Protecting A-Shares Begins with Protecting Small and Medium Investors

Small and medium investors are at a disadvantage in the stock market. Protecting them should start with ensuring that information is disclosed in a way that is open, transparent, truthful, accurate, and complete. However, some listed companies deliberately conceal the true state of their assets, profitability, and cash flow.

The higher the level of those involved in financial fraud, the more concealed the fraud is, and the greater the harm it causes. From past cases, the main perpetrators of fraud in A-share companies are often the management of the listed companies, and it is a collective action by the management.

There are various methods of financial fraud, and the common ones are as follows:

1. Fabricating business to inflate revenue and profits.

2. Recognizing project progress prematurely to inflate income and profits.

3. Underestimating inventory write-downs, goodwill impairments, and bad debts of accounts receivable.

4. Shifting costs and expenses corresponding to the current period to other periods for inter-period adjustments.

5. Using asset restructuring to inflate profits.Among the many methods of fraud, the first approach, namely fabricating business transactions, is the most egregious and highly covert. Companies enter into fictitious sales contracts with customers and false purchase contracts with suppliers, creating counterfeit production, warehousing, and logistics business documentation. Moreover, the funds within and outside the listed companies collaborate to simulate business cash flows, creating the illusion of sales repayments, ultimately forming a closed loop of fraudulent business operations.

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This method is highly covert and poses significant risks; some listed companies have been able to perpetuate fraud for eight consecutive years before being discovered. As 2023 draws to a close, we have summarized the ten financial fraud cases with the highest inflated profits disclosed in the first eleven months of 2023, which belong to this method.

After the case is essentially established, the securities regulatory authority will issue a "Pre-penalty Notification" to the company involved, informing them of the intended administrative penalty decision, as well as the facts, reasons, and basis for that decision. Relevant personnel of the listed company may defend themselves against the case and the penalty. Once the case and penalty are finally determined, the securities regulatory authority will issue a "Penalty Decision."

This summary is based on the "Penalty Decision." The ten financial fraud cases are listed below in ascending order of the amount of inflated profits.

Tenth Place: Qibu Shares (603557.SH)

Inflated Profits: 1.29 billion yuan

In 2017, Qibu Shares made its debut on the Shanghai Stock Exchange with the halo of "the first children's shoes stock." The company owns the well-known children's clothing brand "ABC KIDS." At that time, the brand was the market leader in children's shoes in China and ranked seventh in children's wear.

To conceal weak growth, the company has been engaging in financial fraud for several consecutive years since 2018. From 2018 to the first half of 2020, the company inflated its profits by a total of 1.29 billion yuan. In 2018, the total inflated profit was 230 million yuan, with a real profit of 2.23 billion yuan. In 2019, the total inflated profit was 660 million yuan, with a real profit of 1.77 billion yuan. In the first half of 2020, the total inflated profit was 400 million yuan, with a real profit of 800 million yuan.

In February 2021, the company announced, "Recently, we received a written resignation letter from Mr. Chen Zhangwang, the Chief Financial Officer, who resigned from his position for personal reasons." It is important to note that in the A-share market, the resignation of a CFO is a cause for concern.

In April 2021, Qibu Shares released its 2020 annual report, revealing the true state of operations. The company's operating revenue in 2020 was 770 million yuan, a 49% decrease from 2019, and it suffered a loss of 270 million yuan in profit. The company was also issued a "qualified" "non-standard" audit report by the accounting firm.Under normal circumstances, a "standard" audit report should not only be an "unqualified opinion" audit report, but also should not contain any additional explanation paragraphs, emphasis of matter paragraphs, or other matter paragraphs. "Non-standard" audit reports always require high vigilance.

From the time Qi Bu Shares went public until the exposure of its problems (April 2021), the number of shares held by the top three shareholders significantly decreased.

In 2020 alone, based on the average stock price of 11.04 yuan for that year, the largest shareholder, Hong Kong Qi Bu (a company controlled by Zhang Limin, the actual controller of Qi Bu Shares), reduced the value of its shares by 640 million yuan. The second shareholder, Bang Ao, reduced the value of its shares by 700 million yuan; Lishui Chenxi reduced the value of its shares by 50 million yuan.

When the company's true operating conditions were revealed, the three major shareholders further reduced their holdings. By the end of 2021, Hong Kong Qi Bu held 49 million shares, a decrease of 144 million shares from the end of 2020. Meanwhile, Bang Ao and Lishui Chenxi were no longer among the top ten shareholders.

The "China Securities Regulatory Commission Administrative Penalty Decision No. 80 of 2023" warned Qi Bu Shares and imposed a fine of 57 million yuan; the general manager, Zhou Jianyong, was fined 10 million yuan; the actual controller and chairman, Zhang Limin, was fined 5 million yuan; and other responsible persons were fined a total of 5 million yuan.

Rank 9 Hongda New Materials (002211.SZ)

Overstated profits by 133 million yuan

On January 5, 2019, Hongda New Materials announced that the original controlling shareholder (Jiangsu Weilun Investment Management Co., Ltd.) transferred 122 million shares (accounting for 28.23% of the total share capital) of Hongda New Materials to Shanghai Hongzi Enterprise Development Co., Ltd. (hereinafter referred to as Shanghai Hongzi), and the actual controller of Hongda New Materials changed to Yang Xin.

However, Yang Xin was merely holding on behalf of Sui Tianli, who was the actual controller of Hongda New Materials. Sui Tianli led the famous "special communication network scam" in the history of A-shares, which involved more than ten listed companies and had false sales exceeding 90 billion yuan.

In July 2011, Sui Tianli invested in the establishment of Shanghai Xingditong Communication Technology Co., Ltd., holding 90% of the shares, and thus began the "special communication network scam." The so-called special communication network products were neither actually sold nor used by consumers; they were merely engaged in business with listed companies through signing false contracts, fabricating business activities, and other means.Sui Tianli controlled many enterprises, some of which were upstream suppliers to listed companies, and some were downstream customers. More than ten listed companies, knowingly or unknowingly, participated in this scam.

After becoming the actual controller of Hongda New Materials, Sui Tianli also brought in "special communication" business. In 2019, Hongda New Materials inflated its total profit by 30 million yuan through special communication business, accounting for 39% of the profit disclosed in the annual report of that year; in 2020, the inflated total profit was 103 million yuan, accounting for 151% of the profit disclosed in the annual report for that period.

The "China Securities Regulatory Commission Administrative Penalty Decision No. 24 of 2023" warned Hongda New Materials and imposed a fine of 3 million yuan; Sui Tianli was fined 10 million yuan; Yang Xin was fined 2 million yuan; other responsible persons were fined a total of 500,000 yuan.

Eighth, Danbang Technology (002618.SZ)

Profit inflation of 240 million yuan

In 2011, Danbang Technology was listed on the SME board of the Shenzhen Stock Exchange, with its main business being flexible printed circuit boards and flexible packaging products. Liu Ping is the actual controller and chairman of the company. In 2015, Danbang Technology's major shareholder, Shenzhen Danbang Investment Group, was penalized by the China Securities Regulatory Commission for illegal reduction of shares. ("China Securities Regulatory Commission Administrative Penalty Decision No. 46 of 2015")

At the beginning of Danbang Technology's financial fraud drama, it also staged a bragging performance. On July 16, 2018, Danbang Technology issued an announcement on the successful trial production of the TPI film carbonization technology renovation project, stating: "The product of this project, multi-layer graphene two-dimensional quantum carbon-based film, is currently the world's leading production technology." After that, Danbang Technology's stock price was limited up for two consecutive days.

On July 24, 2018, the Shenzhen Stock Exchange asked Danbang Technology to provide literature references to support its conclusion. However, on August 1, 2018, Danbang Technology replied that after searching the "Science" and "Nature" magazines, there have been no reports similar to the company's quantum carbon-based film material technology. Danbang Technology also did not provide specific literature references.

On August 3, 2018, the "SME Board Supervision Letter No. 145 of 2018" stated: "(Danbang Technology) made exaggerated statements in the announcement without a factual basis, which is misleading."

In October 2020, Liu Ping was reported by Wang Liyi and Zou Sheng for academic fraud. Both of them were executives of Danbang Technology before 2016. Liu Ping claimed to have graduated from the composite materials major of Wuhan University of Science and Technology in 1988, but the report said, "Liu Ping, the chairman of Danbang Technology and the chief scientist claimed to the outside world, has never been to college for a day, and has no master's degree." This report was later confirmed.Starting from October 14, 2020, the heads of the internal audit department, the finance department, the general manager, and the secretary of the board of Danbang Technology successively resigned. In the same month, Danbang Technology received a "Notice of Concern" from the exchange. The inside story of Danbang Technology's financial fraud was slowly revealed.

It was found that Danbang Technology inflated its operating income by fabricating sales contracts, sales orders, finished product warehouse release forms, customer statements, and other related materials. In 2018, 2019, and the first half of 2020, the company inflated its operating income by 187 million yuan, 283 million yuan, and 111 million yuan, respectively, accounting for 54.3%, 82.6%, and 82.6% of the disclosed operating income for the respective periods.

Based on the average gross margin during the aforementioned periods, Danbang Technology inflated its profits by 75.44 million yuan, 120 million yuan, and 44.78 million yuan in 2018, 2019, and the first half of 2020, respectively, accounting for 291%, 744%, and 3637% of the disclosed total profits for the respective periods. The total inflated net profit amounted to 240 million yuan.

The financial fraud began in the first half of 2018, and Liu Ping started to reduce her shares in 2019. By November 2020, when the market discovered the company's financial issues, Liu Ping's shareholding had decreased from 154 million shares to 106 million shares, a reduction of 48 million shares. At the average share price of 12.1 yuan during this period, the value of these shares was 580 million yuan.

The "China Securities Regulatory Commission Shenzhen Regulatory Bureau Administrative Penalty Decision No. [2023] 10" warned Danbang Technology and imposed a fine of 4 million yuan; the actual controller and chairman, Liu Ping, was fined 8 million yuan; the supervisor, Xie Fan, and the financial officer, Deng Jianfeng, were each fined 2 million yuan; and other responsible persons were fined a total of 4.9 million yuan.

Seventh, Helen Zhe (300201.SZ)

Profit inflation of 289 million yuan

Helen Zhe, full name Xuzhou Helen Zhe Special Purpose Vehicle Co., Ltd., is mainly engaged in the research and development, production, and sales of special vehicles such as aerial work trucks, power emergency protection vehicles, and fire trucks. Helen Zhe went public in 2011 with a net profit of 25 million yuan.

In 2015, Helen Zhe spent 260 million yuan to acquire Lianshuo Automation Technology Co., Ltd. (hereinafter referred to as Lianshuo Technology). From 2016 to 2019, Helen Zhe inflated its revenue and profits for each period through its wholly-owned subsidiary, Lianshuo Technology.

In 2016, the company inflated its operating income by 150 million yuan and its profits by 77 million yuan; in 2017, it inflated its operating income by 180 million yuan and its profits by 76 million yuan; in 2018, it inflated its operating income by 170 million yuan and its profits by 86 million yuan; in 2019, it inflated its operating income by 200 million yuan, and the total inflated profit amounted to 50 million yuan. The total inflated profit was 289 million yuan.Jiangsu Regulatory Bureau's Administrative Penalty Decision [2023] No. 4 orders Helen to correct the violations, issues a warning, and imposes a fine of 3.5 million yuan; imposes a fine of 2 million yuan on Helen's Vice Chairman and General Manager of Lianshuo Technology, Yang Ya, a fine of 1.5 million yuan on the former Chairman, Ding Jianping, and a total fine of 1.8 million yuan on other responsible persons.

There are doubts about Helen's 2019 annual report. Although the accounting firm issued an unqualified audit report, the Shenzhen Stock Exchange's "Inquiry Letter" dated May 8, 2020, was to the point, "(Please provide additional explanations) Whether the performance of Lianshuo Technology is true and accurate, the current sales collection situation, whether there is a post-period return, whether there is a situation of income recognition across periods. Please report the sales contracts and sales collection details of the top ten customers of Lianshuo Technology from 2016 to 2019."

In September 2020, during an on-site inspection, the Jiangsu Securities Regulatory Bureau found clues of significant misstatements during the period when Ding Jianping was in actual control of Helen, which also triggered an incident where the management of Helen forcibly seized control of the company.

Additional background: In April 2020, Helen's controlling shareholder, Jiangsu Mechanical and Electrical Research Institute Co., Ltd. (hereinafter referred to as Jiangsu Mechanical and Electrical), transferred 5% of Helen's shares to Zhongtian Ze Holding Group Co., Ltd. (hereinafter referred to as Zhongtian Ze Group). Moreover, Jiangsu Mechanical and Electrical and Ding Jianping changed the controlling shareholder of Helen to Zhongtian Ze Group through the entrustment of voting rights, and the actual controller changed to Jin Shiwei. At this time, Jin Shiwei controlled a total of 24.98% of the company's shares corresponding to voting rights.

Jin Shiwei promised to obtain more shares through a private placement, but in April 2021, Zhongtian Ze Group terminated the private placement plan. Zhongtian Ze believed that Ding Jianping failed to fully and truthfully disclose the operating conditions of the listed company when signing the contract and demanded a penalty of 638 million yuan. Moreover, Lianshuo Technology, which was initially purchased for 260 million yuan, was transferred by Jin Shiwei for 1 yuan.

After this, both parties began litigation to seize control of the company. In October 2021, Zhongtian Ze stated that Ding Jianping had taken away the company's official seal and financial seal. The series of lawsuits triggered by financial fraud continued until December 2023.

Sixth, Zeda Yisheng (688555.SH)

Overstated profits by 296 million yuan

Zeda Yisheng was listed on the Shanghai Stock Exchange's STAR Market in June 2020. According to the prospectus, the company is mainly engaged in information technology business. With new generation information technology as its core, the company provides information technology solutions for the government, enterprises, and institutions in industries such as pharmaceuticals, healthcare, and agriculture.

The prospectus states: "The company is rated as a high-tech enterprise, holding 18 invention patents, 130 software and software copyright items, and has established an academician expert workstation."However, within less than two years of going public, Zeda Yisheng encountered numerous issues. In December 2021, it received an inquiry letter from the Shanghai Stock Exchange. In March 2022, the actual controller, chairman, and general manager Lin Ying, along with the financial director and board secretary Ying Lan, assisted relevant authorities in their investigations. In April 2022, the accounting firm issued an audit report with a "qualified opinion."

The investigation revealed that Zeda Yisheng, through the signing of fake contracts and the conduct of fictitious business activities, had inflated its operating income by 342 million yuan and profits by 187 million yuan from 2016 to 2019, prior to its listing, with the inflated profits being nine times the actual profits. This action constituted fraudulent listing.

After going public, the "2020 Annual Report" inflated its operating income by 150 million yuan, accounting for 59.5% of the reported period, and inflated profits by 82 million yuan, accounting for 89% of the reported period. The "2021 Annual Report" inflated its operating income by 71 million yuan, accounting for 21.6% of the reported period, and inflated profits by 27 million yuan, accounting for 56.2% of the reported period.

Zeda Yisheng collectively inflated its revenue by 340 million yuan and profits by 296 million yuan.

The "China Securities Regulatory Commission (CSRC) Administrative Penalty Decision No. 29 of 2023" and "CSRC Administrative Penalty Decision No. 48 of 2023" decided to give Zeda Yisheng a warning and impose a fine of 86 million yuan. The actual controller Lin Ying was fined 38 million yuan; other responsible persons were collectively fined 27 million yuan. On July 7, 2023, Zeda Yisheng was officially delisted by the Shanghai Stock Exchange.

Fifth, Zijin Storage (688086.SH)

Inflated profits by 375 million yuan

Zijin Storage was listed on the STAR Market of the Shanghai Stock Exchange in February 2020. According to the prospectus, the company is a competitive optical storage technology enterprise in China. The company is engaged in the research and development, design, and development of core technologies for blue-ray data storage.

The company possesses a national-level "Blue-ray Detection Laboratory" and "Guangdong Province Blue-ray Storage Engineering Technology Center," has obtained 5 invention patents, 71 software copyrights, and participated in the formulation of 8 national, industry, and local standards.

Before going public on the STAR Market in June 2017, Zijin Storage raised 164 million yuan with a subscription price of 7.1 yuan per share. Among them, Wang Sicong's Tianjin Pusen No. 1 Asset Management Partnership (hereinafter referred to as Tianjin Pusen) subscribed to 7.0423 million shares, with an investment of about 50 million yuan. Tianjin Pusen held a 5.92% stake, ranking as the fourth largest shareholder. At this time, Zijin Storage's total market value was less than 900 million yuan.On the first day of trading for ZiJing Storage (February 26, 2020), the stock closed at 78.24 yuan, with a total market value reaching 14.9 billion yuan. In less than three years, the market value increased by 16 times, indicating the market's high expectations for ZiJing Storage.

However, on January 4, 2021, an unusual event occurred. ZiJing Storage announced, "Due to the company's business development and the need for annual audit work, after mutual consultation, the company intends to reappoint Lixin as the auditor for the company's 2020 financial report." Changing accountants before the annual report is something investors should be vigilant about.

On the evening of April 29, 2021, ZiJing Storage released its 2020 annual report. This report was still issued with a qualified opinion by Lixin Certified Public Accountants, becoming the first non-standard annual report on the STAR Market. The auditor's report pointed out potential issues with ZiJing Storage, such as the authenticity of prepayments for equipment and the recoverability of accounts receivable. On the same day, ZiJing Storage received an inquiry letter from the Shanghai Stock Exchange.

Starting from March 9, 2021, several institutions have repeatedly reduced their holdings in ZiJing Storage, including Tianjin Pusi.

On February 12, 2022, ZiJing Storage received a "Notice of Investigation" from the China Securities Regulatory Commission (CSRC) for illegal and irregular information disclosure, and the truth of financial fraud gradually became clear.

The investigation revealed that before going public, ZiJing Storage had inflated its operating income by 613 million yuan and profits by 86 million yuan from 2017 to the first half of 2019, constituting fraudulent listing.

After going public, in 2019, the company inflated its income by 271 million yuan and profits by 145 million yuan, with the inflated profits being 17 times the actual profits; in 2020, it inflated its income by 328 million yuan and profits by 169 million yuan, with actual profits being negative.

In total, ZiJing Storage inflated its income by 754 million yuan and profits by 375 million yuan.

The "China Securities Regulatory Commission Administrative Penalty Decision No. 30 of 2023" decided to give ZiJing Storage a warning and impose a fine of 36.69 million yuan; the actual controllers Zheng Mu and Luo Tiewei were fined 21.64 million yuan and 18.04 million yuan, respectively; other responsible persons in the company were fined 14.35 million yuan.

Fourth place: Hezhong SiZhuang (002383.SZ)Inflated profits by 521 million yuan

When Unistrong (Beijing) Technology Co., Ltd. (hereinafter referred to as "Unistrong") went public in an IPO in 2010, it attracted much attention due to Yao Ming holding 0.56% of the shares, prominently ranking among the top five shareholders. In fact, Unistrong's business has nothing to do with sports; its main business is the research and development, manufacturing, and sales of products related to Beidou navigation technology.

Unistrong primarily used two types of fictitious businesses to inflate profits.

Firstly, Unistrong inflated profits by fabricating radar-related business activities.

Unistrong engaged in radar-related business, fabricating production processes, purchasing from companies actually controlled by a certain Yu, and then selling to channel companies arranged by Yu. These channel companies, after several rounds of circulation, returned to the companies controlled by Yu, forming a circular empty turnover. As the investor, Unistrong did not provide technology, participate in production, handle goods, or directly contact customers or suppliers. The related business only involved contracts, documents, and invoices to facilitate the flow of documents and funds, without the delivery of physical goods, lacking in business substance. The total inflated profits from 2017 to 2019 amounted to 61 million yuan.

Secondly, Unistrong inflated profits by fabricating "special network communication business."

Unistrong was aware that the "special network communication business" was a fictitious business without real substance, but it joined the special network communication business chain under the guise of providing processing services. However, in reality, it did not undertake any processing role and did not provide any value-added technology. The total inflated profits from 2017 to 2020 amounted to 427 million yuan.

Combining these two methods with other means, the total inflated profits amounted to 521 million yuan.

After investigation, the "China Securities Regulatory Commission Administrative Penalty Decision No. [2023] 35" decided to give Unistrong a warning and a fine of 6 million yuan; the founder, Guo Xinping, was fined 4 million yuan; and other responsible persons were fined a total of 2.5 million yuan.

In fact, as early as May 2020, Unistrong's business had been questioned. The annual auditor issued an audit report with a "qualified opinion" on Unistrong's financial statements for the year 2019, emphasizing the risks associated with the "special network communication business."In July 2019, before the fraud was exposed, Guo Xinping, the founder of the company and then chairman, transferred 72.32 million shares he held, with a transfer price of 13.43 yuan per share, totaling 970 million yuan.

Third Place: Qixin Shares (002781.SZ)

Overstated Profits by 2.63 Billion Yuan

Qixin Shares is mainly engaged in the design and construction of architectural decoration projects and was listed on the Shenzhen Stock Exchange's main board in 2015. Before going public, the company continued to fabricate financial statements from 2012 to 2014, inflating revenues and underreporting costs and expenses, accumulating overstated profits of 845 million yuan. After going public, from 2015 to 2019, Qixin Shares continued the same fraudulent practices, accumulating overstated profits of 1.79 billion yuan.

Qixin Shares has been fabricating financial statements for eight consecutive years, with a total overstated profit of 2.63 billion yuan. Without the fraud, Qixin Shares would have been in deficit for all eight years.

In mid-2021, some employees of Qixin Shares made a real-name report to the Xinyu State-owned Assets Supervision and Administration Department. On the last day of 2021, Qixin issued an announcement titled "Preliminary Announcement on Self-inspection of Suspected Non-operational Fund Occupation by Related Parties of the Original Actual Controller." On March 31, 2022, Qixin was investigated by the China Securities Regulatory Commission (CSRC), and the veil of Qixin Shares' continuous financial fraud was slowly lifted.

Before the exposure of Qixin's risks, starting from June 2019, Ye Jiahao, the actual controller of Qixin Shares, and his spouse, Ye Xiudong, began to reduce their holdings, cashing out more than 100 million yuan in 2019. In June 2020, Ye Jiahao and his spouse transferred 30% of the company's shares for 1.09 billion yuan.

After the transaction, Xinyu Investment Control became the controlling shareholder. However, Xinyu Holdings significantly underestimated the risks hidden in Qixin Shares' 3.38 billion yuan in accounts receivable. In 2021, Qixin's performance exploded with a loss of 1.75 billion yuan. The accounting firm issued a non-standard audit report for the annual report.

After investigation, the "China Securities Regulatory Commission Administrative Penalty Decision No. 62 of 2023" decided to give Qixin Shares a warning and a fine of 50 million yuan; to impose a fine of 14 million yuan on the original actual controller Ye Jiahao; and to impose a total fine of 46.5 million yuan on other responsible persons.

Second Place: Aerospace Communication (600677.SH)Inflated profits by 2.98 billion yuan

Aerospace Communication was listed in 1993 and has been in the market for 30 years. The company's main business is information communication, aerospace defense, and equipment manufacturing.

The financial fraud of Aerospace Communication can be traced back to 2003. In 2007, the Ministry of Finance's No. 13 Accounting Information Quality Inspection Announcement determined that the company had inflated profits by 31.1 million yuan from 2003 to 2005. In 2014, it was again identified by the securities regulatory department for inflating profits. The 2023 "Administrative Penalty Decision" mainly targets financial fraud after 2016.

In 2015, Aerospace Communication issued shares to the original shareholders of Smart Ocean, valuing 1.07 billion yuan to acquire 51% of the equity of Smart Ocean Technology Co., Ltd. (hereinafter referred to as Smart Ocean). Smart Ocean is a mobile phone OEM manufacturer.

The founder of Smart Ocean, Zou Yonghang, and others such as Zhu Hankun, promised that the actual net profit of Smart Ocean for the years 2016, 2017, and 2018 would not be less than 250 million yuan, 300 million yuan, and 320 million yuan, respectively.

The 2016 financial report of Aerospace Communication was issued with a non-standard audit report by Tianzhi International Certified Public Accountants. Subsequently, Aerospace Communication switched to Ruihua Certified Public Accountants. Since then, the financial reports for 2017 and 2018 have received unqualified audit reports.

On October 31, 2019, Aerospace Communication was investigated by the China Securities Regulatory Commission. After investigation, from 2016 to 2018, Smart Ocean formed false income of 6.57 billion yuan and inflated profits by 2.25 billion yuan through fictitious procurement and sales, etc.; it inflated profits by 732 million yuan through fictitious processing, etc. The total inflated profits amounted to 2.98 billion yuan.

The "China Securities Regulatory Commission Administrative Penalty Decision No. 9 [2023]" decided to give a warning to Aerospace Communication and impose a fine of 600,000 yuan; the main shareholders and main responsible person of Smart Ocean, Zou Yonghang and Zhu Hankun, were each fined 300,000 yuan; other responsible persons were fined a total of 900,000 yuan.

First place: Kai Le Technology (600260.SH)

Inflated profits by 5.94 billion yuanKaile Technology was listed on the main board of the Shanghai Stock Exchange in 2000. In 2012, the company's four major sources of revenue were: optical fiber and cable 33%, real estate 41%, liquor 17%, and plastic pipe 6%. In 2016, Kaile Technology began to enter the "special network communication business." We now know that "special network communication" was almost a complete financial fraud.

Before the fraud was exposed, Kaile Technology's stock price (adjusted for rights) rose from a low of 6.2 yuan in 2016 to 25 yuan in 2018.

From 2016 to 2020, Kaile Technology collaborated with Sui Tianli to conduct "special network communication" business. During the cooperation, Kaile Technology only had a small amount of special network communication business, and other special network communication businesses were all fictitious. It was merely fabricating purchase, production, and sales documents in accordance with the contract, without actual business activities.

Kaile Technology's fraud was large in amount, high in proportion, and the circumstances were very serious.

In 2016, the company inflated its operating income by 4.13 billion yuan, and its profit by 177 million yuan. The inflated revenue accounted for 49% of the disclosed operating income for that year, and the inflated profit accounted for 65% of the disclosed profit.

In 2017, the company inflated its operating income by 11.1 billion yuan, and its profit by 921 million yuan. The inflated revenue accounted for 73.3% of the disclosed operating income for that year, and the inflated profit accounted for 99.99% of the disclosed profit.

In 2018, the company inflated its operating income by 14.64 billion yuan, and its profit by 1.63 billion yuan. The inflated revenue accounted for 86.3% of the disclosed operating income for that year, and the inflated profit accounted for 144.8% of the disclosed profit.

In 2019, the company inflated its operating income by 13.62 billion yuan, and its profit by 1.76 billion yuan. The inflated revenue accounted for 85.9% of the disclosed operating income for that year, and the inflated profit accounted for 183.7% of the disclosed profit.

In 2020, the company inflated its operating income by 7.75 billion yuan, and its profit by 1.45 billion yuan. The inflated revenue accounted for 91.1% of the disclosed operating income for that year, and the inflated profit accounted for 247.5% of the disclosed profit.

From 2016 to 2020, Kaile Technology cumulatively inflated its operating income by 51.23 billion yuan, and the total inflated profit was 5.94 billion yuan. It has been calculated that Kaile Technology's actual net profit attributable to the parent company for the years 2017 to 2020 was negative.China Securities Regulatory Commission (CSRC) Administrative Penalty Decision [2023] No. 46 has determined to issue a warning to Kai Le Technology and impose a fine of 10 million yuan; to impose a fine of 5 million yuan on the then-chairman Zhu Dixiong; and to impose a total fine of 1.5 million yuan on other responsible parties.

As early as the second quarter of 2019, the then second-largest shareholder of Kai Le Technology (Shanghai Zhuofan Investment Co., Ltd.) began to continuously reduce its holdings in the company. By the end of June 2021, it had reduced its holdings by more than 90%. Based on the average stock price during this period, the value of these shares exceeded 500 million yuan.

Conclusion

The financial fraud behavior of listed companies poses a great danger, but it is difficult for ordinary small and medium investors to detect any clues from financial reports. For example, how can one distinguish the authenticity of an order? Or, is the impairment of accounts receivable sufficient? Furthermore, how can one determine whether a company's use of its own funds to purchase financial products is genuine investment or merely a conduit, with the funds actually flowing to a target company designated by the company?

From past cases of fraud, some situations require high attention:

- The accountant issues a "non-standard" audit report.

- The general manager, CFO, secretary, and other senior executives resign.

- The annual report is delayed in disclosure.

- Major shareholders continue to reduce their holdings in large proportions.

- The accountant is changed.Overall, it is challenging for the average investor to detect financial fraud in its early stages. By the time the issue is discovered, it often has been ongoing for years, resulting in investment losses. Company insiders, however, are more likely to notice subtle signs of financial fraud.

In light of this, there should be encouragement for whistleblowing on financial fraud in listed companies. Given the high risks associated with whistleblowing, the rewards for reporting should be as generous as possible.

At the same time, listed companies should enhance their disclosure of information. For instance, years ago, listed companies were required to disclose their top five suppliers and customers, but now they no longer do so, instead using vague identifiers like Customer ABCDE or Supplier 12345. Disclosing this information would help investors verify the authenticity of the company's business operations.

Listed companies should not use the protection of trade secrets or other reasons as a pretext to conceal important information. If a company is concerned about the leakage of trade secrets, it can simply choose not to go public.

Ordinary small and medium investors are the lifeblood of the healthy development of the A-share market. Protecting them equates to safeguarding the A-share market.