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Dozens of companies suspend fundraising as investigation into audit firm Ruihua enters fourth week

Xie Yu yu.xie@scmp.com

Dozens of mainland companies have suspended their fundraising plans or in some instances even halted their initial public offerings, as the economic fallout continues to mount in the four weeks since China's second largest accounting auditor was placed under investigation.

A total of 42 listed firms have announced they have suspended their fundraising plans after their auditor Ruihua Certified Public Accountants was placed under investigation in early July, according to filings made to the Shanghai and Shenzhen stock exchanges as of Monday. In addition, four separate companies applying to IPO on China's new STAR Market have been halted pending a review.

Jinhe Biotechnology Co and Liande Automatic Equipment Co said in stock filings in Shenzhen on Monday that they have received orders from the China Securities Regulatory Commission (CSRC) to suspend their convertible bonds issuance plans owing to the ongoing investigation of Ruihua.

Four other companies issued stock filings on Sunday night, saying they have been ordered by the CSRC to suspend their share placements in Shanghai and Shenzhen.

They are Hunan Baili Engineering Sci&Tech Co, Jiaao Enprotech Stock Co, and MLS Co, and Woer Heat-Shrinkable Material Co.

US$369.6 million in defaults at apparently cash-rich firms expose flaws in mainland Chinese auditing practices

"Financial irregularities and corporate governance issues are a global, and not a specifically mainland China problem. However, these issues on the A share market are often quoted as horrific examples because of their size and also because of the fact that the A share market is no longer a domestic market," said Andrew Lam a director with BDO in Hong Kong.

"With the admission of A shares into international indexes, the enhancement of financial reporting and corporate governance standards on the A share market has become a major issue for mainland regulators."

Four companies are believed to have halted their plans to debut shares on the STAR Market in Shanghai as the investigation into China's No 2 audit firm continues. Photo: Reuters alt=Four companies are believed to have halted their plans to debut shares on the STAR Market in Shanghai as the investigation into China's No 2 audit firm continues. Photo: Reuters

Lam said if the situation does not improve, reputational damage could spread to the general credibility of the Chinese share market as a whole.

Ruihua is the No 2 domestic auditor in China, with revenue of 2.9 billion yuan (US$420.73 million) in 2018, according to data from the Chinese Institute of Certified Public Accountants.

The company has been under investigation by the CSRC since July 5, after the regulator found Kangde Xin, a company audited by Ruihua, inflated its cash position.

Police arrest Kangde Xin's major shareholder in a show of force to support regulator's crackdown on corporate malfeasance

In an official statement, the CSRC said the controlling shareholder of Kangde Xin, the former chairman Zhong Yu, 69, had embezzled the funds from the company. But the regulator did not specify whether Ruihua or the Bank of Beijing, which was the sole account manager to Kangde Xin, had helped to cover up malfeasance.

Zhong's arrest followed investigations into Kangde Xin's financial health, after the producer of polypropylene laminating film defaulted on two bonds worth 1.6 billion yuan in December. The company claimed to have 12.2 billion yuan of cash on its books at the end of 2018, according to its annual report on April 30.

Ruihua issued a statement on Sunday saying it had fulfilled its responsibility by checking the accounts of Kangde Xin.

Meanwhile, the Bank of Beijing said its Xidan branch is involved in a lawsuit with Kangde Xin, and it would "actively respond" to protect its interest.

Ruihua provides auditing services to 316 listed companies in China, around 8.7 per cent of the total number of listed firms in China.

This article originally appeared in the South China Morning Post (SCMP), the most authoritative voice reporting on China and Asia for more than a century. For more SCMP stories, please explore the SCMP app or visit the SCMP's Facebook and Twitter pages. Copyright © 2019 South China Morning Post Publishers Ltd. All rights reserved.

Copyright (c) 2019. South China Morning Post Publishers Ltd. All rights reserved.