209 companies, "non-standard"

【Editor's Note】: The financial report is not only a "report card" for the production and operation activities of listed companies, but also an important basis for investors' decision-making.

As the "stabilizing factor" and "ballast stone" of the Chinese economy, the operating conditions and performance of listed companies, as well as their future layout, have always been a focus of the market.

According to Choice data, as of April 30th, the number of A-share companies with "non-standard" opinions issued for the 2023 annual financial report was 209, an increase from 195 in 2022.

When auditing firms issue "non-standard" opinions on corporate financial reports, it means they are not issuing standard unqualified opinions. The 209 A-share companies with "non-standard" opinions on their financial reports mainly involve issues related to ongoing operating capabilities, fund utilization, as well as sudden events such as fraud and legal cases.

So, how reliable and informative are the financial reports of the 209 A-share companies with "non-standard" opinions?

The reporter noticed that some auditing firms were previously criticized for helping problematic companies "speak," but with further regulatory efforts to strengthen the responsibilities of auditing firms, more and more auditing firms are willing to say "no" to listed companies.

85 risk-warning companies received "non-standard" opinions

Among the 209 A-share companies with "non-standard" opinions on their financial reports, 85 are risk-warning companies. Among them, there are 20 companies with opinions expressing inability to form an opinion, 25 with qualified opinions, and 40 with unqualified opinions with emphasis of matter paragraphs.

Taking *ST Renle as an example, its 2023 annual financial report received an unqualified opinion with an emphasis of matter paragraph, mainly due to its 2023 net profit attributable to the parent company being -498 million yuan, accumulated undistributed profits as of December 31, 2023 being -3.469 billion yuan, net assets being -386 million yuan, and an asset-liability ratio of 109.90%.

The audit firm hired by ST Yuenjoy pointed out that the above situation indicates significant uncertainties that may cast doubt on the company's ability to continue operating. In summary, the continued operation capability of risk-warning companies is in doubt, which is a key concern for audit firms. However, the financial reports of risk-warning companies are mainly issued with "non-standard" opinions, mainly due to a cluster of issues. Industry insiders pointed out that when a company is subject to risk warnings, it means that there are problems in its operations, management, or internal controls, which are often difficult to resolve in the short term. This can have a significant impact during the annual audit process, leading to the appearance of "non-standard" opinions.

Sudden events are emphasized

Encountering fraud, filing cases, major lawsuits, and other sudden events have become important reasons for the "non-standard" financial reports of many A-share companies, mainly with "emphasis on matters" in the unqualified opinions.

In the case of being investigated by regulators, on June 27, 2023, 37 Interactive Entertainment and its actual controller and chairman Li Weiwei, as well as vice chairman Zeng Kaitian, received "Notice of Filing" issued by the China Securities Regulatory Commission, mainly related to suspected illegal information disclosure by relevant parties.

As a result of the above-mentioned matters, the 2023 annual financial report of 37 Interactive Entertainment has been issued an unqualified opinion with emphasis of matter paragraph by the audit firm. The audit firm pointed out that as of the date of the audit report issuance, April 19, 2024, the investigation work initiated by the China Securities Regulatory Commission is still ongoing, and no conclusive opinion or decision on the investigation matters has been received.

In the case of fraud, Feikai Materials' 2023 annual financial report has been issued an unqualified opinion with emphasis of matter paragraph by the audit firm.

The audit firm stated that the public security authorities have initiated a criminal investigation into the contract fraud involving Feikai Materials' wholly-owned subsidiary, Jingkai Electronics, in the process of conducting PCBA (Printed Circuit Board Assembly) business. Currently, the case is in the stage of investigation, and there is uncertainty about the outcome of the case.

In the case of major litigation, HNDA's 2023 annual financial report has been issued an unqualified opinion with emphasis of matter paragraph by the audit firm.

Looking back, HNDA had previously faced a lawsuit from Motorola regarding trade secrets and copyrights, and was temporarily prohibited from selling two-way radio technology products globally by a U.S. court. Subsequently, after a series of litigation disputes, the injunction against HNDA's products has been temporarily suspended by the U.S. Court of Appeals for the Seventh Circuit.

The audit firm believes that due to the injunction on the products not being lifted, there is significant uncertainty about the impact on HNDA's normal operations.

Attention on audit limitations

It was noted by journalists that several A-share companies have received "non-standard" opinions, and the audit firm will mention audit limitations.

Taking Anner as an example, its 2023 annual financial report received a qualified opinion. The audit firm pointed out: "Due to the inability to obtain further detailed information and data related to purchase and sales transactions, it is not possible to obtain sufficient and appropriate audit evidence on the substance of purchase and sales transactions and the recoverability of other receivables, and it is also not possible to assess the potential impact of this matter on the financial report."

On December 15, 2023, Anner's wholly-owned subsidiary Anner Technology signed procurement and sales contracts with Shenzhen Innovation Science and Henan Radio and Television. As of December 31, 2023, Anner Technology prepaid a total of 44.4351 million yuan to Shenzhen Innovation Science for the purchase of computing equipment and related taxes.

However, due to the possibility that the procurement and sales contracts may not be fulfilled as normal and the risk that the funds may not be recovered, Anner Technology transferred the above funds to other receivables and made a bad debt provision of 22.2175 million yuan.

In the category of risk warning companies, ST Intelligence's 2023 annual financial report was issued with a disclaimer of opinion, involving the liquidation and disposal of equity investments in four platform companies in 2023, but as of December 31, 2023, the disposal has not been completed.

The audit firm conducted inspection, interviews, and other audit procedures, but still could not determine whether ST Intelligence needs to make adjustments to the book value of long-term equity investments in the four companies, investment income, and other items in the financial statements, nor could it determine whether there are significant unidentified related fund transactions.

"Dragging" of controlling shareholder's fund occupation

Shanshan Co., Ltd.'s 2023 annual financial report was issued with an emphasis of matter paragraph with an unqualified opinion, mainly because its controlling shareholder, Shanshan Holdings Co., Ltd. ("Shanshan Holdings"), non-operatively occupied a total of 808 million yuan in 2023, with a balance of 80 million yuan as of December 31, 2023. As of the date of the audit report, Shanshan Holdings has fully repaid the principal and interest of the occupied funds.

Shanshan Group and its parent company Shanshan Holdings (collectively referred to as "Shanshan Enterprises") have a high level of visibility and should be a model for other companies in terms of corporate governance.

According to the company's official website, Shanshan Enterprises was founded by Zheng Yonggang in Ningbo, Zhejiang in 1989. Over the past 30 years, Shanshan has steadily developed from a single clothing business into a global leading high-tech group in industries such as new energy technology and polarized film. Since 2002, it has been listed in the Fortune Global 500 for consecutive years.

Some listed companies and their controlling shareholders have been subject to regulatory investigations.

On the evening of April 29, 2024, Changjiang Health announced that the company and its controlling shareholder, Changjiang Runfa Group, had recently received "Notice of Filing" from the China Securities Regulatory Commission for suspected illegal and irregular information disclosure.

On the same evening, Changjiang Health disclosed its 2023 annual report, which showed that its 2023 financial report had been issued a qualified opinion, involving fund occupation and irregular guarantees, and failure to fulfill information disclosure obligations in a timely manner.

Regarding fund occupation, as of December 31, 2023, Changjiang Runfa Group had formed a non-operating fund occupation balance of 292 million yuan through fund transfers; formed a non-operating fund occupation balance of 31.05 million yuan through Changjiang Health's financing lease business; and formed a non-operating fund occupation balance of 1.319 billion yuan through discounting commercial acceptance bills issued by Changjiang Health (as of December 31, 2023, not yet paid).

In January 2024, Changjiang Health continued to transfer non-operating occupied funds to Changjiang Runfa Group through fund allocation, totaling 1.93 billion yuan. As of the date of the audit report, Changjiang Health's non-operating fund occupation balance was 3.625 billion yuan, accounting for 96.18% of the listed company's net assets at the end of 2023.

The auditing agency pointed out that it was unable to determine the accuracy and completeness of the actual fund occupation situation of Changjiang Health's disclosed controlling shareholders and other parties, and was unable to obtain sufficient information on Changjiang Runfa Group's solvency, making it impossible to judge the recoverability of the occupied funds, and unable to determine the accuracy, completeness, and recoverability of the other accounts receivable in this regard.

It is worth noting that the Shanghai Stock Exchange and the Shenzhen Stock Exchange have recently emphasized the issue of delisting in the consultation stage of the new delisting rules for listed companies with major shareholder fund occupation issues.

The Shanghai Stock Exchange pointed out that for listed companies with internal control failures and non-operating fund occupation by controlling shareholders and their related parties, if the balance reaches 30% of the latest audited net assets or exceeds 200 million yuan, and they fail to correct it within the prescribed period, they will be promptly delisted.

The Shenzhen Stock Exchange stated that serious fund occupation without rectification will be included in the category of normative delisting. If the balance of funds occupied by the controlling shareholder or its related parties reaches more than 200 million yuan, or exceeds 30% of the company's latest audited net assets and is not returned within the required period, the company's stock will be delisted, effectively enhancing regulatory deterrence against major shareholder encroachment.