[Abstract] Relevant departments of the China Securities Regulatory Commission remind all audit and valuation agencies engaged in securities services that they must clearly define their positioning, deeply understand the statutory nature of securities and futures-related businesses, uphold an independent, professional, and public stance, and shift away from a development approach that prioritizes industry rankings over the quality of practice.

The effective functioning of the capital market hinges on a highly qualified team of intermediary institutions. Audit and valuation firms serve as crucial “gatekeepers” and “guardians” of the capital market; without their efficient and independent oversight, there could be no sustained, stable, and vibrant capital market.

In 2016, the CSRC adopted various inspection methods, including random spot checks and follow-up reviews, to conduct inspections of certain securities-qualified audit and appraisal institutions. The aim was to urge these institutions to strengthen their internal governance, improve their quality control systems, enhance the quality of their professional practice, continuously crack down on illegal and non-compliant activities by audit and appraisal firms, and purify the ranks of intermediary agencies.

　　The reporter learned that the CSRC has recently completed its handling of auditing and appraisal institutions found to have violated regulations, and has taken corresponding administrative regulatory measures based on the inspection findings. Specifically, certain practice projects with particularly serious quality issues and suspected violations of securities laws have been referred to the investigation department for further action.

　　Innovative Approach: Using “lottery” to Determine Inspection Subjects

　　It is understood that, compared to previous years, in 2016 a more flexible and scientific approach was adopted in identifying the entities subject to audit and assessment inspections—employing random spot checks and follow-up reviews.

　　The random spot checks are conducted in accordance with the overall deployment of the State Council and the specific requirements of the China Securities Regulatory Commission’s Implementation Plan for Random Spot Checks. Through methods such as lot drawing, audit and appraisal institutions are randomly selected from the inspection roster database to serve as the subjects of the checks, and enforcement inspectors are randomly assigned from the roster of enforcement inspectors.

　　Regarding follow-up inspections, under the premise that the relevant inspection procedures clearly stipulate such requirements, the CSRC first placed particular emphasis on this aspect in its 2016 inspection plan. The plan included a comprehensive and in-depth assessment of the implementation status, effectiveness, and any remaining issues related to previous corrective measures taken by auditors and appraisal agencies that had already been inspected. For those cases where corrective actions were evidently inadequate, the CSRC would take further measures. To avoid duplicate inspections, the CSRC has also strengthened communication with industry regulators and industry associations when identifying inspection targets.

　　In identifying specific practice projects, the CSRC adopts a “problem- and risk-oriented” approach, focusing its inspections on audit and valuation practice projects that have drawn concentrated attention in routine regulatory oversight, attracted high investor concern, and significantly impacted accounting information in the capital market.

　　The audit engagement projects subject to focused inspection include those involving clients whose operating performance has experienced significant fluctuations, those with a higher risk of fraud, those whose acquisitions have resulted in substantial goodwill and are under pressure to meet performance commitments, and those that have repeatedly revised their earnings forecasts. The engagement projects subject to evaluation include those with large increases in value, those with significant discrepancies among multiple valuation results, and those involving sectors such as film and media, online games, information technology, mining rights, impairment of goodwill, and reverse mergers for listing purposes.

　　According to the above arrangements, last year the CSRC organized some of its local offices to conduct comprehensive inspections of two auditing firms and three valuation agencies, with a total of 39 audit projects and 33 valuation projects randomly selected for review. In addition, follow-up inspection visits were conducted on two auditing firms and one valuation agency, involving a total of 16 audit projects and 4 valuation projects that were randomly selected for review.

Problem identified: Insufficient integrated management.

　　The inspection revealed that audit and assessment agencies have generally made improvements in areas such as internal management, quality control, and the quality of project execution. However, four key issues still remain: internal management, quality control and independence, the quality of specific project execution, and the competence of practitioners.

　　In terms of internal management, relevant departments of the CSRC noted that a common issue faced by auditing firms is the failure to achieve integrated management between headquarters and branch offices. Specifically, there is still no substantial unification in areas such as business operations, financial management, human resources, technical standards, and information systems. For example, branch offices’ finances are not uniformly managed or centrally controlled; partner profit distribution is not standardized at the overall level; and a unified information system is not yet being used to manage branch-office operations. As for appraisal institutions, the main problems in internal management include inadequate personnel management, irregularities in the management of professional risk funds, and incomplete financial management in some branch offices—for instance, some asset appraisers were found to be practicing at other institutions without the necessary measures being taken, and senior management personnel were concurrently serving as supervisors.

　　In terms of quality control, a particularly noticeable phenomenon is that the quality-control capacity remains relatively weak compared to the scale of business operations. Specifically, some audit and assessment agencies have incomplete quality-control systems and inadequate implementation; their quality-control departments are understaffed, resulting in each staff member handling a large number of annual audit reports. Meanwhile, in certain audit firms, key quality-control processes—including business acceptance and retention, business execution, and monitoring—remain imperfect. Even simple errors found in working papers often go undetected and uncorrected during multi-level quality-control reviews of projects.

　　Independence is the soul of audit and assessment institutions, and has always been a key focus of the CSRC’s accounting supervision. Inspections have revealed that while the independence of audit and assessment institutions has improved somewhat in recent years, the level of attention remains insufficient, and the relevant institutional designs are still imperfect and not fully implemented.

　　In terms of the quality of practice in specific audit engagements, the main issues persist: the failure to fully implement the risk-based audit approach, insufficient attention paid to fraud risks, and the continued existence of longstanding problems such as mismatches between risk assessments and subsequent substantive procedures. Basic audit procedures—including confirmation, observation, cutoff testing, and analytical procedures—remain inadequately performed. Moreover, substantive audit procedures related to revenue, inventory, deferred income taxes, and government grants continue to present numerous challenges. Particularly noteworthy are the relatively prominent issues encountered in some engagements involving the audit of consolidated financial statements, including challenges in determining control, defining the scope of consolidation, and handling the consolidation offsetting process.

　　In the field of valuation, the lack of solid basis for determining key valuation parameters is most evident—for instance, insufficient evidence supporting future price and sales forecasts in the income approach, the selection of comparable companies in the market approach, and the pricing inquiries for critical equipment in the cost approach. Issues such as revenue projections that significantly deviate from historical and current realities without reasonable explanation remain serious. “Some valuation agencies have even engaged in serious misconduct, including backdating report dates and allowing other organizations or individuals to practice under the agency’s name,” said the relevant department of the China Securities Regulatory Commission.

　　The services provided by audit and valuation firms are highly professional, and this professionalism is reflected in the competence of their practitioners. However, inspections have revealed that at present, the competence of some practitioners still needs to be improved: First, their professional skepticism is insufficient—they fail to maintain a questioning mindset and remain alert to suspicious indications; second, their level of professional judgment and business skills need enhancement; they are unable to comprehensively apply relevant knowledge, skills, and experience from accounting, auditing, and valuation to make well-founded, professional judgments tailored to specific business circumstances, and in some cases even commit elementary professional errors; third, they lack sufficient learning about new and specialized businesses—for instance, audits of various innovative business models and valuations in the TMT and gaming industries—showing insufficient enthusiasm and initiative in studying the hot topics, difficult issues, and prominent challenges encountered in practical work.

　　Violations will be strictly investigated: Some cases have already been referred to the inspection authorities.

　　The aforementioned objectively existing problems inevitably undermine the ability of audit and appraisal institutions to perform their duties independently, objectively, and impartially. This not only deprives these institutions of their rightful “gatekeeper” role but also fuels the trend of financial fraud and false disclosure of information among some listed companies.

　　Recently, in accordance with relevant laws, regulations, and departmental rules, and taking into account the severity of the professional misconduct involved, the China Securities Regulatory Commission has imposed administrative regulatory measures requiring rectification on Zhongshen Zhonghuan Certified Public Accountants LLP (a special general partnership). Additionally, the CSRC has issued warning letters as administrative regulatory measures against Xinyong Zhonghe Certified Public Accountants LLP (a special general partnership), Beijing Zhongqi Hua Asset Appraisal Co., Ltd., Beijing Huaxin Zhonghe Asset Appraisal Co., Ltd., and Guangdong Zhongguangxin Asset Appraisal Co., Ltd.

　　Meanwhile, the CSRC has also taken corresponding administrative regulatory measures against 16 certified public accountants who signed off on the aforementioned audit and appraisal reports, 14 asset appraisers who signed off on such reports, and 2 certified public accountants from PwC (Special General Partnership), and these actions have been recorded in their integrity files. Individual practice projects with particularly serious quality issues and suspected violations of securities regulations have been referred to the CSRC’s inspection department for further investigation.

　　Relevant departments of the China Securities Regulatory Commission remind all audit and valuation agencies engaged in securities services that they must clearly define their positioning, deeply understand the statutory nature of securities and futures-related businesses, uphold an independent, professional, and public stance, and shift away from a development approach that prioritizes industry rankings over the quality of practice.

　　Diligence and responsibility are the due obligations of intermediary agencies. Relevant institutions must perform their duties diligently and responsibly, strictly adhering to the requirements of professional practice standards and regulatory rules, maintaining a prudent attitude at all times, and thoroughly verifying and confirming the authenticity, accuracy, and completeness of the documents and materials they rely upon. At the same time, all audit and valuation firms engaged in securities services should enhance their management practices, accelerate the substantive integration between headquarters and branch offices, establish and improve quality control systems and independence frameworks, and increase investment in personnel, funding, and technology.

　　Deng Ge, spokesperson of the China Securities Regulatory Commission (CSRC), pointed out that, against the backdrop of market-oriented, rule-of-law-based, and internationalized reforms, the CSRC has consistently attached great importance to the regulation of audit and valuation agencies. By standardizing regulatory practices, innovating regulatory approaches, and enhancing regulatory effectiveness, the CSRC continues to strengthen the principal responsibility of audit and valuation agencies, gradually improving the supervision mechanisms during and after events, deepening comprehensive and strict regulation based on law, safeguarding market order, enhancing the quality of accounting information in the capital market, and protecting the legitimate rights and interests of investors.