Zero tolerance to falsified financial reports

NEARLY HALF OF THE LISTED NON-FINANCIAL COMPANIES are suspected of fabricating their financial statements this year, including 98 of the 138 listed real estate companies, according to a recent report on the financial security of China's listed companies. Beijing Youth Daily commented on Thursday:

If what the report says is true, this year represents arguably the highest financial risk of Chinese listed companies in a decade. An earlier assessment of 20 State-owned enterprises by the National Audit Office found that 18 of them had lied about their revenues by fabricating more than 200 billion yuan ($30 billion) of income and 20.3 billion yuan in profits.

In fact, financial reporting fraud is not just the wrongdoing of a few companies but a prominent problem.

For listed companies, falsified financial statements may be intended to impress investors and secure the interests of shareholders, because a bad financial report risks keeping prospective investment at bay and worrying investors, which could lead to a plunge in stock price.

Exaggerating a company's financial condition and profitability, to some extent, may reduce the risk of this happening. And there is the possibility that major shareholders need the "beautified" financial statements to offload their shares more easily.

Whatever the reason, the wrongdoers should face a demotion in the securities grading and their companies should be reassessed when they release their true performance figures.

Financial institutions should also be careful in offering loans to applicants with a bad record.

Tougher actions must be taken to rein in those companies which are found to have lied in their financial statements. There should be zero tolerance to such falsehoods.