The Notification on the Supervision on the 2011 Annual Reports of Listed Companies
The annual report is the most crucial part and the most fundamental content in the information disclosure of listed companies. The information contained in the annual report covers business operation, financial status and corporate governance of the company and is the key to improving the transparency of listed companies, directly influencing investors in their evaluation on the value of listed companies and investment decision-making. The CSRC has always attached great importance to the supervision on the annual reports of listed companies, regarding it as the core component of the general supervision over listed companies as well as a vital approach to protect the lawful rights of investors. In 2012, aiming to make the supervision on annual reports more pertinent and effective, the Department of Listed Company Supervision of the CSRC (hereinafter referred to as the 「Department of Listed Company」) adopted the approach of 「divided responsibilities and layered monitoring」, cooperating with different regional offices, Shanghai and Shenzhen Stock Exchanges in the review of the 2011 annual reports and on-site inspection, further exploring the resolution of all problems detected, enhancing service while strengthening supervision, and prompting listed companies to boost their performance. Details related to the supervision on the 2011 annual reports of listed companies made by the CSRC are hereby set out as follows :
I. The Overview
By April 30, 2012, 2403 companies listed at Shanghai and Shenzhen Stock Exchanges have all completed the disclosure of the 2011 annual report on schedule, among which 938 are listed on the Main Board in Shanghai, 484 on the Main Board in Shenzhen, 670 on the SME Board and 311 on the GEB. The details are as follows:
1).All-rounded planning and orderly implementation
Over the years, the CSRC has formed the joint mechanism in annual report supervision based on the concerted effort of the Department of Listed Company, the regional offices of the CSRC and exchanges, where the Department of Listed Company is in charge of the planning and monitoring of annual report supervision, the regional offices take care of on-site inspection and the exchanges are responsible for the review of annual reports. This is the first year for the Department of Listed Company to be directly involved in the review and on-site inspection. In terms of the review of the annual reports, the Department of Listed Company reviewed 2% of the listed companies, the regional offices reviewed no less than 10% of the listed companies within the their jurisdiction, while, in principle, exchanges carried out comprehensive review. The review results were compared for analysis; Meanwhile, the Department of Listed Company selected a group of listed companies for on-site inspection, the regional offices compared the routine supervision with annual report review and independently selected listed companies within the their jurisdiction for on-site inspection.
In the end of 2011, the CSRC made a public announcement, stating the supervision plan on the compilation, auditing and disclosure of the 2011 annual reports of listed companies as well as on the accounting firms in charge of the annual review. Following that, the Department of Listed Company issued the notice on the supervision on the 2011 annual reports of listed companies to the regional offices and exchanges, further clarifying the respective duties and requirements for the three main parties in charge of the supervision.
Based on these arrangements, the Department of Listed Company held a series of seminars on annual report supervision and organized experience-sharing activities, group discussions and training sessions by experts. Meanwhile, the Department of Listed Company also released timely updates regarding the supervision on the annual reports in the form of news bulletins on supervision on listed companies and special reports on annual report supervision. The regional offices and exchanges regularly submitted reports to the Department of Listed Company concerning annual report supervision and major events, while maintaining timely exchange of regulatory information, taking advantages of regulatory coordination to achieve joint supervision and information sharing.
2).Focus on information disclosure, strengthen the comparative analysis in the review of annual report
Based on the supervision prior to, during and after the annual report disclosure, the exchanges completed the review and analysis of the 2011 annual reports of 2403 listed companies, focusing on 9053 issues, of which financial and accounting issues accounted for 58%, problems regarding daily operation made up 22%, corporate governance matters made up 14% and other issues accounted for 6%. Among all the companies, the regional offices selected the annual reports of 408 listed companies, or 17% of the total for review, comparing the results with those of the review carried out by the exchanges. In the review, the regional offices put emphasis on 1920 issues, mainly covering compliance issues regarding financial accounting treatment, corporate governance and standard operation, information disclosure, the utilization of funds raised and distribution of cash dividends. Based on routine supervision, the Department of Listed Company picked 48 listed companies for the review, or 2% of the total, comparing the results with those of the review done by the exchanges and the regional offices. These companies were either involved with abnormal changes in their stock price, media questioning and complaints or facing material risks and sharp fluctuations in performance or have just completed major asset reorganization and IPO within the reporting period.
By the end of June 2012, the review of the 2011 annual reports and the comparative analysis of the three major parties had already been completed. Regarding the review of the annual reports of the 48 companies mentioned above, the exchanges put their emphasis on 385 issues, the regional offices 412 issues and the Department of Listed Company 246 issues. Among these issues, 144 were overlapping ones that were the common concerns of all three parties, mainly including corporate governance and standard operation, financial accounting treatment, information disclosure, and the credibility of performance. In response to these issues, the regional offices and exchanges have already adopted measures including inquiry, interview, on-site verification, requirement for publication of supplementary notices, circulation of a notice of criticism, public censure and referral for case initiation and official investigation. As for the rest of the concerns, the Department of Listed Company has already notified the regional offices and exchanges, demanding them to further verify and handle the issues and to stay alert of the issues in routine supervision.
3).Further enhance the effectiveness of annual report supervision through on-site inspection
On-site inspection is a major approach to confirming problems and detecting and actively eliminating risks at an early date. On the basis of annual report disclosure and routine supervision, the regional offices worked jointly to pick 434 listed companies, or 18% of the total for on-site inspection. By mid-October 2012, the regional offices devoted a total of 13,100 people (including 4208 external accountants) in this effort and completed the on-site inspection of 434 companies along with an extended inspection on 397 projects with respect to services provided by intermediaries such as accounting firms, financial consultants, sponsors and law firms. Through on-site inspection, 3868 problems relating to listed companies and 1437 problems concerning the practice of intermediaries were detected.
Based on the review and routine supervision of the annual reports, the Department of Listed Company, taking into account such factors as jurisdiction, industry, company size and market sector, chose 8 companies for on-site inspection of the annual report. Between August and mid-September 2012, 8 inspection teams consisting of almost 80 people from the Department of Listed Company, regional offices and exchanges, carried out an in-depth on-site inspection in accordance with the principles of 「complementation of expertise and supervision-related recusal」. Despite the extremely limited time, demanding task and the lack of human resources, the inspection teams managed to complete the on-site inspection in a timely and effective manner. A total number of 150 problems was detected during the inspection, mainly including: lack of independence, non-standard operation of the shareholders』 meeting, the board of directors and the board of supervisors meetings, lack of sound internal control, insufficient management over inside information, inadequate information disclosure, lack of standard financial accounting treatment, incompetent supervision by financial advisors, etc.
4).Reinforce supervision and effectively boost the quality of listed companies
Compared with the same period of last year, more in-depth and extensive supervision had been carried out over the review and on-site inspection of the annual reports. Meanwhile, the CSRC also adopted tougher measures when it comes to the investigation and accountability of violations, emphasizing the effectiveness of supervision in various processes of the annual report supervision. Through potent regulatory measures and timely risk resolution, listed companies were encouraged to further enhance the quality of information disclosure and standard operation. By now, the rectification of 2707 problems, or 70% of all problems, has been completed, while 1161 problems are still being rectified.
During the review of the annual reports, Shanghai and Shenzhen Stock Exchanges issued 1492 letters of inquiry regarding the annual reports, letters of concern relating to supervision or the post-annual report review comments to companies, representing a year-on-year increase of 457 copies; meanwhile, they also issued 38 letters for comments regarding accounting and legal issues to the Department of Listed Company and the Department of Accounting, an increase of 29 compared with the same period of last year; in addition, they required companies to publish correction or supplementary notice 359 times, representing an year-on-year increase of 150 times , issued 32 circulating notice of criticism, an increase of 18 over last year, as well as 8 public censures, a rise of 5 over last year (See table 1).
Table 1: Statistic on the Supervision on the 2011 Annual Reports by Shanghai and Shenzhen Stock Exchanges
Annual Report Supervision | Total | Shanghai | Shenzhen | SME Board | GEB |
Memorandum issued for the annual report supervision | 10 | 5 | 1 | 2 | 2 |
Letter issued for comments regarding accounting matters | 28 | 19 | 2 | 5 | 2 |
Letter issued for comments regarding legal matters | 10 | - | - | 10 | - |
Letter of inquiry and letter of regulatory concern regarding problems detected in the annual reports (or letter of comments after the review of the annual reports )issued to companies | 1492 | 472 | 440 | 365 | 215 |
Correction notice required to be published by companies | 220 | 47 | 50 | 83 | 40 |
Supplementary notice required to be published by companies | 139 | 44 | 29 | 34 | 32 |
Notice of criticism circulated | 32 | 25 | - | 5 | 2 |
Public censure | 8 | 7 | - | - | 1 |
People publicly identified as unqualified for the position of directors, supervisors or senior officers in listed companies (number of people) | 8 | 8 | - | - | - |
Total | 1947 | 627 | 522 | 504 | 294 |
Regarding the general problems detected in the on-site inspection of the annual report, the regional offices of the CSRC issued 564（an increase of 359 over the same period of last year）letters for comments or letters of concern, conducted 470 interviews (a year-on-year increase of 385 ) in case of serious problems, adopted 92 administrative regulatory measures (an increase of 38 over the same period of last year) including the issue of warning letters, correction orders, public statement orders, training orders or the identification of unsuitable candidates, and referred 7 companies to the police for case initiation and official investigation (an increase of 5 over the same period of last year). All the administrative regulatory measures above have been documented in integrity record in compliance with due procedures. (see table 2)
Table 2: Statistics on the Supervision on the 2011 Annual Report by the CSRC
Supervision on the Annual Reports | Total in this year | Shanghai | Shenzhen | SME Board | GEB | ||
On-site inspection | On-site inspection of the annual report | 434 | 208 | 74 | 97 | 55 | |
Intermediaries subject to extended inspection (number of intermediaries) | 397 | 164 | 83 | 67 | 83 | ||
Problems verified through on-site inspection (number of problems) | 3868 | 1431 | 889 | 851 | 697 | ||
Integrity record management | Inquiry (times) | 1347 | 443 | 184 | 165 | 555 | |
Entry (number of entry) | 90 | 27 | 29 | 13 | 21 | ||
Letters issued | Letter for comments or letter of concern regarding supervision (number of copies) issued | 564 | 266 | 127 | 108 | 63 | |
Administrative regulatory measures adopted | Letter of warning issued (number of copies) | 30 | 14 | 5 | 6 | 5 | |
Correction required to be made (number of companies) | 45 | 17 | 18 | 7 | 3 | ||
Public statement required to be made (number of companies) | 7 | 3 | 4 | 0 | 0 | ||
Required participation in training (number of people) | 8 | 3 | 0 | 5 | 0 | ||
Regular report required to be made (number of companies) | 0 | 0 | 0 | 0 | 0 | ||
Identified unsuitable candidates (number of people) | 2 | 0 | 2 | 0 | 0 | ||
Companies referred for case initiation and official investigation (number of companies) | 7 | 4 | 1 | 1 | 1 | ||
Regulatory interview | Directors, supervisors, senior officers (number of people) | 470 | 224 | 117 | 65 | 64 | |
Institutions responsible for annual report auditing (number of companies) | 148 | 71 | 46 | 21 | 10 | ||
As for new issues that attracted the attention of the Department of Listed Company in the annual report review, the regional offices and exchanges have implemented relevant solutions through inquiry, interview, on-site verification and rectification orders and continued to keep an eye on these issues in routine supervision. Regarding the companies with problems detected in on-site inspection by the Department of Listed Company, the regional offices have already issued 5 letters of concern on supervision, 1 letter of warning, 2 correction orders,conducted an interview with 2 companies, ordered 2 companies to participate in training, filed a request for unofficial investigation on 1 company to a regional offices, circulated 4 notices of criticism and carried out 2 special researches; issued 3 letters of concern on supervision to intermediaries and conducted an interview with 2 intermediaries, and filed 1 request for on-site inspection to the Department of Accounting. The regional offices will carry on the implementation of the solutions for these problems in the follow-up supervision.
II. The achievement made by listed companies in standard operation
In recent years, the CSRC has further fostered the development of standard operation mechanism for listed companies by encouraging listed companies to enhance their level of standard operation and transparency through a series of measures. As demonstrated in the review of the 2011 annual reports, listed companies have made great progress in corporate governance, information disclosure, internal control and investor protection, becoming even more standardized in their operation.
1) Listed companies exhibit an enhanced awareness of standard operation and further improvement in corporate governance
Over the years, corporate governance has always been a major component for the supervision on listed companies. The CSRC has established relevant regulations and systems, actively guiding companies in enhancing governance structure, increasing the awareness of standard operation, boosting governing quality and forming the internalized mechanism for standard operation. Between 2007 and 2009, the Department of Listed Company carried out a three-year 「special initiative for corporate governance of listed companies」. By the end of 2009, 10645 corporate governance problems had been rectified, accounting for 98% of all corporate governance problems detected. In the beginning of 2010, in order to deal with the residual problems left by the restructuring of listed companies, the Department of Listed Company carried out a special initiative to 「resolve peer competition and reduce related transactions」, guiding 136 key companies to solve problems through business integration and overall listing, in order to strengthen the independence of companies. By the end of 2011, the rectification of 92 companies had basically been completed. Through years of efforts, the governance of listed companies has saw certain improvement, with the problems concerning corporate governance found in the on-site inspection of the 2011 annual reports witnessing a year-on-year decrease of 3%. The listed companies have also achieved some progress in the operation and independence of shareholders』 meeting, the board of directors and the board of supervisors meetings. The value of related transactions by the 92 companies above dropped from RMB 31.323 billion in 2010 to RMB 12.661 billion, representing a 60% decrease.
2) Listed companies demonstrate a gradual improvement on the quality of information disclosure and heightened transparency.
During the review of the 2011 annual reports, the exchanges reinforced the review of information disclosure of the annual reports, detected potential problems in a timely manner and required relevant companies to make explanations. Via on-site inspection, the regional offices further verified the authenticity, accuracy and completeness of the information disclosed by companies. The Department of Listed Company furthered implemented the insider registration system, established a comprehensive preventive and control system for insider trading and increased the efforts of crackdown on insider trading. With the efforts of the CSRC and the exchanges, listed companies have gradually improve the quality of information disclosure and further increase their transparency. According to the review of the 2011 annual reports, listed companies in general have already established the information disclosure management system and the insider registration system, implemented the centralized management of information disclosure through the articles of association and internal administrative rules and strengthened the internal screening, aggregation, transmission and disclosure mechanism for sensitive information. Although some companies still have problems such as delayed and incomplete information disclosure, there has been a considerable drop in deliberate violations related to information disclosure and a marked improvement in the nature and impact of these violations over previous years. There have been significantly fewer cases involving the improper trading of stocks during the window period by senior officers. Meanwhile, the inside information management have become more standardized.
3) Listed companies have established a sound standard internal control system, further reinforcing the basis for standard operation.
In order to implement the requirements of the Basic Standards for Corporate Internal Control and its supporting guidelines, the Department of Listed Company have included the development of internal control of listed companies in the routine supervision, facilitating the implementation of standard internal control system in listed companies through multiple procedures and phases. According to the disclosure of the 2011 annual report, 1866 listed companies, or 77.65% of all listed companies, produced the self evaluation report on internal control. Among them, 99.30% believed in the effectiveness of internal control. 969 listed companies, or 40.32% of all listed companies, hired third party institutions to produce auditing report on standard internal control system. Among them, 94.74% were standard with no reservations. Based on the on-site inspection of the 2011 annual report, most companies have already established a department specifically in charge of standard internal control system and confirmed the responsible entity of internal control, attaching significantly greater importance to internal control. As the standard internal control system is implemented in all the companies listed on the Main Board in 2012, as its next action, the CSRC will be more devoted to facilitating the implementation of the internal control system and further bolstering the foundation for the standard operation of listed companies.
4) Listed companies have increased their awareness of rewarding shareholders and the protection of investors' lawful rights and interests have been further improved.
In order to strengthen investor protection, the Department of Listed Company has been dedicated to implementing the policy of cash dividends, encouraging and guiding listed companies to increase the awareness of rewarding shareholders. According to the disclosure of the annual reports, between 2009 and 2011, there were respectively 1006, 1321 and 1613 listed companies that implemented cash dividends, making up 54.76%, 60.74% and 67.12% of all listed companies in the year. The cash dividends were respectively RMB 389.042 billion, RMB 500.556 billion and RMB 606.764 billion, making up 35.85%, 30.09% and 31.35% of the total net profits in each respective year. Listed companies have been exhibiting gradual enhancement in cash dividends and more clear and transparent arrangements. Meanwhile, taking advantage of the annual report supervision, the Department of Listed Company has regarded the making and implementation of cash dividend policy as a major component of on-site inspection. According to the inspection, most companies have already clearly stipulated the dividend policy in the articles of association, their board of directors and shareholders』 meetings have adopted more standardized decision-making procedures regarding profit distribution, and the listed companies are becoming significantly more aware of voluntarily rewarding shareholders.
III. Major problems discovered in annual report supervision
According to the general results of the annual report review, listed companies have become more aware of standard operation and improved their corporate governance. However, they are still lacking in corporate governance, information disclosure, internal control, financial accounting treatment and the management and utilization of the funds raised (see the figure below). The intermediaries can generally act with due diligence and care pursuant to the requirements of laws, regulations and professional ethics, despite the fact the some intermediaries still exhibit low quality in practice. Compared with the same period of last year, despite pressing problems in the operation of listed companies ' shareholders』 meetings, board of directors and the board of supervisors' meetings, 24% of the listed companies have saw certain improvement in their standard operation, representing a year-on-year decrease of 3%.As the business and services of listed companies became more diversified, new and more complex accounting treatment problems emerged. As a result, the accounting treatment issues have become the most important problems, accounting for 27% of all the problems and representing a 3% year-on-year increase; as the comprehensive implementation of the standard internal control system and the raising of relevant requirements, internal control issues made up 18% of the total with a 3% year-on-year increase; with more detailed requirement on information disclosure and strengthened supervision, information disclosure issues accounted for 14% with a year-on-year increase of 2%; as the management of inside information has been further standardized, inside information-related problems made up 7% of all problems, exhibiting a 1% year-on-year decrease; issues concerning fund raising and independence maintained the original percentage of 5% and 2% respectively. The details are as follows:
Figure: the breakdown of major problems detected in the annual report supervision
1) Corporate governance and standard operation
Firstly, the lack of independence. Some companies still rely heavily on the major shareholders, lacking independence in such areas as assets, staff, finance, business and organizational structure. For instance, the controlling shareholders can directly interfere with the selection of senior officers in listed companies; major projects and contracts are required to be reported to the controlling shareholders for examination and approval. Secondly, the complexity of related transactions. Old problems still exist, such as the lack of standard procedures for related transactions and insufficient disclosure regarding the related parties and their transactions. Meanwhile, many new problems have emerged, for instance, the related parties are more concealed and the related transactions are more complex; as funds are appropriated in disguise, It is more difficult to determine whether the appropriation involves operational or non-operational funds. Thirdly, the shareholders』 meetings, the board of directors and the board of supervisors' meetings are not operating in a standard manner. For instance, directors are not attending the board of directors' meetings in compliance with the rules; the shareholders』 meetings are not held in line with relevant rules; the minutes from the shareholders』 meeting, the board of directors' meetings and the board of supervisors' meetings are incomplete or too simple; major events are not implemented according to necessary procedures.
2) The standardization and effectiveness of information disclosure
There are mistakes or omissions in the annual report disclosure of some companies and contents disclosed by some companies don’t correspond with the fact ; some companies make insufficient information disclosure, leaving out major events; some companies fail to conduct timely information disclosure, replacing ad hoc reports with regular reports; the disclosure of non-financial information tends to be too general and short of particulars, resulting in the lack of practicability and pertinence.
3) Inside information management
Some companies lack effective management over inside information and clear definition of the procedures and duties of internal reporting; the insider registration arrangements are neither complete nor standardized, sometimes with the routine registration of senior officers serving as a substitute for insider registration; some companies lack effective measures in risk prevention and control, which has resulted in senior officers trading stocks within the window period.
4) Development of standard internal control system
Some companies lack strong foundation for internal control and sound internal management mechanism; significant deficiencies exist in the standard internal control system, exhibiting the lack of special risk assessment procedures and risk warning standard; the development of internal control arrangement is merely an empty formality which can not be fully implemented and executed; the lack of information technology in the implementation of internal control; the lack of experts of internal control. The organizational structure and staffing are yet to be enhanced.
5) Financial accounting treatment
Some companies fail to have well-developed financial management arrangement and financial information system; have a weak financial and accounting foundation which lacks standard voucher preparation and management; make inaccurate accounting treatment and have great space to improve over their accounting. For instance, defects in income confirmation, lack of grounds for the distinction of capital and revenue expenditure, nonalignment of income with cost; new financial tools and business models have a great impact on accounting treatment.
6) Management and utilization of funds raised
Some companies fail to utilize funds raised in accordance with the required examination and approval authority and decision making procedures; have in fact annually employed portions of the raise funds for projects into which the funds raised are scheduled to be invested, which diverge greatly from the investment plan, without making relevant disclosures in special reports; exercise non-standardized management over special account for funds raised, allowing non-raised funds to be included in the same account.
7) Problems existing in intermediaries
Firstly, there is still room for improvement in terms of the practicing quality of institutions for the annual auditing. For instance, the testing for internal control is more a formality than practical; vital auditing procedures such as confirmation, supervision of stock check, fund appropriation auditing are not effectively carried out; the lack of standard working paper compilation in auditing procedures. Secondly, the sponsor institutions are yet to make further improvement. For examples, the sponsor institutions are yet to give more support to the on-going supervision of listed companies; there are weaknesses in due diligence investigation prior to the IPO; on-going supervision are not conducted in an across-the-board and well-rounded and dutiful manner.
IV. Follow-up arrangement
Till now, the supervision of the 2011 annual reports has almost been completed. The Department of Listed Company is currently summarizing the achievements, deficiencies, experience and innovative approaches in the previous regulatory efforts, laying the ground work for the annual report supervision in the next year. T he CSRC will adopt the following measures in the next phase:
1) the CSRC will further implement the solutions to all the problems detected in the annual report supervision, urging listed companies to focus on information disclosure and relevant rectification measures
The exchanges will urge listed companies to be devoted to information disclosure, to carry out special analysis of the detected problems, to focus on the common problems and new conditions and problems existing in listed companies and to research and solve these problems in the follow-up supervision. The regional offices of the CSRC will put the emphasis on the effectiveness of supervision, carrying out follow-up supervision in a gradual manner, urging listed companies to implement rectification orders and investigating any violations for legal responsibilities, in order to effectively enhance standard operation of listed companies
2) the CSRC will further reinforce the supervision mechanism of the annual report, boosting regulatory efficiency
Building on the previous supervision, the Department of Listed Company will improve the existing annual report supervisory system, continue to foster the supervision mechanism, take full advantage of the coordination among the Department of Listed Company, the regional offices and exchanges, strengthen on-site inspection and adopt effective measures to further boost regulatory efficiency.
3) the CSRC will improve relevant rules to solve common problems that currently exist in listed companies
After the completion of the supervision of the annual reports, the Department of Listed Company is now researching common problems and typical cases that exist in listed companies, centering on the objective of making regulatory work serve real economy and striking the balance between the respect for the independent operation of enterprises and effective supervision. Based on the new problems and issues detected in practice, the Department of Listed Company will continue to improve relevant rules, urging listed companies to solve relevant problems in a timely manner, effectively enhancing the standard operation and the overall quality of listed companies.