Review of the financial fraud case of Wanfu Biotechnology: A case study of CPA audit failures in listed companies – The main business of Wanfu Shengke (Hunan) Agricultural Development Co., Ltd. is the research and development, production, and sales of rice intensive processing products. Discussion on Impact of Big Data Analysis on CPA Audit.
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The company stood successfully listed on the Growth Enterprise Market in 2011. But it stood exposed to a financial fraud scandal in just one year. In 2012, when the CSRC inspected the company. It found that the prepaid account balance in the company’s financial statement data was very high. Which stood suspected financial fraud. Therefore, the CSRC decided to file a case for inspection in September, and the exchange suspends trading of the company’s stock for one month. Later, Wanfu Shengke admitted to financial fraud and temporarily suspended trading for the second time on May 16, 2013.
Analysis of the fraudulent methods of Wanfu Biotechnology
“One-stop” fraud mode, strong systematic
Wanfu Shengke made virtual purchases, production, and sales, and forged corresponding credentials. The non-real-money fraud mode adopts by the post-listing financial fraud. A huge amount of prepaid accounts existed fabricated. The “one-stop” fraud process is to first transfer the funds in one’s account to scattered personal accounts using prepayment, which is ostensibly the prepayment for the purchase of grain, and then the fictitious income, and pass the money in these personal accounts through the company. The sales revenue stands transferred back to the company’s account. And the free funds complete the extracorporeal circulation to achieve the purpose of inflating sales revenue and increasing profits. A series of pipelined frauds are enough to reflect its systematic fraud.
Fictitious cash flow, strong concealment
Its free funds change ways in cardiopulmonary bypass. It stands shown as a prepayment of a large amount of money. Which stands divided into several pieces of funds when the payment stands returned to avoid the attention of the auditors. At the same time, to avoid inconsistency between personal and corporate accounts, Wanfu Biotechnology also took the risk of smuggling the business seals of several banks and forging bank receipts. Investigators also spent a lot of time checking bank receipts and found fake bank receipts. This shows that the fraud exists hidden and realistic, and it is relatively difficult to find the problem directly.
Adopting the cost backward calculation system, the overall balance of the financial statements
According to the principle of income and cost ratio, Wanfu Biotechnology adopts the cost-back calculation system. The financial staff reversely calculates the company’s cost according to the fictitious income to achieve a balance between production and sales. Not only that, many of Wanfu Biotechnology’s businesses are true and false. True numbers also have false numbers. And based solely on the financial statements calculated backward. It is impossible to see the tricks and find out the problem of fraud.
Reasons and faults in the case study of CPA audit failures
In addition to Wanfu Shengke’s fraudulent methods, certified public accountants also have many mistakes in the audit business. Such as the following:
The analysis program is not in place
First of all, as a rice processing enterprise. Wanfu Biotechnology has an abnormally high gross profit margin and low inventory turnover rate. In the analysis of the upstream and downstream industry chains. It can be found that the upstream purchase price increases. While the downstream product sales price decreases. , the gross profit margin is very stable strangely.
Sponsors and accountants may fail to find abnormal gross profit margins. And can easily conclude that the company’s business is normal and gross profit margins are no problem; not only that. Auditors also did not maintain proper professional prudence for the abnormally high prepaid accounts and gave due consideration. Some are concerned, see through the lies of their raw material supply, and conduct further audits on the above anomalies. Thereby identifying and assessing the risk of material misstatement.
Lack of confirmation and supervision procedures
Auditors must implement corresponding procedures based on the principle of relevance, clarify work requirements, and ensure the quality of practice. However, later investigations found that Zhonglei and its certified public accountants did not make any judgments about the bank deposits and account receivable of Wanfu Biotechnology at the end of 2008 and 2009.
Correspondence to the balance of the payment was carried out, and the corresponding alternative audit procedures were not implemented. Due to the lack of bank deposit confirmation and accounts receivable confirmation procedures, the certified public accountants contacted by Zhonglei failed to detect Wanfu Shengke’s fraud and completed the fact of fictitious income through the extracorporeal circulation of its funds.
Even in the implementation of the confirmation procedure. The firm did not perform well and did not control the implementation process of the confirmation. Some of the replies even had the signature and seal of the person who was not asked to inquire about the letter. The above-mentioned procedural defects and carelessness were the important reasons for the failure of the audit.
There is no “ground gas”, and the verification of the bank’s running water is ignored
The certified public accountant failed to start with the details, especially the original documents. Such as bank receipts and other original documents to find the issuer’s financial abnormality. Many companies’ fraudulent methods are not flawless. It was the auditors who were careless, ignored some details, and passed over the subtleties. The bank balance deposits and bank receipts with high authenticity were passed over, allowing them to forge.
Thoughts and Suggestions for the case study of CPA audit failures
Design, implement, and maintain necessary internal controls
The realization of the “one-stop” fraud reflects the excessive concentration of power in Chinese enterprises. Gong Yongfu and his wife Yang Ronghua hold 80.38% of Wanfu Biotechnology, and the equity is highly concentrated. It is like a mom-and-pop shop and lacks perfect internal control. Defects in the company’s governance structure are a major driving force behind the realization of Wanfu Shengke’s financial fraud. Therefore, enterprises should design and implement necessary internal control, strengthen corporate governance, and change the situation of excessive concentration of power.
Certified public accountants should abide by and strengthen professional ethics
As far as auditing business is concerned, a certified public accountant must be independent of the audited entity and be in the public interest. A certified public accountant with good professional ethics can abide by professional ethics requirements, maintain corresponding professional doubts, and reasonably use professional judgments.
In Wanfu Shengke’s audit, the firm’s upstream and downstream verification found signs of false transactions, but did not conduct further audits, but issued an unqualified opinion, which is obviously against professional ethics. Secondly, auditors should not blindly listen to the information provided by the audited enterprises but should conduct audits in strict accordance with the procedures and collect evidence from different information channels, to effectively prevent and reduce the risks brought by the audit.
Strengthen supervision and management of intermediary agencies and local governments
Because intermediaries are subject to the business entrusting party, to continue to receive high remuneration from the entrusting party, many intermediary agencies have lost their independence, and illegal operations have contributed to financial fraud and harmed the interests of investors and the public. Therefore, the China Securities Regulatory Commission should improve relevant laws and regulations, introduce and improve the corresponding civil compensation system, clarify rights and responsibilities, and increase the cost of violations.
All sectors of society should also work with relevant government departments to build a reputation mechanism for intermediaries. At the same time, overcome the local government’s use of the number and “performance” of locally listed companies as its “performance”, and increase the punishment of government officials for illegal “green light” behaviors of listed companies.