Accountants suspended three to six months for alleged roles in fraud of listed firms

The mainland has turned up the heat on companies that mislead stock market investors with false data, accusing a local accounting firm of helping eight listed firms 'cook' their books.

Newspapers carried a Xinhua news agency report yesterday saying that five accountants at the Hubei Lihua Accounting Firm had been suspended for three to six months for their alleged roles in providing falsified data.

The Shanghai Securities News carried a bold headline saying: 'Hubei Lihua Goes Berserk in Falsifying Data' while other dailies published commentaries that wagged fingers at the company and noted that in serious cases accounting firms could lose their licence.

'Lihua's co-operation with many listed companies to create fraud is shocking,' the Xinhua report said.

'Chartered accountants are publicly recognised as the market's 'gatekeepers.' Investors have to rely on their financial reports to assess the properties of listed companies.'

The prominent reports followed a string of stock market scandals that ranged from price-rigging by fund managers to abuses by listed companies and brokers as well as banks that illegally channelled funds into the market.

All of the companies linked to Hubei Lihua had issued A shares for domestic investors since 1998.

The firms were considered blue chips or 'star stocks' before the alleged fraud was discovered but had since turned into 'land mines' or 'rubbish stocks', the agency said.

Some of the firms have already been censured or fined for their roles in the fraudulent activities.

Garment maker Hubei Xingfu was censured by the Shanghai stock exchange in March for failing to disclose information in a timely manner.

Washing powder maker Hubei Tianyi Science & Technology Co, formerly Shashi Power28, was fined one million yuan (about HK$940,000) by the China Securities Regulatory Commission (CSRC) in December for inflating profits and disguising an investment project.

Garment maker Huangshi Kangsai was publicly named in a Xinhua report that accused the firm of bribing senior officials to gain approval for a stock listing in 1996.

No punishments had been meted out to accountants who worked on the allegedly false accounts of other firms, or Hubei Lihua itself, which led to dissatisfaction among securities industry professionals and retail investors, Xinhua said.

Hubei Lihua was the Hubei province's oldest, largest and most recognised accounting firm before its reputation was badly tarnished after many of its listed clients reported a sharp downturn in earnings, Xinhua said.

It was unclear if the accounting firm would face penalties beyond the suspensions of the individuals as it has already been taken over by Beijing Zhongshen Accountants. Officials at the firm's offices in Wuhan, capital of Hubei province, had no comment.

Xinhua said China's accounting practices were still chaotic and many companies falsified earnings to gain a listing.

'Some companies used related party trades, asset restructuring, debt restructuring, etc to create 'frothy earnings' to deceive investors and the public,' Xinhua said.

Chinese regulators have intensified a clampdown on the wildly speculative share markets this year as the country approaches entry into the World Trade Organisation, which will throw open its sheltered domestic economy to foreign players.

The CSRC launched a probe this month into biochemical firm Guangxia (Yinchuan) Industry for alleged fabrication of earnings by a subsidiary which accounted for more than 75 per cent of the listed firm's net profits for last year and this year.

The crackdown has pressured the once high-flying A shares. The Shanghai A share index has lost nearly 8 per cent this year and the Shenzhen A index is down more than 11 per cent.