The annual report of listed companies is the main source for investors to understand the business operation of listed companies, directly affecting investors』 judgment of the value of listed companies and investment decisions. Over the years, the CSRC has always dedicated to enhancing the transparency and standard operation of listed companies via annual report supervision. Annual report supervision is a long-term and on-going measure. With respect to the supervision of 2012 annual report, the CSRC combined on-site and non-on-site supervision, regarding the latter as the focus of the first half of the year. By far, the CSRC has already completed the check, review and analysis of annual reports of listed companies.
I Overview of Annual Report Disclosure
By April 30, 2013, 2492 listed companies on SSE and SZSE disclosed their annual reports, including 954 on SSE Main Board, 482 on SZSE Main Board, 701 on SME Board, 355 on GEB (not including *ST Chuangzhi and *ST Yanhuang which already withdrew from the market). Among all the companies, 2270 disclosed profits and 222 disclosed losses. The total operating income of listed companies amounted to RMB 24.63 trillion, representing a year-on-year increase of 8.89%; the total net profit reached RMB 1.96 trillion, up by 0.93%;
The average earning per share was RMB 0.36, down by 24.01%; the average net return on equity stood at 13.35%, down by 1.92%. In overview, in 2012, listed companies maintained growth in operating income, while experiencing a slowdown in the growth of net profit and decrease in profitability and operation efficiency; the financial sector remains strong while real economy suffers deficiency, with a widening gap among industries and high performance becoming more concentrated rather than evenly distributed; technological innovation has picked up speed, while strategic emerging industries are yet to show any significant edge in performance.
Among auditor’s reports of the 2492 listed companies, 88 were non-standard auditing reports, accounting for 3.53%. Of these reports, 70 were issued with unqualified opinion with explanatory notes, 15 with qualified opinion and 3 with disclaimer of opinion.
In addition, pursuant to the Circular on Classified and Batch-by-batch implementation of Internal Control Regulatory System of Listed Companies on the Main Board in 2012, 853 companies listed on the Main Board, including 777 state-controlled companies and 76 companies listed in both domestic and overseas markets, disclosed in their 2012 annual reports the internal control evaluation report and internal control audit report. Among these companies, 4 companies exhibited non-financial report material flaws in the internal control assessment reports disclosed, 5 showed non-financial report material flaws in the internal control auditor’s reports disclosed; 3 companies were issued internal control auditor’s reports with adverse opinion and 18 were issued internal control auditor’s reports with explanatory notes.
II Annual Report Supervision
(1) Non-on-site Supervision
According to the CSRC planning, the preliminary annual report supervision should center on the check, review and analysis of annual reports, exchanges, regional bureaus and relevant departments of the CSRC should further coordinate with one another in jointly conducting non-on-site supervision.
SSE and SZSE have reinforced follow-up review and carried out comprehensive review on annual reports of 2445 companies (apart from the 47 companies with exemptions), ensuring the effective implementation of annual report disclosure via measures such as improving technological preparation, education and training, revising disclosure guideline, releasing memorandums, conducting research on important issues, enhancing risk alert and carrying out stern punishment against violations.
CSRC regional bureaus have further reinforced classified supervision, placing the focus of review on 585 key companies, attending annual report audit forum of listed companies, communicating with intermediaries and conducting on-site monitoring and supervision of annual report audit, so as to get in-depth understanding of company risks via intermediaries, explore technological supervision, keep a close eye on potential risks of listed companies via on-site inspection and boost supervision efficiency.
The Department of Listed Company Supervision at the CSRC has put more effort into the review and comparative analysis of annual reports, reviewing 64 companies listed on the Main Board and the SME Board and cross referencing the result with the review of CSRC regional bureaus and exchanges; choosing 10 companies listed on the GEB of different industries, sizes and risk types for process monitoring. In annual report supervision, the focus has been placed on media concerns and material risks; issues detected in annual report review are studied and dealt with via circulars, training and exchange programs and special seminars; the disclosure and supervision of annual reports as well as the operation of coordination mechanism are under comprehensive evaluation, in order to further strengthen the working mechanism.
The department of accounting supervision has conducted target-oriented review and analysis of the annual financial reporting of 501 listed companies, and resolved professional issues in annual report disclosure including accounting, auditing and internal control by releasing accounting supervision bulletins, responding to inquiries within the system, announcing answers for the execution of corporate accounting rules supervision an making financial information disclosure rules, so as to coordinate all aspects of accounting supervision.
(2) Annual Report Review
During the comprehensive review, SSE and SZSE focused on 8539 issues, among which 27% were related to business performance, 22% finance and accounting matters, 18% information disclosure, 17% regarding regulated operation including corporate governance, internal control, fund raising and related party transactions and 16% regarding other issues. The exchanges have already released 4 memorandums of annual reports, issuing 2084 official letters to listed companies, including the letter of inquiry, attention letter and supervision letter, demanding companies to publish revised or supplementary notifications 453 times, circulating notice of criticism on companies 39 times, issuing public censure 7 times and publicly identifying inappropriate candidate once.
CSRC regional bureaus placed its review focus on 3362 issues, among which 994, mainly covering business performance, information disclosure and regulated operation, overlapped with key issues in the review by exchanges. Regional bureaus have already required relevant companies, sponsoring and auditing institutions to issue special statements regarding these issues. Currently, regional bureaus are concentrating on the on-site inspection of annual reports and will adopt corresponding regulatory measures once the issues in question are confirmed.
Regarding the annual reports of the 64 companies under joint review and comparative analysis by the exchanges, CSRC regional bureaus and the Department of Listed Company Supervision at CSRC, the exchanges focused on 316 issues, regional bureaus 430 issues and the Department of Listed Company Supervision 438 issues. Of these issues, 175 were overlapping issues drawing the attention of all three parties, mainly covering inaccurate and insufficient information disclosure, abnormal changes in business performance, non-standard finance and account handling, suspicious fund flow among related parties. During the joint review, the exchanges attached more importance to the accuracy, completeness and timeliness of information disclosure;
Regional bureaus paid more attention to the authenticity, accuracy and adequacy of the disclosure of finance and account handling, corporate governance, fund flow among related parties, major contracts or transactions and due performance of intermediaries; the CSRC placed its focus on the overall policies, regulation and listed company supervision, such as the requirements of the new Annual Report Guidelines, the requirements for the supervision of utilization of funds raised, tender offer in connection with equity change, standard for the due performance of independent directors, etc. Relevant regional bureaus or exchanges have been required to further confirm and deal with the aforementioned key issues.
III Progress made through annual report supervision
(1) Further enhanced information disclosure quality among listed companies
2013 is the first year for the new Annual Report Guidelines to be implemented. According to the annual reports, listed companies have further improved the quality and transparency of information disclosure, gradually establishing an investor-oriented disclosure system; in accordance with the new rules, listed companies have completed the mandatory parts of annual report disclosure; some companies have also disclosed additional information on voluntary basis. For instance the number of companies voluntarily disclosing social responsibility reports hit a record high, with better quality of the information disclosed.
Based on individual circumstances, some companies choose to fully disclose non-financial information. For instance, many H-share companies have carried out in-depth disclosure of business operation within the period of report and forward-looking information via segment reporting, effectively revealing the risks faced and corresponding coping measures; the guidelines for information disclosure of special industries, such as the film and TV industry on the GEB, has been well executed; annual performance bulletin or performance forecast have been released to disclose company performance to investors in a timely manner, further reducing bad faith violations and promote market fairness.
(2) Better regulated operation of listed companies
During annual report supervision, the CSRC has focused on innovative regulatory methods and reinforced supervision. In terms of the review of annual reports, listed companies have become more aware of the importance of compliance and enhanced corporate governance; most companies have confirmed relevant transactions or issues in accordance with rules of the Accounting Standard for Enterprises, hitting a record low in the number of non-standard opinions; listed companies in general have witnessed relatively satisfactory attendance rate at board meetings, with the tenure, due performance and compensation of independent directors becoming gradually more standardized.
Internal control assessment reports now contain significantly more information and the internal control auditing reports exhibit differentiated results, truthfully reflecting internal control design and operation; all listed companies have disclosed the progress in their undertakings and corresponding solutions; both the total amount of cash dividend and the proportion it takes have witnessed steady increase, with ever stronger willingness among listed companies to give back to shareholders and enhanced communication channels with shareholders regarding cash dividend decisions; there has been a significant drop in the number of violations in stock trading within the window period, with the speculation through high ratio bonus share issue kept in check.
IV. Problems detected in the check and review of annual reports
In general, listed companies have witnessed further enhancement in the quality of information disclosure, financial reporting and the quality of audit as well as steady progress in internal control assessment and internal control auditing. However, some companies still lack authentic performance report, effective and pertinent information disclosure, appropriate financial and accounting measures, and are still in need of improving corporate governance and regulated operation in related party transactions, fund occupation and fundraising. Furthermore, special industries, new business and overseas business all pose new challenges to information disclosure. The details are as follows:
(1) Business performance
Due to the depression in certain industries, some companies are faced with operation risks or potential delisting; company liquidity suffers, with an increasingly pressing insolvency risk; some companies exhibit suspicious over-concentrated transactions in the end of the year, hinting earnings management; profit and loss alternate in a regular manner, hinting intentional adjustment to business performance.
(2) Execution of Accounting Standard
At some companies, accounting policies and accounting estimate are not strictly executed; gross basis and net basis are not clearly distinguished in revenue recognition, resulting in the exaggeration of revenue; government subsidies are not properly recognized while the derecognition of financial assets are set at an inappropriate time-point, significantly affecting key financial indicators; some companies lack proper impairment policy for available-for-sale financial assets and sufficient disclosure of such policy; inaccurate classification of accounts for financial products also have rather strong impact on the asset structure of companies; account handling including the recognition, measurement and documentation of material items are yet to be regulated.
(3) Information disclosure
At some companies, the annual report disclosure is not up to standard and filled with careless mistakes; negative contents are intentionally omitted in information disclosure; statements included in the disclosure are overly general, which fail to meet investors』 needs in value judgment; the disclosure of accounting policies only includes general guidelines and have yet to become more specific and pertinent; non-recurring gains and losses fail to reflect the actual state of business of the companies; significant events have not been disclosed in a timely manner, or no follow-up disclosure is carried out; regular reports are released instead of ad hoc reports.
(4) Standardized operation
Some companies focus solely on major shareholder/shareholders, making it difficult for small shareholders to protect their own rights and interests; equity dispersion and the fight over controlling right still exist; some directors and supervisors are lacking in due diligence and due performance and there are still problems in the operation of the board of directors, the board of supervisors and the shareholders』 meeting; some related party transactions have yet to follow necessary review procedures, causing the general public to doubt the necessity and fairness of these transactions; meanwhile, related party transactions are becoming increasingly complex and concealed; illegal guarantee and non-operational capital occupation still exist in a number of companies; unregulated use of fund raised are rather prevalent among companies listed on the GEB; furthermore, in some companies, there are still problems including insufficient disclosure of cash dividend, lack of feasible solutions for the failure of performance of undertakings, and violations in the disclosure of changes in shareholders』 equity.
(5) Internal control disclosure
Significant discrepancies exist in the content and format of internal control disclosure of different companies and the internal control information disclosed are hardly comparable; some companies lack sufficient disclosure of internal control deficiencies, intentionally avoiding the disclosure of such information; the proper scope for the internal control assessment have yet to be set and the assessment needs to be done in a more thorough manner; the criteria for the identification of internal control deficiencies have yet to be set in line with realistic circumstances, in order to improve the objectivity of the internal control assessment.
(6) Auditor’s reports
In some auditor’s reports, the application and statement of explanatory events are not in accordance with audit criteria and the scope stipulated in relevant application guide; listed companies are still lacking in risk assessment and corresponding auditing procedures of innovative business; in terms of unusual material transactions, more attention is yet to be paid to potential risk of collusion practices and effective auditing procedures; the appropriateness of corporate accounting policies and the overall presentation of financial statements is yet to be enhanced.
(7) New issues and new trends
Special industries such as the real estate industry are experiencing ever more diverse and complex business models, requiring more specific information disclosure. There are significant discrepancies in the specific requirements of different enterprises for the information disclosure of new business, including distribution model, EMC revenue and cancellation of equity incentives due to failure to meet vesting conditions. Despite on-going overseas business expansion, listed companies are still lacking complete and sufficient information disclosure and control over overseas asset. These inadequacies, along with restricted scope of review and assessment, are resulting in insufficient risk disclosure.
V. The next step
(1) Further enhance effective supervision via on-site inspection. The supervision of annual reports of listed companies will focus on on-site supervision in the second half of the year. At present, regional bureaus of the CSRC are concentrating on on-site inspection; the Department of Listed Company Supervision at the CSRC plans to join forces with the Shanghai and Shenzhen bureaus in on-site inspection, aiming to reinforce inspection and accountability investigation on listed companies and intermediaries. Stern regulatory measures will be carried out against any violations and leads of such violations detected during on-site inspections. Regarding issues found in annual report supervision, regulatory measures will be executed immediately when applicable and cases that require official investigation and inspection will be referred to the inspection department, in order to boost the effectiveness of supervision and urge listed companies to enhance transparency.
(2) Learn from experiences in annual report supervision and improve relevant working mechanism. Upon the completion of 2012 annual report supervision, the CSRC will urge regional bureaus and exchanges to review and exchange success stories, mistakes, experiences and innovative measures in annual report supervision, discuss new trends and new issues and keep the public updated with the progress in annual report supervision; the CSRC will adopt more thorough inspections on the basic accounting practice and the internal control of information disclosure of listed companies as well as the practice of relevant accounting firms, with the focus on the execution process; the Commission will explore specific measures to enhance annual report supervision mechanism.
(3) Promote research on key issues and improve annual report disclosure rules. The CSRC will promote research on key issues regarding annual report supervision on the basis of supervisory experiences and changes in market conditions, further facilitate communication and coordination with the Ministry of Finance and urge the revision and improvement of enterprise accounting standard; the existing information disclosure rules will be revised with more details regarding information disclosure requirements; the guideline for the information disclosure of special industries will be further explored and differentiated information disclosure system will be established to encourage listed companies to voluntarily disclose information in accordance with their own specific nature.