China’s Enron?

Listed firm in a major new accounting scandal


Undone by Nanjing property

Between 1996 and 2000 the revenues of an American energy company broke new records, rising 750% to $100.8 billion. If that seemed too good to be true, it’s because it was. The firm was Enron and it was rigging its accounts.

Chinese media has been reporting on a local company that has been cooking the books too, albeit on a much smaller scale than Enron. The firm is Nanjing Textile and according to the stock regulator it inflated profits for five years running. The CSRC investigation found that fictitious returns of Rmb300 million ($48.1 million) were created between 2006 and 2011. In one year alone the P&L was boosted 5,500% by accounting tricks.

The size of the fraud isn’t jaw-dropping. But what is grabbing more attention is that Nanjing Textile’s owner is the city’s state asset administrator (Sasac). That makes it one of the most prominent cases in which a listed state-owned firm has been caught fiddling the numbers – and the first example to surface publicly over the past decade.

The wrongdoing at Nanjing Textile seems to have been prompted by fears that it would be booted out of the stock market. As regular readers will be aware, listed firms that make losses for three consecutive years risk being dropped from the bourse (a fate facing Nanjing Tanker, see WiC227). All the same, National Business Daily describes the fraud as “surprising”, noting that executives at state-owned businesses normally face much more regulatory oversight. With less personal incentive to cheat, they’re normally less motivated to indulge in account rigging too. Stock market scandals over dodgy balance sheets are more common among non-state firms, the newspaper points out.

Founded in 1978 and originally a maker of garments, Nanjing Textile floated in 2001 on Shanghai’s stock exchange. By this point it had already diversified into a number of other businesses from light industry to chemicals. More significantly it also set up a real estate company in the year it went public to develop a property portfolio in Nanjing. That firm, Landsea, accounted for the bulk of the parent’s profits over the next five years.

Between 2004 and 2009 the parent sold down its Landsea stake to a 21% holding. This hit annual profits, leaving Nanjing Textile with its more poorly-performing legacy businesses. A consulting unit – which also had a stake in Landsea – was sold too. (The purchasers of the shares were members of the property unit’s management, according to 21CN Business Herald, which grabbed headlines long before the CSRC’s more recent revelations.)

Nor did it help that Rmb1 billion was spent acquiring Nanjing Nantai International Exhibition, a division that only contributed a measly Rmb8 million in profits.

Nanjing Textile’s performance “nosedived” after its better assets had been stripped away, comments National Business Daily. To hide the decline, the management team then resorted to boosting the numbers, primarily with fraudulent export rebates and overstated contract revenues.

Already punished is Nanjing Textile’s former president, Shan Xiaozhong who was jailed last year (albeit for corruption rather than accounting fraud). According to 21CN he was sentenced to 13 years for siphoning about Rmb200 million from the company (which WiC hazards was a further drag on cashflow).

And now that the regulator has finally unravelled the extent of the company’s accounting deceit, what further punishment has the CSRC levied? Surprisingly, the retribution was not too onerous: the company has been fined Rmb500,000, while its three top executives have been fined smaller amounts and given warnings. The penalties provoked consternation in the press. The People’s Daily wondered how such a “light punishment” could be levied, adding “will the low cost of violating the rules only instead encourage others to commit fraud?” The newspaper argued that the securities laws needed updating to allow for bigger fines. Other media pointed out too that the company hasn’t been delisted, nor its auditor sanctioned for its failure.

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