Recently Shanghai No. 1 Intermediate People¡¯s Court (hereinafter referred to as ¡°Shanghai No. 1 Intermediate Court¡±) made the judgment of first instance after the trial, sentencing the four accountants involved to criminal detention or fixed-term imprisonment of six months to two years, suspended, and fines of RMB 50,000 to RMB 100,000. In the trial of second instance, Shanghai High People¡¯s Court upheld the above judgment of Shanghai No. 1 Intermediate Court.

[Case Review]

In August 2013, a certain person surnamed Lu (tried in another case), President of a machinery manufacturing company (hereinafter referred to as ¡°the manufacturing company¡±), tried to raise some funds by issuing a private placement bond for SMEs so as to resolve the company¡¯s financial difficulties. However, the actual financial situation of the manufacturing company did not meet the relevant requirements for the issuance of a bond. So Lu decided to modify the company¡¯s financial statements. Through the introduction of a friend, Lu got to know a certain person surnamed Yang, Deputy Director of the Zhejiang Branch of an accounting firm (hereinafter referred to as the ¡°Zhejiang Branch¡±). Having learnt about the manufacturing company¡¯s desire to issue a bond, Yang accepted the audit project for the manufacturing company in the name of the accounting firm, and assigned the accountant surnamed Chen as the project supervisor who entered the manufacturing company and started the on-site audit.

During the audit, Yang and Chen included the off-balance-sheet revenues of the manufacturing company into the operating revenues, modified the net profit, and converted shareholder donations to the company¡¯s capital reserve to reduce the debt ratio according to Lu¡¯s requirements in the absence of relevant testing papers and when audit adjustments couldn¡¯t be made as per the auditing standards. Then Chen prepared the first draft of the audit report but refused to sign it as the project supervisor. So Yang arranged the accountant surnamed Xu and the accountant surnamed Wang to sign it as the on-site project supervisor and the signer respectively. Neither Wang nor Xu had reviewed the first draft of the audit report before signing it. In December 2013, the accounting firm officially produced a standard unqualified audit report, for which the manufacturing company paid an audit fee of RMB 450,000.

Thanks to the report, the manufacturing company was allowed to issue a two-year private placement bond of RMB 100 million. Upon the bond¡¯s maturity in 2016, the manufacturing company was unable to repay the bond¡¯s principal and some interest, resulting in significant economic losses for the investors.

In September 2016, after learning that the police was investigating the suspected fraudulent issuance of a bond by the manufacturing company, Yang organized Chen, Xu and some others to have multiple discussions and self-checks. They replaced their internal audit forms and colluded with each other to devise a consistent story about the auditing process. Later, Yang, Chen, Wang, and Xu each received a phone call from the police demanding them to go to the police for an investigation. Before the police, they truthfully confessed the facts of their crimes. After the relevant facts were found out, the No. 1 Branch of Shanghai People¡¯s Procuratorate filed a public prosecution with Shanghai No. 1 Intermediate People¡¯s Court, accusing Yang, Chen, Wang, and Xu of producing the testing papers highly inconsistent with the facts.

[Case Study]

After hearing the case, Shanghai No. 1 Intermediate People¡¯s Court held that, Yang, as the deputy director of the Zhejiang Branch and the person in charge of the audit project for the manufacturing company, performed the acts of organization, management, etc. in the activity of producing the testing papers highly inconsistent with the facts for the manufacturing company, and thus shall be identified as a supervisor directly in charge; Chen, as a certified public accountant of the Zhejiang Branch and the on-site supervisor of the audit project for the manufacturing company, performed the acts of on-site auditing, first draft preparation, etc. in the activity of producing the testing papers highly inconsistent with the facts for the manufacturing company, and thus shall be identified as a person directly responsible for the crime; Wang, as a certified public accountant with the signing right authorized by the legal representative of the accounting firm, carelessly produced the audit report for the manufacturing company without reviewing it first in accordance with the auditing standards, and thus shall be identified as a supervisor directly in charge; Xu, as a certified public accountant of the Zhejiang Branch, signed the audit report for the manufacturing company in spite of the fact that Xu hadn¡¯t participated in the on-site auditing for the company, and thus shall be identified as a person directly responsible for the crime.

To sum up, the acts of all the four persons mentioned above constitute the crime of producing testing papers highly inconsistent with the facts. The four persons all confessed the facts related to the case after presenting themselves before the police, and thus it can be determined that all of them had delivered themselves up to justice. Yang, Chen, and Xu performed the act of colluding with each other to devise a consistent story about the case and other related acts, and shall be severely punished. With the help of family, Yang volunteered to compensate the victims for certain economic losses, and thus could be given a lighter punishment.

Having taken all the above-mentioned circumstances of sentencing into consideration, Shanghai No. 1 Intermediate Court sentenced Yang to fixed-term imprisonment of two years, suspended for three years, with a fine of RMB 100,000, Chen to fixed-term imprisonment of a year and six months, suspended for two years, with a fine of RMB 50,000, Wang to criminal detention of six months, suspended for six months, with a fine of RMB 50,000, and Xu to fixed-term imprisonment of six months, suspended for one year, with a fine of RMB 50,000.

The court warns that when the certified public accountants are engaged in auditing activities, they shall strictly follow relevant laws, code of practice and norms of work, produce objective audit reports, and give appropriate audit opinions. Those who have violated the auditing norms and duties by producing reports inconsistent with the facts will be punished by law according to the circumstances.

[Relevant Laws]

I. Article 229 of the Criminal Law of the People¡¯s Republic of China

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Any member mentioned in the first paragraph who, grossly neglecting his duty, produces testifying papers that are highly inconsistent with the facts, thus causing serious consequences, shall be sentenced to fixed-term imprisonment of not more than three years or criminal detention and shall also, or shall only, be fined.

II. Article 231 of the Criminal Law of the People¡¯s Republic of China

Where a unit commits the crime mentioned in the Articles from 221 through 230 of this Section, it shall be fined, and the persons who are directly in charge and the other persons who are directly responsible for the crime shall be punished in accordance with the provisions of the Articles respectively.

III. Article 64 of the Criminal Law of the People¡¯s Republic of China

All money and property illegally obtained by a criminal shall be recovered, or compensation shall be ordered; the lawful property of the victim shall be returned without delay; and contrabands and possessions of the criminal that are used in the commission of the crime shall be confiscated. All the confiscated money and property and fines shall be turned over to the State treasury, and no one may misappropriate or privately dispose of them.

IV. Article 67 of the Criminal Law of the People¡¯s Republic of China

Voluntary surrender refers to the act of voluntarily delivering oneself up to justice and truthfully confessing one¡¯s crime after one has committed the crime. Any criminal who voluntarily surrenders may be given a lighter or mitigated punishment. The ones whose crimes are relatively minor may be exempted from punishment.

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V. Article 72 of the Criminal Law of the People¡¯s Republic of China

A suspension of sentence may be granted to a criminal who is sentenced to criminal detention or fixed-term imprisonment of not more than three years and satisfy the following conditions; and a suspension of sentence shall be granted if the said criminal is under the age of 18, a woman who is pregnant or a person who has attained the age of 75:

(1) The circumstances of the crime are relatively minor;

(2) The criminal has demonstrated repentance;

(3) The criminal will not commit any crime again; and

(4) Granting suspension of sentence will not result in significant adverse impact on the community of his/her residence.

Where a criminal is granted with suspension of sentence, he/she may also be prohibited from engaging in certain activities, entering certain regions or premises, or meeting with certain persons during the probation period depending on the circumstances of the crime.

Supplementary punishments, if any, imposed on a criminal granted with suspension of sentence shall still be executed.

VI. Article 73 of the Criminal Law of the People¡¯s Republic of China

The probation period for suspension of criminal detention shall be not less than the term originally decided but not more than one year. However, it may not be less than two months.

The probation period for suspension of fixed-term imprisonment shall be not less than the term originally decided but not more than five years. However, it may not be less than one year.

The probation period for suspension of sentence shall be counted from the date the judgment is made final.

(Writer: Li Danyang of Shanghai No. 1 Intermediate Court)