Chiang Kai Shek College

Auditing Theory Term Requirement

Fraud Case: Dandong Xintai Electric Co. Ltd. fabricated documents and
altered account balances in the financial statements (Foreign)

Submitted by:
John William Boaz L. Soriano
BS Accountancy

Submitted to:
Ms. Cristy Joy S. Allauigan,CPA,MBA
Professor
BUSINESS OVERVIEW

Dandong Xintai Electric Co. Ltd is a company known for its distribution of energy
saving electrical transmission and transformation equipment as well as grid performance
optimization equipment. This company was started in 1999 and located in Dandong,
China. This business entity is also a subsidiary of Liaoning Xintai Co., Ltd which is widely
known in China. The organization is also doing research and development for their
product and services to be more enticing to the new customers and promotes loyalty
within their existing customers. They also manufacture their own products producing a
variety of products to offer. The energy saving electrical transmission and transformation
equipment contains oil immiscible power transformers, epoxy resin pouring transformers,
amorphous alloy iron core transformers, smart box-type substations, smart wind power
combined transformers and other merchandise that is within the company’s product line.

Oil immiscible power transformers Epoxy resin pouring transformers

The grid performance optimization equipment consists of products like

magnetically controlled shunt reactors, capacitive voltage transformers, high pressure
filter capacitors, arc suppression coil single phase and earth fault selection devices, air
reactors and other related products. The said products are mainly use for the power
grids, wind power generation, petrochemical, metallurgy, coal, electric railway,
photovoltaic power generation and also in other related fields

This company was out for the market as Initial Public Offering which the capital is
supported and funded by the Industrial Securities Co. Ltd. In its initial offering of shares
to the public in the year 2014, the company gathered a large sum of money totaling to
RMB 257,349,112.79 as a gross proceeds of the company. All businesses have spent
costs to garnered such earnings. When the Xintai company reported their initial expenses
to the public the proceeds or earnings have been deducted. The company’s net proceeds
when gross proceeds less the expenses incurred are RMB 219,999,987 which is good
start for a business which is just starting. The company’s Initial Public offering is
considered to be a successful in China.

SIGNIFICANT ACTIVITIES OF THE BUSINESS PERFORMING THEIR ILLICIT

ENGAGEMENTS

The company of Xintai Electric Co. Ltd has been an enticing organization on the
time they have offered their company to the public for the first time. They people of their
country is concentrated on their company, its recognition became an means for more
supervision, inspection and engagements with their government.

The CSRC ( China Securities Regulatory Commission) have been very attentive
to the transactions of the company and the documents the company directly produced
when they register for their Initial Public Offering. After some investigation conducted by
CSRC the company have received a notice about their administrative penalty and the
access of the market to transact with them have been prohibited. The notification has
been delivered to the company on May 31st 2016

The contents of the notice delivered to the company was about the anomalies of
the business financial transactions they been executed. This cause the company to be
suspended on their significant engagements needed in their daily operations. The CSRC
declared the company to be in their suspended listings of companies who are under their
investigation. And then, from that instant their company became physically and financially
distress. This suspension of the company became the first stage where the CSRC
consider other internal and external factors that the company might have a more
significant fraudulent activities that had been conducted in their past affairs.

Upon further investigation of the CSRC, they have gathered sufficient and
appropriate evidences to prove that the company conducted and performed illegal acts
to their transactions and their initial public offering. The evidence that the Commission
have collected from substantial factual information of the company shows that the
business records verified by them have been tampered and altered by the people who
directly carrying out the reports which is approved by the management and those charged
with governance in the organization. The important documents submitted by the company
about their financial capability and position is fallacious which makes the CSRC more
suspicious on their internal environment and to broaden their analysis about the entity.
The CSRC explored the in the Financial statements of the company that has been audited
internally and they have discovered more facts about the false recording of transactions,
major omissions, and manipulation of the financial data of the company about their
periodic reports that have been disclosed after their initial public listings to be open for
public market in the China.
 The following statements below are the sub contents of a major engagements and
transactions of the company that is proven to be fraudulent and falsely documented.

A. Documents of Xintai Electric co. Ltd for the Application of the company as an IPO
that deems to be proven fraudulent

The company have submitted documents to the CSRC for their application as an
IPO in the year 2014. Written forms, permits and other needed materials have been
forwarded to the commission for the approval of their application. Included in the
submitted forms is the financial statements of the business entity which is a sufficient
evidence that the commission have been gathered. The financial statements specifically
in the balance sheet of the organization which the committee have discovered the
problem of the company as to the balance of their accounts receivable which is
overstated. The investigators have uncovered that the organization dealt with their
difficulty as to their overstated accounts receivable by reducing this through the use of
external commercial borrowings to show off more cash as their evidence to hide the
excessive receivable accounts which is falsely recorded. The borrowings they made to
the external parties have been paid to a strike which happened on the next period.

The investigators also have encountered transactions of the company from year
2011 to June, 2013. From that two and half years they have gathered evidences which
have showed fabricated and invented collections of accounts receivable amounted to
380.58 million yuan which shows a good sign for the company and entice the investors
to devote their money and invests it to the company. The bad debts expense or reserve
of the company have been missing which added to the cash of the company amounting
to 16.98 million yuan and bloated the net cash from the operating activities which
amounted up to 240.84 million yuan. This files submitted by the company became
fraudulent because they deceived and conned the people who wants to invests in their
company.

B. Overstatements of the company’s accounts receivable

The company of Dandong Xintai expected to receive accounts receivable from

different subsidiaries of Xintai Electic Co. Ltd. The two other subsidiaries of the company
of Xintai is Daqing Xintai Co. Ltd and Daqing Xinheng petroleum equipment Co. Ltd.
Based on the audited report of the financial statements of the business at the end of the
year 2015 they estimated and anticipated to have accounts receivable from Daqing Xintai
amounting to 14.656 million yuan and another accounts receivable from Daqing Xinheng
amounting 18.3626 million yuan. The audit evidences gathered by the auditor is not
sufficient to support the expectations of the management and it increases the uncertainty
for the company to not withdraw the receivables predicted on the audited report.
 The management executives of Xintai have made-up statements to hide the
dilemma of the company as to their accounts receivable. Their statements includes the
rationalization of the company that even if the two subsidiaries of Xintai cancelled their
registration they are still liable to the company because this is the protocol they have
inside the organization between related parties once a debt it must be transfer in all
circumstances. Some accountants in the company disagree to the decision of the
management because the cancelled debt of the related parties upon the postponed
registration must be declared by the company as their bad debts expense for the period
it was happened. The company’s decision of inflating the accounts receivable which must
be recorded as bad debts affects the integrity of the whole organization about the
effectiveness and efficiency of their operations . This event only shows that the company
had been doing fraudulent activities to make their appearance to the stakeholders
trustworthy and make their financial information are reliable

C. Overvalued amounts of other receivables

Based on the audited financial position report of the company there are other
receivable accounts that the company expects to receive. Salesman borrowings
amounting to 82.3115 million yuan and non-employee borrowings 41.7994 million yuan.
This estimated amounts as to their other receivables have no sufficient appropriate
evidences to support the data that has been disclosed by the company. The management
decided to do this actions to continue their operations and to show that the company
transactions are running smoothly specially on their financial capabilities. But at the audit
report the management expose the truth and issue a disclaimer of opinion as to the
fairness of the presentation of their financial statement and supported by admitting that
the improper use of their internal controls is the main reason to manipulate and alter
company’s funds.

Financial ratios of current assets as to the current and total assets

Items 2015 2014 2013

Receivable account 49445.77 39004.90 20781.95

Current asset 95530.64 85509.73 57408.24

Total asset 119486.37 104339.25 75108.83

Ratio of receivable account 0.52 0.46 0.36

to current asset
Ratio of receivable account 0.41 0.37 0.28
to total asset
The table shows the percentage of financial ratios of the accounts receivables net
of allowance for doubtful accounts to the total current asset and the total assets of the
company recorded and presented in their audited financial statements. According to the
calculated amounts presented in the table mostly the accounts receivable has a major
share in the total and current assets. Because of the inflated accounts receivable they
have calculated incorrect financial ratios that is significant in the decision making of the
stakeholders of the company or any person who wants to use the information given by
the financial statement specifically the financial position where the receivables are
presented. As you can see in the table above there is a significant increase at the end of
each year since 2013 up to 2015. There are more accounts affected by this changes
specifically the sales of the company, since the sales account includes cash sales and
sales on accounts, the receivables mainly affect the operating revenue of the whole
organization which is more than 50% of than the cash. The management decision to do
fraudulent alteration to the accounts has a domino effect to different operating segments
of the company. The expected revenue which is the inflated accounts receivable is not
really an additional proceeds to the company but it boosts the company to have
irrevocable debts at the end of the period.

TBEA Shenyang Transformer Company is a business that is in the same industry

as Xintai. Comparing the two companies both audited financial statements it show that
there is a significant difference between the values of the financial ratios computed by
both companies. The two organizations have the most similar business model with each
either so the investigators expected that they must attain a reasonable difference between
a relevant change based on the two indicators which is the accounts receivable turnover
and total asset turnover. This information from the similar company is an additional
information or evidence gathered by the CSCR investigators to prove that there is a
malicious and fraudulent activities in the transactions of the company of Xintai mainly its
inflated accounts receivable that results to miscalculation and misrepresentation of the
company’s financial position.

Items 2015 2014

Xintai TBEA Xintai TBEA

Receivable account 0.84 4.47 1.40 5.42

turnover rate
Total asset turnover rate 0.004 0.03 0.05 0.03

Comparison of correct receivable and total asset turnover of Xintai Electric Co.
Ltd. and TBEA Company

Two similar companies within the same industry have been compared in the
investigation to gather more evidences about the fraudulent activities of the Xintai Electric
 Co. Ltd. The table shows the comparison made between the Xintai and TBEA company
on their receivables and total asset turnover. Based on the information, the company of
Xintai is left behind in terms of their receivables which garnered a low level comparing to
its industry. Also the total assets are affected by this low level account receivables
because it is a major component where liquidity of the company relies on as the same as
the cash balance. This extreme variations between the two companies made the
company’s management to decide on manipulating their balances so that they will not be
left out on the industry and they entice more stakeholders to invest their time and effort
to the business. This circumstances was an opportunity for the company to exaggerate
revenues and manipulate profits which makes it more substantial proof for the illicit
activities made by the Xintai Company

Items 2015 2014 2013

Net cash flow occurred during 1933.23 −15178.97 4095.98

business activity

Net profit 567.82 4409.98 6292.48

Ratio of net cash to net profit 3.40 −3.44 0.65

Financial Information of the net cash to net profit

This information presented in the table is the true value of net profits of the
company of Xintai for the year 2013 to 2015. The data gathered shows the relationship
between the cash flow generated from the operations of the business and the net profits
earn by the entity. The fluctuations from year one to year three is significant deviations
that can affect the whole organization. The differences between the financial ratios one
each periods manifested a high probability of fraudulent alterations and manipulations of
management to the profits of the company.

DEFICIENCIES OF THE COMPANY ON ITS INTERNAL CONTOLS

The CSRC discovered that the internal controls that the company of Xintai
generating to the whole organization is not effective in detecting, preventing and
correcting error and fraudulent activities. The following are the components of the internal
controls of the entity which is deficient.
A. Control Environment
1. Management Philosophy – The company of Xintai Electric Co. Ltd had been
investigated that the actual controller of the entity is Deyi Wem which also the
director, chairman and the general manager of Lianing Xintai in China. This kind
of attitude of the top management is adapted by the lower management. The
managers did not take seriously the treatments and policies on presenting
accounting information because there is only one person that have the power to
decide. Managers begin to tampered the accounting information of the company
for their own benefit and they have violated the laws and regulations of the whole
organization. This leads to a low quality, less reliable, not relevant accounting
information.

2. Integrity and Moral Values – The operator and accounting supervisor did not
comply to the Code of Conduct of their working responsibilities. The fraud in
financial information of the company’s production and management which includes
supplies, storage, production and marketing and other personnel or staffs in
different divisions in different working responsibilities. Accounting supervisors of
the company manipulates the accounting information and they disregard the
values of being trustworthy and honest. In each product line on their production
one employee adapts the work or the process of the another which constitutes
fraudulent actions in the final output that they offer in the public and private market.

3. The Board of Directors of Xintai Electric Co. Ltd – The direct shareholder of
Liaoning Xintai , the chairman and holds more top management positions in the
company and with his wife directly and indirectly held a total share of Xintai’s
shares up to 32.21%. The second shareholder of the company Liaoning Shuguang
Industry Co. Ltd. in China which holds a share of 8.16% in proportion to the whole.
Because of the centralization of the business structure, the Board of Directors was
not occupied by any person or employees in the lower management. The husband
and wife have a complete governance and control to the decision making of the
whole organization. Xintai have made up an audit committee which is mainly
provides the company’s internal environment transactions more reliable and
reasonable assurance that the financial statement are fairly stated. The audit
committee of Xintai consists of seven members including three independent
directors. Although they have provided the company an audit committee the
controlled is already in the chairman of the board which the CEO or the largest
stockholder in the company which makes the committee a disguise which hides
their fraudulent activities. Before, the discovery of fraud in company, the
independent directors who has the job to inform the basic matters about the entity
did not perform their specific responsibilities. The important matters consists of the
internal control of the company, the firm hired by the entity, annual financial reports
and the other basic public issues that organization faced. The role of the
 independent directors is not taken with proper diligence and they did not safeguard
the assets of the whole organization.

4. Human Resource of Xintai Electric. Co. Ltd – The place where Dandong
Province is located is not a developed region in China. The city lacks of highly
improved technologies and skilled people to be a part of their human resources.
The department of human resource currently working in the different positions in it
cannot adapt totally to the changing environment and cannot expanding their
knowledge because of the scarce resources in the city. The hired members of the
department also has insufficient capabilities in terms of the financial management,
operating efficiently and effectively and low quality of transaction in the capital
markets.

B. Risk Assessment

China is the most complicated country towards the market oriented transactions in
the present time. The economy of china is a slow growth country and the structure is
always adjusted to changes in the environment. Business risk facing by the company is
in a very high rate and a lot of effort is exerted by the company to minimize the effects of
this risks. The cost of labor which is an expense to the company rises frequently because
of continuous changes and the operation of the company is always disturb by high cost.
The industry where Xintai power transmission system and control equipment is under the
macroeconomics policy and it is susceptible to relevant changes in the industrial policies.
The company’s monopolized decision making and control over the organization do not
minimize the risks during the operations because the employees does not have the
initiative to respond to it when they experience it.

C. Control Activities

Xintai have five control activities present in the entity which consists of business
authorization control, responsibility division of labor control, accounting system control,
physical control and independent inspection. The segregation of duties in the organization
is not functioning well and there are any deficiencies exposed when it was investigated
by the CSRC. The management has the opportunity to manipulate the accounts on the
financial statements because they have freedom to this kind of illicit activities. The
independence and integrity of the organization is lacking because the controlling
shareholder is the one who decides all of major and significant events or transactions that
may happen in the company. The company does not comply with any standards or
policies in reporting and presenting the cash balance, inventory accounts and significant
accounts in the financial statements. The CSRC also gathered evidences that the some
of the contracts in sales which includes the time and period of payment, terms of payment
and other provisions were not reviewed and approved by the Chief Executive Officer or
 any top level management. Also included in the information gathered is the specific issues
relating to the account receivables. The cash flow control activities were also discovered
to not functioning well and design is not good to detect fraudulent activities.

D. Information and Communication

The information system of Xintai had just been built up and implemented, and there
was no timely, incomplete, and inaccurate communication between the various functional
departments and the management within the company. Thee data was severely
asymmetric as well. According to the study, Xintai accountants in charge of unique fund-
raising accounts have frequently altered. The employees did not follow the rules to
complete all the transfers, and the accounting executives did not report the problems to
the leaders and sought solutions together. In the end, only the lack of communication led
to the delayed and incomplete fund-raising accounts for a long time.
Ultimately, only the absence of communication has resulted in long-term delayed and
unfinished fund-raising accounts. As far as external disclosure data is concerned, it
included the following events when Xintai Electric transferred the assets and returned to
made-up accounts receivable from 2011 to 2014 at the start of the next accounting period,
leading in fewer clauses for poor loans receivable from accounts.
Xintai Electric sold to its associated parties four house properties. However, it did not
present the problem to the Board of Directors and the Board of Supervisors for
deliberation as a linked transaction, nor did it reveal the problem in August 2015 in a
timely way.

VERDICT TO THE CASE OF XINTAI ELECTRIC CO. LTD.

China Securities Regulatory Commission (CSRC) released an announcement on

the day of June 1st of 2016 when the regulatory body finished the investigation for the
Xintai Electric Co. Ltd case on fraudulent transactions and other illegal engagements of
the company. Based the sufficient and appropriate evidence gathered the CSRC notified
and announced the prohibition of Xintai to the market of China. The regulatory body gave
their judgment to the administrative penalties that the business will compensate to the
commission. The decision of the commission is to delist the company of Xintai, and this
was first time in the country to be delisted because of fraudulent issuance of information
relevant for decision making which concerns many investors and regulators of the
organization. On the date of 25th of August 2017, this was the last day Xintai take up a
proportion on the market share of the industry. After this date the company until the
present time will never be back on the market again because it was forcibly delisted on
the market industry due to fraudulent initial public offering and other illicit transactions
made by the management.

VIOLATIONS AND PENALITIES OF XINTAI ELECTRIC CO. LTD

 The China Securities Regulatory Commission have a basis where to classify each
fraudulent activities and illicit acts an organization will carry out in a certain period of time.
There are three aspects present in determining what kind of fraud and the applicable
administrative penalties relevant to violations an organization will do. The three aspects
used by CSRC are fraudulent issuance, illegal information disclosure, and violation of
provisions on relevant institutions engaging in securities business. The CSRC has been
very strict on the supervision of the companies registered to them. Because of this
updated processes of the commission, Xintai have been investigated further and
discovered that the company had been altering their financial statement transactions.

Fraudulent issuance and illegal information disclosure made by the company was
measured by:
1) Fabricated information in the financial statements which is disclosed by the company
2) Inexact financial data, deficient basis, selective and inflated disclosure, and
misrepresentative statement by the organization
3) Material misstatements of the financial information submitted and disclosed, containing
of the failure to disclose related party and affiliated transactions, significant change in
equity compositions, most important issue of independency and material amounts
overdue, breach of contract or collateral.

Penalizations to the Issuer

1. The company of Xintai Electric was commanded by the commission to correct their
mistake on the presentation of accounts in the financial statements of the
organization. Also they have received a notice of warning and ordered to take
corrective action, given a warning letter and compelled a fine a large money
amounting to 8.32 million yuan.
2. Wen Deyi a key official and the person who have the most positions handled in the
organization received a notice of warning in the form of a letter and imposed a fine
amounting to 8.92 million yuan.
 3. Liu Mingsheng was also given a notice of warning in a form of letter and imposed
to him a fine amounting to 600 thousand yuan.
4. Yu Xiaoyang and Wang Yongheng each of them was also given a warning letter
and imposed a fine amounting to 200 thousand yuan.
5. Sun Wendong, Cai Hong, Chen Bochao, Song Liping and Chen Yuchong each
this key officials was given a notice of warning in a form letter and compelled them
a fine amounting to 80 thousand yuan.
6. Jiang Guangfu, Zhao Chunnian, Fan Yongxi, Han Dong and Sun Honggui each of
this key offcials was also given a notice of warning in a form of letter and compelled
a fine amounting to 60 thousand yuan.
7. Wang Jianhua and Hu Xiaoyong each of them also was compelled with a fine
amounting 50 thousand yuan.
8. Du Xiaoning was imposed a fine amounting to 30 thousand yuan.

The Chief Executive Officer of the company and also the controller of the
organization who is Wen Deyi was subject to dual or double penalization because he is
the person who is directly responsible for the alteration of accounts in the financial
statements. Also because he was governing the whole organization and do not correct
the unethical actions of the company but tolerate this kind of acts. The CSRC have
decided to give him a notice of warning and imposed a large sum of money amounting to
8.92 million yuan which to be paid in a certain period given by the commission.

Prohibition of the business to engage in the activities of the market

The company of Xintai Electric Co. Ltd has been permanently ban by the
commission in entering to the market and having significant transactions to the different
parties. The key officers of the company which is Wen Deyi and Liu Mingsheng was also
prohibited for their whole life in engaging to different activities in the market whether not
the same industry. The CSRC have decided that the two key officials cannot take any
position as a director, supervisor or senior executive of all the listed in the record from the
date of the issuance of the commission’s decision.

Violations of the benefactor of the organization

1. The recommendation report collected and gathered by the Commission while
investigating the records of the sponsors of the business found out that it was false
information that was issued by the partner of the entity who is the company of
Industrial Securities Co. Ltd.
2. The sponsor of the business which is the Industrial Securities Co. Ltd. under the
investigation of the commission have failed to examine and validate if the
documents of their partner which is Xintai Electric Co. Ltd. are authentic and
accurate Initial Public Offering documents are presented and submitted.

Based on the data released by the China Securities Regulatory Commission, the
 Industrial Securities failed to observe and check the documents of the issuer about the
IPO information upon recommending the application of the Xintai Electric Co. Ltd.
matching with the business rules and the standards of the industry. The negligence of
the benefactor company about the accounts receivable and bank deposits of the issuer
company which is Xinati Electric Co. Ltd., they have distributed and presented
fabricated documents.

Penalizations to the benefactor of Xintai Electric Co. Ltd:

1. The company of Industrial Securities Co. Ltd was given a notice of warning in the
form of letter and had a fine amounting to 12 million yuan from funding income
repossessed with a charge of 24 million yuan and it also has a penalty of 20.78
from financing income retrieved with a charge amounting to 600 thousand yuan.
2. The key officials of the company, Lan Xiang and Wu Wenxiang were given notice
of warning in a form of a letter with a penalty amounting to 300 thousand yuan
payable by the both of them and their licenses to practice the profession they
have had been annulled.

A significant statement was disclosed by the China Securities Regulatory

Commission upon their decision about penalties to the Industrial Securities Co. Ltd. The
benefactor must set aside a separate fund amounting to 550 million yuan to compensate
the unconscious investors of the secondary market suffered from the falsified information
presented by Xintai Electric Co. Ltd.

Infringements made by the authorized Accounting firm of the company of Xintai

Electric Co. Ltd:
1. The accounting firm partner by the organization is Xinghua Accounting Firm. The
firm has the primary duty to verify the presented accounts in the financial
statements if it was fairly presented and free from in all material respects. Under
the investigation of the Commission the accounting firm failed to perform due
diligence when validating the accounts presented in the financial statements during
the period of the Xintai Electric Co. Ltd filed an application to be an IPO and
released fraudulent information that are included in the audit report.
2. Failed to perform its obligation as an auditor in the year 2013 in presenting fairly
stated financial statements and including false data in its the audit report
3. In the year of 2014 the accounting firm neglected material alteration in the financial
statements of Xintai and presented false audit report.

Based on the public information presented by the CSRC, the accounting firm was
unsuccessful to perform its duty in giving the appropriate information on the entries and
transactions made by the company about the organizations accounts receivable that can
affect the income of the company, accounts payable and the advance payments made
by the company while applying to be an IPO. The accounting firm do not present sufficient
and appropriate evidences to support the audit report. Confirmation requests made by
the auditor to support the accounts receivables of the company do not get a reply to their
request and the advance payments does not really exists. The adoption of substitute
procedures, insufficient audit evidence and failure to verify the significant deviation on the
bank accounts of the company are the grounds to support the violations made by the
accounting entity.

Penalizations to the Accounting Firm of Xintai:

1. The accounting firm of Xinhua was ordered to take corrective actions on the
mistakes that they have made. The commission confiscated the income of the
business amounting to 3.2244 million yuan including a charge amounting to 9.6732
million yuan.
2. Wang Quanzhou, Yang Tiehui and Wang Quansheng the key officials of the
Xinhua accounting firm were each given a notice of warning in a form of a letter
with a charge of 100 thousand yuan each of them.

Prohibition of the Commission to Xinhua to access the market

The China Securities Regulatory Commission gave notice to the accounting firm
of Xinhua about their prohibition to the access in the public and private market as a result
of the failure to detect the fraudulent activities made by Xintai Electric Co. Ltd. The notice
contains the information about Wang Quanzhou and Yang Tiehui as key officials of the
firm they cannot contact any parties in the market and also the company cannot enter into
engagements in the whole market. The prohibition to access the market has a time period
of five years and after that they can practice again their profession in the firm. The specific
terms is that in a span of five years the key officials cannot obtain any top management
position and the position where the person is charge for the governance taking effect in
all listed companies in all industries. The notice given to the accounting firm was
announced publicly to the people of China and all the parties affect by the fraudulent
activities made by Xintai.

Non-compliance and breaches made by the appointed Law firm of the company of
Xintai Electric Co. Ltd:
1. The records presented by the company of Xintai was falsified and the law firm of
Eastbright disclosed legal opinions to that data given by the management of the
company as the basis for their judgements.
2. The law firm of Eastbright based on the investigation and evidences gathered by
the CSRC, the firm have violated the requirements and pre-requisites written in the
Rules for the Securities Practices of Law Firms in China.

Based on the records corresponding to the evidences gathered by the China

Securities Regulatory Commission, The Eastbright law firm failed its duty to perform its
tasks and obligations to give a relevant and reliable information on the legal aspect of the
business to the intended users of the company of Xintai. The proofs collected by the
Commission showed that the confirmation requests to the banks, commitment letters and
records of the interviews made and presented in the working papers of the law firm was
in line with the statements and recommendations made by the benefactor of the
organization which is the company of the Industrial Securities which failed to verify the
altered accounts provided by the management specifically the inflated receivables of the
company of Xintai. Furthermore upon the checking of the examinations and planning
stage of the law firm it appears that they have failed to discuss it in the team and no review
of the legal opinion was made by the team who execute and works with the company. It
also seen in the official documents that the records of interview and the significant written
representations were not signed by then parties present in the consultation of legal
matters. Lastly, the official seal of the law firm is not affixed in the important records it
must be present.

Penalizations to the Law Firm of Eastbright:

1. The Eastbright Law firm was instructed by the CSRC to take correct actions to
their mistakes in giving their legal opinions on the company of Xintai. The
commission taken away the net income of the law firm amounting to 900
thousand yuan with a charge of 1.8 million yuan.
2. Guo Lijun and Chen Yanshu, the key officials of the law firm who have a direct
obligation and responsibility to the false legal opinions was given a notice of
warning in a form of letter by the CSRC with a fine of 100 thousand yuan for
the both of them.

REVIEW OF RELATED LITERATURE

Camsing International financial fraud constituted by the CEO
This company have significant transactions made and written in the history of the
Chinese market. The biggest and the latest transaction made was the POW
Entertainment which is owned by the late Stan Lee and because of his death it was an
the opportunity to the acquirer to buy it. It was a successful engagement between the
both of them. The Chinese organization was governed and founded the by CEO which is
Lo Ching. In year of 2017 the chairwoman of Camsing was arrested by the Chinese
authorities because the officers saw a large deviations and suspected fraudulent activity
in the shares of the company. The shares of the organization of Camsing was proven to
deflate by 90 percent in the market. The person accused was involved in different kinds
of fraud related to major Chinese financial institutions and e-commerce companies.
Camsing International have several subsidiaries across the world, it has expanded
throughout the years. One of the subsidiary of the parent company is Camsing Global
which assumed to have released financial products amounting to a large money of more
than 500 million dollars by taking the advantage to report expected revenue to be earned
from huge e-commerce companies of JD. Com and Suning.com as an already realized
proceeds and income of the company. Because of the alleged accusations to the
company of Camsing about their falsified documents and business contracts the two e-
commerce companies have a high risk and possibility of being defaulted on their unpaid
billings consumed. The company of Camsing operates in various kinds of business
specifically in media and entertainment industry which encompasses the theme park in
the province of southern China and another business which its main products and
services offered is mostly movies and selling of branded international products which
came from the Hollywood like Transformers and Kung Fu Panda.

The case filed to the chairwoman Lo emerges so fast and it is spreading quickly
on China. The police from Shanghai who were designated to perform the process of
detaining capture more than 10 employees of the organization of Camsing Global, as well
as the personnel from the forerunner in Chinese wealth management which is Noah
Holdings. The organization of Noah Holdings was involved in distributing the financial
products to Camsing. The company of Noah has been alarmed on the company of
Camsing Global after its detection of a significant risks on the products. Noah first call the
attention of the accused chairwoman Lo and taken internal investigation and requested
meeting. Noah company demanded Camsing to increase the fundraising amount
because of the allegations of suspicious accounts. But upon further investigation of Noah
they failed to eliminate their worries in the suspicious balance s of accounts so they have
reported it to the police who can corroborate more evidences to support the allegations.

The company of Noah and JD.com have given each other false accusations to
each other about the real entity who have the primary responsibility for the supervision of
the organization of Camsing have failed to their duty and that event became an
opportunity for the company of Camsing Global to perform a multi-hundred-dollar fraud.
Noah Company have filed to the court a lawsuit against the Camsing Global and JD.com
for the claim that the supply chain is not a fraudulent act but the actually it is.

According to JD.com company on the released statement "We are shocked that
this occurred and have been cooperating with the police on this issue". The entity of
Jd.com have never received any verification requests from the company of Noah
regarding the financing of Camsing's financial products. And also this statement of
JD.com places the blame of the accusations to the company of Noah for failure to detect
risk control flaws.

According to the company of Caixin, most of Camsing's financial products in question

are ultimately ensured by Chairman Lo's personal assets. The news about the
speculations of fraudulent activities, the investigation reveals that the total assets of
Camsing was less than the value of 5.8 million including all of her properties, vehicles
and all bank deposits they made. The shares of the parent company which Camsing
International fell a bit much lower than 15 percent as a result of the report provided by
Caixian. After a tremendous week for the company of Camsing the comoany sahres
deflate 91 percent and the computed market capitalization was lower down to 700 million
dollars.

Accounting Firm who act as an external auditor of fraudulent companies was

barred to operate

A financial intermediary of Zhongxinghua Certified Public Accountants LLP was

the latest focus of the China Securities Regulatory Commission because of the
delinquency of the company to follow the rules and regulations of the proper disclosing
the information needed to be presented in the public. The firm failed to practice their due
diligence to detect material and significant errors and alteration in the financial statements
of their clients. The accounting firm was banned on the month of July 15 because of
conducting debt financing related business and was given a notice of warning. Included
in the notice received by the firm was to correct the misconduct they have made based
on the report of the National Association of Financial Market Institutional Investors who
operates as a bond market regulator. One of a major company that the firm audits is the
Reward Science and Technology Industry Group which sells chemicals and dairy at the
same time. This company was found out to be performing fraudulent transactions and
altering account balances in the financial statements based on the audited financial
statements of the company dated 2017. The issue of this conglomerate company is that
they was bankrupt because they was trapped and defaulted with 6 billion yuan which is
converted to 872 million dollars amount of bonds payable.

The accounting firm of Zhongxinghua was called a key gatekeeper because they
have the access to the market and the companies who will use their services will have an
reasonable assurance that the financial statements presented are reliable. Because of
this the accounting firm of ZhongXinghua was guilty of the failure to perform the proper
audit procedures needed. And not really obtaining the sufficient and appropriate
evidences to support the claim of fairly stated financial statements of different entities they
offered their services. The institution of NAMFII said that the accounting firm violated the
industry rules and break the norms in the business.The case of the accounting firm of
Zhongxinhua adds up to the emerging list of financial intermediaries who failed to operate
in line with what is their intended responsibilities to the client and the public market. This
company was included in the accounting firms that was found out to be accountable for
the clients claim of fairly stated accounts. This issues was faced and concerns the
regulators of China because they must be the role models in presenting and stating facts
in the people or the intended users of financial information but they failed to comply to
such standards. Others caught up in the performing the same activities include
Ruihua Certified Public Accountants, one of China’s largest accounting companies
present , and GP Certified Public Accountants Co. Ltd.,
Guangdong's largest auditor.
 According to the regulators who were performing the investigation about the
companies transactions to different entities they have found out that the accounting firm
of Zhong Xinhua failed to check the actual and total assets of the company of Reward
Groups. The external audit firm disregarded the company’s documentation about the
substantial business performance of the company when it signed the company’s financial
report and disclosed the audited financial statement and released audit opinion to the
public users of the entity. As for the further investigation on the accounting firm they also
have found out the Reward Group was a privately owned company which failed to pay
the debt they have in a form of bonds payable amounting to a large sum of money exactly
300 million yuan in the year end December 2017 even if they have reported that the
company’s cash was amounting to 4 billion yuan. The company of Reward Group who’s
defaulted the bonds triggered a 6 billion yuan cross defaults which includes a 200 million
offshore bonds because of the complexity of the companies guaranty with their third party
partners.

Reward Group’s altered financial information

The investigation of Caixin company was resulted to facts that is an important
evidences to the fraud made by the company of Reward Group. The institution of the
Reward Group was falsely disclosing and recording financial data on their financial
statements. One of the evidence is that the company’s assets which is presented was
actually an asset pledged to secured creditors and the entity failed to include the real
application of cash and its purpose in the disclosures presented in the public. The entity
was allegedly overstate the revenue presented by the means of altering the transactions
made with the related parties and other major partners of the company. This informations
was the basis of the firm of Zongxinhua to issue a disclaimer opinion on the condition of
the financial stability of the company. The have included in the disclaimer that the Reward
Group company as of December 2018 have a total assets amounting to 18.4 billion yuan
consisting of 497 million in a form of cash which is stated that 414 million yuan are
restricted for the debt and cannot be use for the daily operations of the company. The
company of Reward Group has decide to filed bankruptcy dated June 2019 because of
the many debts that they have. According to the statement of the National Enterprise
Bankruptcy Information Disclosure Platform the company of Reward. Group had 11.2
billion yuan only that must be presented on the balance sheet as of December 2018 with
existing debts payable of more than 6 billion yuan. This financial information was the basis
of the company in filing bankruptcy because of it cannot perform to pay the debts that
they have made. The top regulators who is responsible for securities issued a charge and
penalty order to the company of Reward Group in the month of July 2019. The penalty
was designated to the major shareholder of the company who have the controlling interest
in the whole organization. This key officials named Hu Keqin major stockholder and
financial director Zhao Jingwen because of their violations in the proper disclosures that
must be made.
Investigation on alleged fraud of auditors in the Kangde Xin Composite Material
Group Co. Ltd
The China Securities Regulatory Commission was alarmed to increasing cases on
fraud in Chinese market. When the issue of the alleged fraud in the financial information
of the company of Kangde Xin Composite Material Group Co. Ltd. was been brought up
the regulatory commission did not missed any time and they have investigated the
company as soon they have known the reports. The CSRC made inquiries and
observations to the company and after that they have exposed a huge scandal made by
the listed company which is they have altered some of the account balances of their
business. The external auditor of the company of Kangde Xin Company was the
accounting firm of Ruihua Certified Public Accountants, which is one of China’s huge
financial intermediaries is also under the investigation of the China Securities Regulatory
Commission because it was the key gatekeeper of the company to access and
recommend it to the public market. The accounting firm have failed to comply with the
requirements of the Commission to disclose and prepare an audit report about the
condition and state of the financial stability and capability of the client’s business. This
accounting firm is the external auditor of Kangde Xin Company since 2012 and its
responsible for the Shenzhen listed company’s annual report and account balances in the
financial statements.

The Commission regulators have started investigation on the company of Kangde

Xin in the month of January 2019 when the protecting film manufacturer have been in
default of its debts on the actual but only reported certain amounts when they have
present the payable in the financial statement of the organization. The company showed
that the cash and bank deposits for the certain period was amounting to 15 billion yuan
in past four months before the examination of the entity’s financial information happened.
The regulators also found out that the profits of the organization have been altered and it
was inflated for the past four years from 2014 to 2018 by an overstatement amounting to
11.9 billion yuan. This findings was reported by the Commission to the public for the
security of the current stakeholders of the company and the upcoming investors to made
up their right decision to be a partner or stockholder of Kangde Xin Company. This
evidences gathered by the regulators of the Commission was a major basis of the
penalizations that will be given to them because of fraudulent activities made by their
company.

The accounting firm of Ruiihua which is the external auditor of Kangde Xin
company provided a disclaimer of opinion on the auditor report that they have presented
to the public users. In the disclaimer of opinion they have given their opinion about the
current state of the entity of Kangde Xin annual financial information on the period of the
year end of 2018. During the year 2015 up to 2017 the firm of Ruihua had been releasing
audit reports providing unqualified opinions as a basis for prudent users of the financial
data to know the current condition of the company. Upon further investigation of the
regulators of CSRC the total amount of payment of the company of Kangde Xin for the
auditing services provided by the accounting firm is amounting to 8.4 million yuan. The
CSRC released a statement that if they are investigating a certain company who have an
issue of fraud it includes the checking of related parties on the company specifically the
financial intermediaries of the company because they provide services which is
independent to the company that can actually give more value to the entity and the
reliability of the financial statement is accurately stated is high as basis of decision making
for the intended users.

China Regulatory Securities Commission high detection of financial fraud and the
penalties of the guilty parties under the rule of their law

Based on the Law of the Commission of Chinese Securities of all listed companies
and other companies who have done fraudulent activities in their operations has the right
to take the right prosecution and charge to be given to that companies who have done
this kind of unlawful engagements. This charges can be applied to financial intermediaries
which includes companies who provide audit services. If the entity under investigation
was proven to have failed doing their responsibility to provide due diligence in performing
the procedures that they must complied with and not issuing a credible and reliable
information, the CSRC can ordered this companies to correct the mistakes they have
made and take the right charges to the company as to their suspected misappropriations
on their financial information. The penalties to be given to the company is in line with how
grave their act was and also it is the responsibility of the CSRC to suspend or cancel the
licenses of the said companies.

Violations and Penalties of Ruihua accounting firm and Kangde Xin Company

The accounting firm of Riuhua has been on the spotlight if the Commission
regulatory board in June 2016 which it fails. To fulfill its duties to assist the National
Association of Financial Market Insitutional Investors to provide a reliable financial data
of its client which is Yunfeng Group Co. Ltd. This company od Yunfeng was defaulted 2
billion yuan on their acquisition of bonds on the start of the year 2016. The accounting
firm was subject to penalties and charges for behaviiour they made in their services
provided. It was also subject to other two separate punioshments in the period Decmber
2016 and January 2017 for altering the finan cial data of clients and providing false audit
reports to the public. In this violations made by the accounting firm the CSRC made their
decision to banned the firm receive new clients who needed audit services for their
financial statements.
As for the further investigation of the CSRC on the Kangde Xinhua Company they
have found out the company’s failed to report and disclose all the important transactions
of their company on the annual reports. The non-disclosure results to an embezzlement
of company’s funds by the major shareholder or the one who has the control over the
whole business. The company also failed to record the proper allocations of the funds
raised by the help of the shareholders of the organization.
Shares of the company were under the supervision of the CSRC because of the
fraudulent activities they made. It is proven that in the past 4 years of the company
operating the business in not profitable. The regulatory board of the Commission planned
to impose a charge amounting to 600 000 yuan with special penalties of 3.67 yuan for its
28 personnel who works in the company. The controller of the company who is Zhong Yu
will be fined to a total amount of 900 000 yuan and will be prohibited in the market for its
whole life. The CSRC have made this decision on the basis on how grave their actions
was situated.

REFLECTION:
This fraud case of the Xintai Electric Co. Ltd is a sign that most of the companies
in the market wants to show a good performance and reliable financial information to the
public in order for them to entice more potential stakeholders and retain the old
stakeholders of the company. Because of this standards made by the people in the
market, organizations just want to disclose information that is good for the image of the
company rather than showing the true information to the users of the financial information.
I have learned many lessons in this case of the company of Xintai, one of those is the
actions taken in a certain period will have a great effect on the future actions you’ll
undertake. Even though it is small wrong actions you made and not seen for the first time
and then you repeat it again for a number of times it will have great effect if you will
aggregate it and it can be a downfall for you. We always say to our friends or close family
members that if you’ll trust a person you must not base it on the physical appearance it
must be on the inner being of the person. This applies to the companies in the market if
you are a prospective investor that if you want to invest and you have a company or
business in mind do not look only for their fame in the market but also investigate on the
prior year’s performance of the company and how it manages its operations and how
stable its financial capabilities in the company. Another learnings I have gain in this case
you must comply with the rules and regulations that is present so that you’ll align all your
decision making in that policies. This is the major problem I have seen in all companies
that I have read which is related to my case because they have failed to follow what are
their responsibilities and perform their jobs with proper due diligence to disclosed reliable
information specifically the financial information which is very important in the market for
the basis of future investors and other intended users to support and be a shareholder or
partner of the business they have seen a potential financial capability to sustain their
capital.

“He that walketh uprightly walketh surely: but he that perverted his ways shall
be known” (Proverbs 10:9). This verse in the bible only shown us that if we will do
something good we will go wrongly on the paths that we are not meant for but if we will
do opposite it will be expose to all the people and will be a bad image for the rest of your
life. Like in the case of Xintai because they want to show only a good image and did not
comply to the right procedures and altered their documents they have a penalty and extra
charges for this act and they were marked as company that cannot transact and engage
on the market forever. The related parties also have been given a sanction and this
entities gain bad image for their support to the wrongdoings of the company of Xintai.
Under the code of ethics of the professional accountants they must possess the five
fundamentals principles. One of those is integrity which an trait of being straightforward
and honest in all aspects. This must be valued by each person because it is very important
to be honest every time you’ll do anything without the presence of everybody even if it is
just the only person present you must comply with it. This trait was not followed by the
company of Xintai and all related companies who have done fraudulent activities and
engage to different companies even if it knows they have been doing wrong. Another
principle is the objectivity which means you will not be bias on your decisions and no
influence of others will be entertain. This trait must always be an attitude of all the people
because it creates more reliable information and data to be relied on. The company of
Xintai also failed to comply with these principle because they became bias on their
decision making as provided by only one controlling party who governs that whole
organization. Professional Behavior is also one of the principle of ethics that be must be
inherent in all professionals which is to comply with relevant laws and regulations and
avoid to discredit the licenses they have gained. This trait is also disregarded by XIntai,
financial intermediaries and other companies that are in the business which have been
doing wrong acts. Compliance is very important to all business entity in all of the countries
around the globe because it is the basis if they have a reliable information about their
financial stability.

Lastly I have learned that for every wrong actions you make there is an actual
consequences that you will be given as a payment for it. Xintai have made violations as
mentioned in the case above, this wrong acts is very grave and enough sanction to the
company must be given. The decision of the China Securities Regulatory Commission is
very objective because it only shows how severe the actions was. I agree on all the
decisions made by the Commission because the justice must be rightly serve to the guilty
entities and other related parties. This is the justice that we must possess in our country
because they have really investigated the matters concerning to the alleged fraud of the
different entities in market. Everyone can make mistakes but without the intent of doing it
that’s why we have our advisers, auditors or any person that can check the information
will give so that corrections will be made. However if mistakes are seen and not corrected
this where the problems will starts. As a person of this country and as human being
created by God mistakes is always there but if it can be corrected do it so because we
can benefit from it. Mistakes can be our stepping ground for a more successful endeavor
in the future.
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