Analysis paper on the financial fraud case of Wanfu Biotech

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Wanfu Biotech Financial Fraud Case Analysis Paper 1

1. Background Introduction

Wanfu Biotech Co., Ltd. (referred to as "Wanfu Biotech") is An agricultural product processing enterprise in Changde City, Hunan Province, it is mainly engaged in the research and development, production and sales of rice intensive processing products. It was listed on the GEM on September 27, 2011. On September 14, 2012, the company announced that it had been investigated by the Hunan Supervision Bureau of the China Securities Regulatory Commission for suspected violations of relevant securities laws and regulations. On September 18, Wanfu Biotech issued an announcement stating that the China Securities Regulatory Commission decided to launch an investigation into the company, and its shares were suspended from trading the next day. On October 25, Wanfu Biotech issued the "Announcement on Supplementary Information Disclosure and Correction to the 2012 Interim Report" (referred to as the "Supplementary Correction Announcement"), admitting that it had inflated operating income by 188 million yuan in the 2012 semi-annual report. , the operating cost was artificially increased by 146 million yuan, and the net profit was artificially increased by 40.2316 million yuan, which caused the company's total profit in the first half of 2012 to change from a profit of 28.7401 million yuan to a loss of 11.1737 million yuan, a decrease of 138.88%. In addition, the company has not disclosed the first half of the year. Discontinuation matters. On March 2, 2013, Wanfu Biotech issued a self-examination announcement and admitted financial fraud. So far, Wanfu Biotechnology has become the first fake stock on the GEM.

2. Analysis of fraud methods

Generally, the result of corporate financial fraud is an inflated increase in operating income and profits. According to the correlation between the three financial statements in accounting, the increase in operating income and profits in the income statement is reflected in the balance sheet, which is an increase in assets. According to Wanfu Biotech’s announcement, its specific fraud methods include inflating accounts receivable, inflating projects under construction, and inflating prepaid accounts.

(1) Inflated operating income

Wanfu Shengke’s main business project is the sale of rice, maltose and other agricultural and sideline products. The actual sales revenue of most products is forged to be more than four or five times the normal selling price. The forged sales revenue is more than a hundred times the real sales revenue. Some products even have no actual sales and are fabricated out of thin air. The existence of sales behavior. The actual operating income of syrup was 20.3174 million yuan, while the false report stated that the operating income was 122.2612 million yuan, an inflated increase of 101.9438 million yuan; the operating income of maltodextrin was 0 yuan, and the false report stated that the operating income was 11.2389 million yuan, an inflated increase of 11.2389 million yuan; The actual operating income of the product was 82.3144 million yuan, and the false report was 269.7602 million yuan, an inflated increase of 187.4458 million yuan.

A few days ago, Wanfu Biotech released its 2012 annual report. The company lost 3.41 million yuan last year. What is particularly strange is that despite the large-scale production line shutdown in the first half of last year and the counterfeiting crisis in the second half of the year, Wanfu Biotech achieved revenue of 296 million yuan for the whole year, a year-on-year increase of 8.39%. "When the fraud came to light and sales were greatly affected, Wanfu Biotech achieved revenue of 214 million yuan in the second half of last year. People cannot help but doubt the authenticity of its performance." Since Wanfu Biotech's fraud was leaked, it led to Changes have occurred upstream and downstream of the industry chain: upstream suppliers have taken the opportunity to raise prices, which has greatly increased the company's operating costs; downstream customers have reduced the quantity of Wanfu Biotech products they purchase, or have asked the company to supply goods at lower prices, and the company's product sales have declined significantly.

In addition, the top five accounts receivable before the correction did not appear again after the correction, and the total amount of the top five accounts receivable before the correction reached 71.7278 million yuan, which was 2760.42 million yuan more than the actual situation. Ten thousand yuan was falsely increased by 44.1237 million yuan. It shows that there is serious fraud in accounts receivable. According to the investigation, the two contracts signed by Wanfu Biotech with Huayuan Grain and Oil Operation Department and the three-point contract with Shaniu Food Factory disclosed in the sales contract did not exist; The owner of the trading house, Huang Deyi, is related to the controlling shareholder of Wanfu Biotech. From this, it can be seen that the company has forged sales contracts and fictitious sales operations.

(2) Inflated advance payments

Accounts payable and advance payments include not only project payments, but also payments generated from daily operations. However, Wanfu Biotech's accounts payable are very small, only 7.63 million yuan at the end of the first half of 2012, which can be ignored. As for prepaid accounts, except for the end of 2011, the amount has never been large. At the end of 2011, Wanfu Biotech's prepaid accounts increased by 449.44% compared with the end of the previous year. The company's explanation for this is, "The main reason is that the company raised funds The investment project has been fully launched and the prepayment for equipment has increased. "The question is, since the prepayment for the project should have decreased at the end of the first half of the year, why did the prepayment on the statement increase so much? Some people explained that a lot of purchase money was paid in advance during daily business activities.

However, judging from historical data, Wanfu Biotech's daily operating activities do not generate much prepaid accounts. Judging from the fact that prepaid accounts were also not high at the end of the first half of 2011, there is no season that causes prepaid accounts to surge. sexual factors. In fact, according to the prospectus, among the prepaid accounts at the end of the first half of 2011, the prepaid broker (raw materials) purchase amount was only 9.55 million yuan.

(3) Inflated income and profits

By conducting related party transactions, using related parties to fabricate sales, and through sales pricing differences, the purpose of transferring profits or inflating profits is achieved. In the financial fraud case of Wanfu Biotechnology, there was obvious fraud in related party transactions. The report shows that Hunan Province Shaniu Food Factory and Huaihua Xiaoyaya Food each contributed about 13 million yuan in revenue. However, in the revised report, these two companies have disappeared from the list of the top five customers: Hunan Qidong Jiamei Food The revenue contributed by Hejin Zhongyi Candy Company was 14.1561 million yuan and 13.4195 million yuan respectively, which changed to 2.228 million yuan and 1.1873 million yuan after the change.

Wanfu Shengke has set up a large number of external virtual supplier accounts. The owners of these accounts are some real grain brokers, but they are actually controlled by Wanfu Shengke. Transfer self-owned funds into these accounts in the form of advance payments, and then withdraw cash from them or transfer them back in other ways, which constitutes sales returns, resulting in an increase in sales scale, thereby inflating operating profits.

Wanfu Biotech privately engraves fake official seals for customers, fabricates fake sales contracts, falsely issues sales invoices, prepares bank documents, fake warehouse receipts and other counterfeiting processes, making the inflated sales revenue look reasonable. , or even go to the tax department to pay taxes on fake income.

Inflated profits and income need to correspond to "assets". In the process of fraud, Wanfu Biotech chose to inflate the "construction in progress" and "advance accounts" projects. Its construction projects with raised funds are still under construction to reduce the risk of exposure. As for the prepayments, whether they actually occurred needs to be verified. , perhaps actually posting and transferring funds back.

3. Signal analysis of Wanfu Biotech’s financial fraud

In the semi-annual report, the company’s total operating income reached 23.22 million yuan, an increase of 16.23% over the same period last year, while operating profit and profit The total amount was only 25.54 million yuan and 28.74 million yuan respectively, a decrease of -15.34% and -16% compared with the same period last year. In the 2011 annual report, the company's total operating income increased by 27.60% compared with 2010, operating profit increased by 10.62%, and total profit increased by 9.11%. Within the same one-year period, operating profit and total profit fluctuated greatly, which is suspicious.

The company has a large number of prepaid accounts, all of which are "prepayments for projects and equipment, and the projects are still under construction", and the corresponding customers are all individuals and cannot be verified.

The amount of corporate projects under construction has increased significantly compared with the end of 2011, but the degree of completion within half a year is very low. The heating workshop renovation project was only 50% complete, and the sewage treatment project was only 2% complete. In addition, judging from the construction projects in progress in June 2011 disclosed in the prospectus, there was no sewage treatment project. Then, the authenticity of this item in the semi-annual report is very questionable. For the starch sugar expansion and renovation project, the 2012 semi-annual report increased the investment amount by 12.5 times compared with the 2011 annual report, but the project progress dropped from 90% to 30%. However, the starch sugar expansion and renovation project was not mentioned at all in the 2012 annual report. , it is unknown whether the project exists or has been completed.

4. Enlightenment of financial fraud

Financial fraud cases occur frequently and must be taken seriously. More importantly, financial fraud is not a quick fix. There will inevitably be clues to follow after a long period of strategizing. We must reflect on how to make full use of public information of listed companies and risk-oriented audit models to detect financial fraud of listed companies as early as possible. In the case of Wanfu Biotech, a large number of bank certificates were forged. The fact that the problem was not exposed before was necessarily related to the lax review of relevant certificates and bills. Therefore, the audit should pay attention to the review of original vouchers of relevant enterprises. Wanfu Biotechnology belongs to the high-tech industry and is a local performance enterprise. Its industry background, listing procedures, financial support, and technology research and development are all key audit breakthroughs. Perhaps it is necessary to strengthen on-site visits to obtain direct evidence. For a company that focuses on sales, the relationship between it and its customers is also quite close. Therefore, through on-site visits to investigate the authenticity of its various businesses, fraud can be further prevented and discovered.

References:

[1] Economic Information Network. Investigation into the first fraudulent GEM stock [Z]. Securities Market Weekly, 2012, (43): 8-9.

[2] Cui Xiaoli, Wu Lei. Case analysis and enlightenment of Wanfu Biotech’s financial fraud [J]. Modern Commerce and Industry, 2013, (15)

[3] Ningping. Wan Case analysis of Wanfu Shengke’s financial fraud [J]. Friends of Accounting, 2014, (25)

[4] Sun Xudong. Wanfu Shengke’s prepaid account fraud [J]. Securities Market Weekly, 2012, (43) ): 48-49

[5] Fu Qiang, Liu Xiulan. The manifestation and impact of financial information distortion of listed companies in my country [J]. Journal of Southwest University for Nationalities (Humanities and Social Sciences Edition), 2012, (4 ): 122-126. Wanfu Biotech Financial Fraud Case Analysis Paper 2

Abstract "The first fraudulent stock on the GEM" - Wanfu Biotech's financial fraud case has once again aroused the public's concerns about financial reports among investors. Concerns about information quality also cast serious doubts on the credibility of intermediaries such as the China Securities Regulatory Commission and accounting firms. Based on the currently disclosed information and based on the financial fraud triangle theory, we analyze the reasons for Wanfu Biotech’s financial fraud and provide suggestions and thoughts to avoid the recurrence of such scandals.

Keywords Wanfu Biotech; financial fraud; triangle theory

1. Case introduction

Wanfu Biotech (Hunan) Agricultural Development Co., Ltd. (hereinafter referred to as "Wanfu Biotechnology") was formerly known as Xianglu Wanfu Co., Ltd., Taoyuan County, Hunan Province (hereinafter referred to as "Taoyuan Xianglu Wanfu"). It was established on May 8, 2003, with a registered capital of 3 million yuan. It was established on April 1, 2005. , the registered capital increased to RMB 20 million. On March 21, 2006, it was renamed Hunan Xianglu Wanfu Agricultural Development Co., Ltd. (hereinafter referred to as "Xianglu Wanfu"), and its business scope was changed to: acquisition, warehousing, and sales. Grain; processing and sales of rice and feed; production and sales of high maltose syrup, maltodextrin, starch, starch sugar, candy, biscuits, soy milk powder; production and sales of rice husk activated carbon, sodium silicate, oil, and livestock breeding and processing. On October 7, 2009, Xianglu Wanfu was changed to Wanfu Biotech (Hunan) Agricultural Development Co., Ltd. and was listed on the GEM on September 27, 2011. The stock abbreviation is "Wanfu Biotech" and the stock code is "300268 ".

Wanfu Shengke pioneered the circular economy production model in China with rice starch sugar and rice protein as the core products of deep processing of rice and efficient comprehensive utilization of by-products, and has become the first level of circular economy and comprehensive utilization efficiency of by-products. One of the companies with the highest and longest industrial chain. As an emerging industry with high technological content, the development of this industry plays a positive role in increasing farmers' income, promoting the upgrading of the agricultural product processing industry, and promoting the development of the food industry. Therefore, it is supported by various policies and future development should It is bright.

However, Wanfu Biotech, which had just gone public, fell into a "financial fraud scandal." In August 2012, the Hunan Securities Regulatory Bureau discovered clues during a routine inspection of Wanfu Biotech. The unusual behavior of the company's financial director attracted the attention of the Securities Regulatory Bureau. After investigation, the company inflated its operating income in the 2012 semi-annual report. 165 million yuan, with an inflated operating profit of 34.35 million yuan. The aforementioned data amount was large and the circumstances were serious, so it was investigated by the Hunan Provincial Securities Regulatory Bureau. With the deepening of the investigation by the regulatory authorities, Wanfu Biotech’s past "evil" OK” was finally revealed. Wanfu Biotech announced on March 2, 2013 that the company's self-examination found that the financial data in the regular reports from 2008 to 2011 contained false records: from 2008 to 2011, the cumulative inflated revenue was about 740 million yuan, and the inflated operating profit was 180 million yuan. About 160 million yuan, an inflated net profit of about 160 million yuan. According to Wanfu Biotech's prospectus and 2011 annual report, the company's total net profit in four years was 181 million yuan. However, 160 million yuan of the net profit was fictitious. In fact, the total net profit in the four years was only about 20 million yuan. Nearly 90% of the income was obtained through “counterfeiting”.

"The first fake GEM stock" - Wanfu Biotech has been publicly condemned twice by the Shenzhen Stock Exchange. The stock has fallen to the limit and been banned for many times. The relevant personnel involved have been tried and punished in accordance with the law. The intermediaries that "escorted" its listings have also been severely punished by law. For example, Zhonglei Accounting Firm has had its business income confiscated and fined 2 due to false records in its IPO audit report and 2011 annual report. times fines, revoking its securities service business license, etc.

The "Wanfu Biotechnology Fraud Case" that shocked the stock market has once again caused investors and regulatory authorities to pay attention to the financial quality of listed companies. At the same time, the outside world has begun to question the credibility of audit and other reports issued by intermediary agencies. Doubts are getting stronger and stronger.

2. Analysis of the causes of Wanfu Biotech’s financial fraud

Through the exploration of the phenomenon of financial fraud in my country and the classic financial fraud theories, such as iceberg theory, GONE fraud theory, risk factor theory and Triangular theory, this article believes that using the financial fraud triangle theory can more thoroughly explain the causes of corporate fraud under the special institutional background of our country.

(1) Pressure

Unlike the West, the main motivation for financial reporting fraud in my country is to cope with the special regulatory policies of the capital market, such as issuance and listing policies, additional issuance and allotment policies, and special treatment and trading suspension policies, etc. Often in order to achieve a "glorious" listing and avoid special treatment, suspension or termination of listing, companies use various methods to whitewash financial data.

1. In order to win the "listing" competition

The GEM provides a good way to raise funds for the majority of small and medium-sized enterprises, and can make full use of private capital, which is conducive to the cultivation of high-tech As for the growth of enterprises, as of December 31, 2012, there were nearly 355 companies listed on the GEM in my country. According to the provisions of the "Interim Measures for the Management of IPOs on the GEM", a company to be listed on the GEM needs to meet the following requirements: continuous profits in the past two years, a cumulative net profit of not less than 10 million yuan in the past two years, and continuous growth; or profits in the past year, and The net profit is not less than 5 million yuan, the operating income in the last year is not less than 50 million yuan, and the operating income growth rate in the last two years is not less than 30% (the net profit is calculated based on the lower before and after deducting recurring profits and losses) . In order to meet the conditions for public issuance of stocks and listing, Wanfu Biotech inflated its sales revenue by approximately 120 million yuan, 150 million yuan, and 190 million yuan respectively from 2008 to 2010, and inflated its operating profit by approximately 28.51 million yuan. yuan, 38.57 million yuan, 45.9 million yuan. After adjustment, the operating income from 2008 to 2010 was approximately 108.24 million yuan, 177.65 million yuan, and 243.59 million yuan, and the operating profits were approximately 4.14 million yuan, 3.43 million yuan, and 7.53 million yuan. Listing qualification indicators are often relatively higher in actual implementation. Such "real" performance may hardly qualify for GEM listing, let alone stand out from the crowd in the long IPO queue. According to reports, Wanfu Biotech had no plans to go public at first. However, in order to promote local economic development, improve economic business, and enhance competitiveness, and vigorously promote local companies to go public, Wanfu Biotech has repeatedly done ideological work and persuaded Wanfu Biotech to go public. Listed. In this way, under the strong temptation of the capital market and the heavy pressure imposed by government departments, Wanfu Biotech began a ridiculous journey of fraud to obtain listing qualifications.

2. Avoid delisting

If a listed company suffers losses for three consecutive years and fails to eliminate them within the time limit, its listing will be terminated. In fact, before the official delisting, these companies began to be subject to some special controls. For example, once a listed company has suffered losses for two consecutive years or the net assets per share are lower than the face value of the stock, the exchange will impose "special treatment" on its stocks ( ST). In 2011, Wanfu Biotechnology fabricated operating income of 280 million yuan, inflated operating profits of 65.4136 million yuan, and inflated net profits attributable to shareholders of listed companies of 59.1269 million yuan, respectively accounting for 30% of the three financial data in the company's disclosed 2011 financial report. 50.63%, 110.67% and 98.11%. After adjusting the above inflated data, the company's operating income, operating profit and net profit attributable to shareholders of listed companies in 2011 were 273 million yuan, -6.3051 million yuan and 1.1417 million yuan respectively; the operating income in 2012 was 2.96 billion, the operating profit was -7.3658 million yuan, and the net profit attributable to shareholders of the listed company was -3.4161 million yuan. It can be seen that if Wanfu Biotech does not adopt false transactions and other methods to "create" economic performance, it will face "ST" and other risks.

(2) Opportunities

1. Unbalanced company internal control system

According to the prospectus of Wanfu Biotech, the company’s board of directors has an audit committee, which is mainly responsible for : Audit and supervise the company's financial revenue and expenditure plan, the implementation of investment and expense budgets, and economic benefits; audit the legality and authenticity of the company's financial statements; audit and supervise the company's internal control system and its control procedures. The objects of the company's internal control mainly include related transactions, use of raised funds, information disclosure, main business activities (such as contract agreements, sales and collections, inventory purchases and payments), etc. According to the current investigation results, Wanfu Biotech's fraud mainly adopts a "one-stop" counterfeiting model, that is, virtual procurement, production and sales processes, forging purchase and sale contract documents, financial bills, etc., to achieve the spectacular performance of "becoming famous all the way". At the same time, the company failed to report and disclose the production suspension in the first half of 2012 in a timely manner, thus inflating its revenue. If the company has a good internal control system and managers strictly implement the internal control system, this one-stop false sales will not be possible.

2. Lack of appropriate punishment mechanism

At present, my country's securities law enforcement has not yet played a real deterrent effect on potential violations of laws and regulations. At the same time, there is a lack of civil liability provisions in my country's current securities regulations. Through statistics on the administrative penalties imposed by the China Securities Regulatory Commission on more than 200 listed companies for false statements and other violations from 2006 to 2012, it was found that the penalties imposed were mainly warnings to the main persons in charge of listed companies and ranged from tens of thousands of yuan. fines, and the fines issued to relevant intermediary audit firms are even rarer.

In this way, for companies that violate regulations, the negative costs of "public condemnation" are far smaller than the benefits of information disclosure violations, and the impact on intermediaries is even more negligible.

(3) Self-rationalization

After facing pressure and gaining opportunities, there is the last element that truly forms corporate fraud - excuses, that is, the "rationalization" of fraud. After the fraud case surfaced, Gong Yongfu, chairman of the company, revealed that the listing of Wanfu Biotech was mainly promoted by the government, and the current situation is not unrelated to the "excessive" promotion of the local government. "Government promotion" may be part of the factor that promotes Wanfu Biotechnology's fraud, but it seems more like an excuse for it to excuse its own fraud.

3. Enlightenment and Suggestions

Fraudulent issuance, financial fraud and other behaviors seriously damage the rights and interests of investors and are cancers of the capital market. The Wanfu Biotech fraud case not only severely damaged the confidence of small and medium-sized investors in the capital market, but also revealed that there are still problems with the China Securities Regulatory Bureau and intermediaries during the IPO review stage of my country's listed companies. Based on this, this article puts forward several suggestions:

1. Establish a market-oriented regulatory concept

Regulatory agencies should continue to promote the market-oriented reform of listing and issuance policies and make quasi-market approval The system should gradually transform into a fully market-oriented registration system, improve the information disclosure mechanism, and provide investors with sufficient and true information so that they can make independent judgments and decisions. The regulatory authorities should ensure that the financial information provided by companies issuing securities or being traded is The information is true and complete. At the same time, the influence of external forces promoting the listing of companies should be weakened. The listing of companies cannot be packaged in order to achieve certain economic indicators. It is necessary to ensure that the listing of companies is driven by marketization rather than policy. Imagine that without the strong promotion of the government and the Financial Office, and without the "green light" release from the China Securities Regulatory Commission and sponsors, Wanfu Biotech, which does not yet have the conditions for listing, would not be forced to go public.

2. Improve the legal system and increase penalties for financial fraud

Revise and improve existing rules to further clarify issuers and sponsors, accountants, lawyers and related market participants responsibilities, and detail the accountability mechanism and penalty provisions for violations. Strengthen the supervision and inspection of the professional practices of sponsor agencies, underwriting agencies, accountants, law firms and other relevant intermediary agencies. If due diligence is found to be insufficient, information disclosure is non-compliant, financial fraud and other behaviors are found, timely and severe penalties will be imposed in accordance with regulations, and increased penalties will be imposed. The strong crackdown and punishment on financial fraud in listed IPOs has the effect of establishing legal authority and deterring companies with fraud motives. While conducting administrative accountability and punishment, we should establish a complete mechanism to protect investors' rights and interests and actively promote the implementation of civil compensation mechanisms.

3. Strengthen the internal control of enterprises and enhance professional quality training

Put forward clear requirements for internal control evaluation in relevant data laws and regulations, and gradually establish a unified and scientific internal control evaluation of financial reports standard. Clearly define the legal responsibilities of company management for internal control of financial reporting, and strengthen supervision and punishment measures for management. At the same time, the professional level and moral quality of accounting personnel should be enhanced, and internal training, assessment, and supervision should be carried out regularly within the company; relevant members of the board of directors should be regularly trained on appropriate financial knowledge. According to Gong Yongfu, chairman of Wanfu Biotech, he did not know the reason for the fraud. The degree is so serious, and the former financial director Qin Xuejun was also instructed to prepare false accounts. As for the so-called master's true nature, no one knows, but if the two people understood the seriousness of this move, they would not agree to such bold falsification of profits. , it can be seen that both financial personnel and functional leaders must master good financial knowledge.

4. Gradually establish a complete delisting system, with strict requirements to ensure the quality and vitality of listed companies

Early elimination of companies that are pseudo-high-tech or develop slowly and lack scientific management Go out, give full play to market theory, expand supply so that so-called "shell" resources lose their market, and create conditions for the market to play the role of survival of the fittest.

References:

[1] China Securities Regulatory Commission. The China Securities Regulatory Commission notified Wanfu Biotech on suspicion of fraudulent issuance and related intermediaries’ illegal violations[R].2013.5.14.

[2] Chen Xi. A brief analysis of financial fraud of GEM IPO listed companies [J]. Financial Perspectives, 2012.

[3] Wu Ge. Research on financial report fraud of listed companies - based on the company Governance Perspective [M]. Higher Education Publishing House, 2010: 68-73.

[4] Xia Zihang. Chairman of Wanfu Biotech said he "falsified too much" and the financial director bizarrely "delivered an account" during the audit [N]. Shanghai Securities News, 2013.

[5]Wanfu Biotechnology Fraud Case[OL]./s_wfskzj_all/1/.

[6]Dai Xiaohe.Gong Yongfu Confession[N]. Securities Market Weekly, 2013.5.24 (Issue 1900).

About the author:

Yu Xinli (1988-), female, from Shangzhi, Heilongjiang, Beijing Master's degree candidate at the Business School of Industrial and Commercial University.

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