte Beijing does not issue audit reports during this period. It is expected that Deloitte should also be prepared for this, and it is expected that the audit business of the Beijing office will be completed by Deloitte head office or other offices during this period.
Zhou Hua said that the Deloitte penalty has been treated separately from the head office and the branch, which shows that the administrative law enforcement of the Ministry of Finance reflects the orientation of promoting the healthy development of the CPA profession with accounting supervision.
Zhou Hua believes that the penalty cases of overseas member firms of the "Big Four" accounting firms are the norm. In cases that shocked the world such as Enron, World Communications Company, Xerox, Parmalat, Olympus, Tesco, etc., news reports of the punishment of the "Big Four" accounting firms were often reported in the press.
Financial surveillance strengthens signals
In recent years, the central government has attached great importance to strengthening financial supervision, focusing on solving problems such as frequent financial fraud, distortion of accounting information, and the failure of the duties of some intermediary institutions as "gatekeepers", which can be seen from relevant documents.
In 2021, the General Office of the State Council issued the Opinions on Further Standardizing the Order of Financial Auditing and Promoting the Healthy Development of the CPA Profession. In February 2022, the General Office of the CPC Central Committee and the General Office of the State Council issued the Opinions on Further Strengthening Financial and Accounting Supervision to improve the accounting supervision system, improve the accounting supervision work mechanism, and severely crack down on outstanding problems such as violations of financial accounting laws and regulations.
Zhou Hua said that the administrative punishment imposed by the Ministry of Finance on Huarong and Deloitte is one of the supervision measures continuously taken by the Ministry of Finance to implement the spirit of relevant documents, earnestly perform the main responsibility of accounting supervision, and the administrative punishment procedure strictly follows the Administrative Punishment Law of the People's Republic of China, with conclusive evidence and accurate characterization, which is a typical case of continuous standardization of law enforcement in accounting supervision.
Li Baixing believes that the issuance of relevant policy documents and the severe punishment imposed by the Ministry of Finance on Huarong and Deloitte are a good embodiment of strict accountability and release the signal of "strict supervision" of financial supervision.
"This series of incidents shows the firm determination of the party and the state to crack down on violations of laws and regulations in accounting and auditing, and promote high-quality economic and social development by effectively strengthening accounting supervision." Liu Junyong said.
Vice Minister of Finance Zhu Zhongming recently said at the press conference of the State Council's new office that in 2023, the Ministry of Finance will carry out a special action of accounting supervision. We will persist in penetrating, filling loopholes, using heavy codes, and healthy practices, strengthen the supervision of the quality of accounting information and the quality of intermediary practice, seriously investigate and deal with financial fraud, accounting fraud and other violations of laws and regulations, and resolutely eliminate the "black sheep".
Mr. Zhu said the finance department imposed penalties on more than 170 accounting firms last year, more than in the previous three years combined. This year, we will continue to strengthen this work, in addition to the Ministry of Finance directly inspecting 35 accounting firms and 10 asset appraisal institutions, we will also organize financial departments across the country to carry out inspections with certain coverage. Strictly deal with and punish violations of laws and regulations found in inspections in accordance with the law, promptly issue inspection announcements and typical cases, and effectively make financial discipline "teeth electrified" and become untouchable "high-voltage lines".
Li Baixing believes that the Ministry of Finance's supervision and inspection of accounting firms and certified public accountants will be normalized. It is foreseeable that in the future, both the international "Big Four" accounting firms and large domestic accounting firms may suffer severe administrative penalties for their illegal acts.