Recently, two pieces of news about financial fraud aroused my interest. The first is a company named Amethystium Storage from Guangdong, China. It is mainly engaged in the production of storage equipment and information technology solutions. It was accused by the China Securities Regulatory Commission of false business, revenue recognition in advance and illegal guarantee on November 28. The CSRC claims that it has constituted fraudulent issuance and illegal disclosure of information. The second company is Essence Information Technology Co., LTD. from Tianjin, China. It is mainly engaged in software development and technical services in the process of food and drug production and circulation. It was accused by the CSRC of concealing and fabricating the securities issuance documents and several annual reports on November 18. The two companies were fined 30.68 million yuan and 81 million yuan respectively.

In addition, earlier this year, Kingenta Ecological Engineering Co., Ltd. received the first fine from the China Securities Regulatory Commission in 2022. In a short span of three years the company artificially “create” more than 230 one hundred million yuan. It was fined 1.5 million yuan after the affair was uncovered, while the group’s chairman and seven company executives were fined 6.05 million yuan for their role in the financial fraud. As the first company to receive a ticket in 2022, the financial fraud case of Kingenta had a very bad impact. In the past three years, Kingenta has falsely increased the company’s income using fictitious contracts and fictitious trade businesses to cover up the performance problems caused by blind expansion.

It is not difficult to find that the entire regulatory system for financial fraud in China has shown a trend of stricter rules and heavier punishment. There are also many forms of corporate fraud. They may behave differently, but the source of these behaviors is interest-driven. However, if a company wants to go public, information disclosure is the company’s obligation to investors.

Looking at the cases of financial fraud in recent years, it is not difficult to find that the forms of financial fraud in companies are similar. If we bring our perspective to these manipulators, we can easily find the logic of their actions. From the above contents, we can know that financial fraud is mainly realized through artificial adjustment of assets, liabilities and profits. One is the relatively direct falsification of accounting data, which is relatively easy to identify. The other is to identify the forged or altered transaction record, thus forming a forged closed-loop. Most companies suspected of financial fraud have a gap between their demand for funds and their performance strength. In this case, the company artificially modifies or fabricates various financial indicators or data characteristics in various ways, thus resulting in financial fraud. Therefore, when we conduct a financial analysis of a company, we can capture the clues of financial fraud from these motives and accounting data.

The review of company accounts is often not an easy task, which requires the involvement of professional accountants and auditors. For those who do not have many theoretical reserves, I would like to give the following suggestions. The first is to check the essence of the company’s business. The ultimate purpose of financial fraud is to increase revenue and profit, so the primary judgment of verification is to determine whether the company’s main business has the business essence matching the corresponding data. Secondly, we need to check the company’s customers and suppliers. From the previous case, we can see that in financial fraud, customers and suppliers are the most common partners, so it is very important to sort out the business relationship of enterprises. The third is to check the company’s cash flow. Through the investigation of the company’s bank flow, we can understand the company’s business situation and judge the authenticity of business transactions. Finally, the company’s written vouchers need to be reviewed. This includes the company’s business contracts, vouchers for goods transactions and certificates of deposit.

In general, the healthy development of the capital market cannot be separated from the support of morality. If listed companies want to achieve long-term development, they need to strengthen corporate governance to prevent violations.