When facing thousands of listed company announcements every day, which ones should you read? What are the key points to take away from the dozens or hundreds of pages of material announcements? Are the many professional terms in the announcements bullish or bearish? Check out Caixin's "Quick Read Announcement" column, where our reporters across the country will provide you with accurate, fast and professional interpretations on the night of the announcement.

On November 26th, Caixin reporters learned that due to many years of financial fraud, ST Zhizhi (603869.SH) and related responsible persons are facing a major fine from the CSRC, and 3 responsible persons will be banned from the market. Caixin reporters found that during the three-year period of financial fraud from 2019 to 2021, the company hired the same accounting firm that issued standard unqualified audit opinions, while its audit fees were at a high level.

Tonight, ST Zhizhi announced that the company and related parties have received the CSRC's "Notice of Administrative Penalty Pre-notification". Due to false records in the annual reports from 2019 to 2021, the CSRC plans to impose an 8.5 million yuan fine on the company, give warnings to the relevant responsible persons, impose a 4.3 million yuan fine on the then director Zhang Yadong, a 3.2 million yuan fine on the then directors Zhang Tao and Zhang Yanfeng, a 2.1 million yuan fine on the then CEO Yang Rui and the then vice president Xie Xin, a 1.5 million yuan fine on the vice president Wang Xi, and at the same time impose a 6-year securities market ban on Zhang Yadong, and 3-year bans on Zhang Tao and Zhang Yanfeng.

Specifically, ST Zhizhi's main method of fraud lies in recognizing revenues when several subsidiary companies conduct system integration and product sales operations, confirming income when some project contracts are not actually executed and products are not delivered truly, and the relevant sales revenue return is not real. The announcement shows that in 2019, 2020, and 2021, the false increase in operating income was 0.882 billion yuan, 68.14 million yuan, and 68.83 million yuan, accounting for 27.34%, 5.80%, and 7.35% of the disclosed current operating income, respectively.

Especially in 2021, the false increase in total profit was 14.0558 million yuan, accounting for 159.81% of the disclosed current total profit. This also means that if the profit is not falsely increased, the company may have been in a loss-making position that year.

Despite such a large-scale fraud, Zhitong Accounting Firm, one of the top eight domestic accounting firms, has consistently issued standard unqualified audit opinions. After the company switched to PwC, the 2023 financial report was issued with a qualified opinion, and the internal control report was issued with a negative opinion.

According to Caixin reporters, revenue has always been a focus in audit work. Auditors generally make assumptions about revenue as a significant risk. Apart from risk assessment and internal control testing, substantive procedures also include analytical procedures, contract examination, payment recovery status, project progress review, and annual confirmation of revenue amounts.

According to the audit report released by the company, Zhitong Accounting Firm has continuously identified the provision for bad debts of accounts receivable and impairment testing of goodwill as key audit matters for three consecutive years, without ever listing revenue recognition as a key audit matter.

It is worth mentioning that the audit fees are also highly dubious. During the period of falsification, Zhitong Accounting Firm's audit fees were relatively high, even higher than the subsequent fees charged by the 'Big Four' KPMG. According to the company's disclosure, from 2019 to 2020, ST Zhizhi's audit fees remained at 2.2 million yuan, decreased to 1.8 million yuan from 2021 to 2022. In 2023 to 2024, they switched to KPMG for audit fees of 1.98 million yuan.