China Life faces disclosure queries

PUBLISHED : Thursday, 08 April, 2004, 12:00am
UPDATED : Thursday, 08 April, 2004, 12:00am

Parent firm to pay 67m yuan in taxes and fines for rogue investments involving some of its branches

China Life Insurance (Group) would have talked to the national auditor about the details of a probe that uncovered 5.4 billion yuan in accounting irregularities before its public listing in December, according to a source at the state agency.

Feedback is given by companies under investigation before Li Jinhua, head of the National Audit Office, delivers his report at the body's annual conference in January. It would normally need to be done before December to give the audit office adequate time to compile the report, the source said.

This raises disclosure questions for the listed company as it announced yesterday that its parent must pay 67.49 million yuan in unpaid taxes and fines. The possibility of adverse findings was not covered in its listing prospectus.

China Life was found to have made rogue investments, with some of its branches shirking taxes and keeping funds as 'private reserves' for the purchase of assets and payment of benefits to staff. Accounting irregularities totalling 5.4 billion yuan were discovered.

The market yesterday took the news positively, with China Life shares rising 5.64 per cent to close at HK$5.15 on heavy turnover of $959.93 million.

'The parent will pay the fine and take up the liability, which is positive as it removes the uncertainty that's been hanging over the company,' said Kenny Tang Sing-hing, a research manager with Tung Tai Securities, noting the fine was not as big as the market had feared.

Although it was announced in January last year that the company would be audited, no mention was made in the 'risk factors' section of the listing prospectus of the potential findings.

'Before the audit report is released, the company being audited must give its feedback to the state auditors,' the audit office source said. 'Before the audit report is finally put together ... they may dispute the problems found.'

Another source familiar with such audits said: 'There is a process of mutual exchanges of views to gain better understanding of the issues uncovered.'

Others stressed that while 'exchanges of views' between the audited company and the audit office do take place, the audited company often is not given the full findings.

An official with a company which underwent the audit in recent years said the audit office would often seek clarifications from the company only when it was uncertain about what it had found.

Sometimes, the exchanges would take place at the local level and officials might not immediately report them to the head office.

Locally listed China Life declined to comment yesterday, as did officials of its listing underwriters - Deutsche Bank, Credit Suisse First Boston, Citigroup and China International Capital Corp. China Life (Group) could not be reached.

China Life faces class-action lawsuits in the United States for allegedly failing to adequately disclose 'massive financial fraud to the tune of US$652 million' at its unlisted parent, based on the national auditor's findings. The company has been quick to distance itself from the acts of its parent.

However, its profit-and-loss accounts for 2000, 2001 and 2002 present the financial results of the predecessor company, and the parent transferred its entire branch services network to the listed entity under a policy management agreement.

'I never felt the attempt to distance themselves was valid, given the accountancy report in the prospectus which was of the pre-IPO company,' editor David Webb said.

At branch level, the parent no longer has its own finance personnel. The accounting function has been sub-contracted to the listed company, although separate books and accounts are kept.

China Life said it was 'considering the report and its implications on the company in greater detail'. Lawyers took this to mean that further statements are inevitable.