Banking & Finance

A total write-off

Top Chinese auditor is wound up over scandal


Ruihua audited 213 A-share firms

In China’s auditing industry, Ruihua Certified Public Accountants was a would-be national champion. In its heyday in 2018, it was the auditor of 213 companies listed on the A-share market.

Its client book, however, was left with just one such entity last month, following a slew of scandals that cast a negative light on its integrity and credibility.

Jiemian, a local news portal, reported last month that the Beijing-based firm was preparing for dissolution, having deregistered at least 19 offices across the country. A notice issued by the Beijing Institute of Certified Public Accountants, which acknowledged that Ruihua had agreed to dismiss its Communist Party committee, also pointed towards its impending demise.

Founded in 2013, Ruihua was one of the first batch of auditors to be granted the licence to service companies with dual listings in mainland China and Hong Kong. It rose to become China’s second largest accounting firm in just a few years, thanks to a spate of mergers with other auditing firms that quickly extended its reach. Its revenue hit Rmb4 billion ($615 million) in 2016, just a little less than PwC, then the leading player, was making in China at the time.

The downturn in its fortunes came in 2019 after a number of its clients were found to have engaged in major malpractice.

The most infamous case was Kangde Xin, a maker of laminating film that is now being dubbed as “China’s Enron”. The Shenzhen-listed firm shocked shareholders in 2019 by telling them that it had misstated its cash position to the tune of Rmb29.9 billion. It was later found to have overstated its profits for four years by a total of Rmb11.5 billion through systematic fraud such as booking fictitious sales.

Ruihua was also blamed for dereliction of duty after Furen Pharmaceutical was caught falsifying financial data while failing to pay Rmb62 million in cash dividends.

These high-profile cases prompted a crackdown from the China Securities Regulatory Commission (CSRC) on local auditors, which at one point forced over 60 domestic firms to halt their IPOs or fundraising plans (see WiC463).

“Fierce rivalry has forced a lot of auditors to compete through price at the expense of service quality,” pointed out Sina Finance.

Last year the CSRC dished out a total of 314 administrative penalties worth more than Rmb4 billion. Over 100 A-share companies have also been fined for various wrongdoings so far this year.

The disciplinary actions followed a revamped Securities Law implemented last March. Aside from setting tougher punishment for malpractice such as insider trading, the new rules also targeted dereliction of duty by IPO intermediaries such as underwriters and auditors.

The more rigorous oversight persuaded a number of companies to reconsider their IPO plans. Earlier this year a random review by industry group the Securities Association of China led to 16 out of 20 applicants beating a retreat after their filings were deemed of shoddy quality. At least 60 companies have withdrawn their applications since January, Securities Times has estimated.

One of them is Unisound Information Technology, which pulled the plug on a listing plan on Shanghai’s STAR Market just 108 days after submitting its application. The Beijing-based artificial intelligence company explained that it would rather focus on growing its business for now, before reviving the plans to go public.

Unisound’s IPO messaging had puzzled investors and rivals. It piled up Rmb791 million in losses between 2017 and the first half of 2020; financial performance that jarred with the claim in its prospectus to command 70% of the domestic market in voice-to-text health record management, as well as voice-command solutions for home appliances.

iFlytek, a much more established AI rival (we first mentioned the company in WiC377), publicly challenged Unisound’s claims. Its rebuttal was a strong one: iFlytek said that its speech recognition technology was adopted by 489 hospitals as of June 2020, versus Unisound’s 112. And in contrast to the losses seen at Unisound, Shenzhen-listed iFlytek made a small profit last year.

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