The 2023 annual report season has come to an end, and the annual reports that are closely watched every year have emerged with "non-standard opinions" from auditors, heating up the market's discussion on the quality of financial reporting by listed companies.
Wind data shows that as of April 30, among the 5,361 listed companies on the A-share market, 205 companies received non-standard audit opinions from auditing firms, accounting for about 3.8%, which is slightly higher than in 2023.
It is noteworthy that on the evening of April 30, when more than 500 annual reports were disclosed, 96 of them received non-standard audit opinions, indicating a relatively concentrated number.
Xuding Fund's Chief Economist Hu Yu told Yicai that considering the new "Nine National Articles," the delisting mechanism is also being further improved, and the exchange has added new internal control non-standard audit opinion delisting situations, so investors should also be more vigilant about the delisting risks of non-standard companies.
The number has increased compared to previous years.
The annual report of a listed company is one of the important bases for investors to understand the performance of the listed company and make investment decisions. The audit opinion made by the auditing firm on the annual report is an important basis for investors to measure whether the financial data in the annual report truly and accurately reflects the operating conditions of the listed company.
In the audit opinion, the most common is the "unqualified opinion" audit report, which is a standard audit report, indicating that the company's financial data is fair.
The other four types, such as unqualified opinions with emphasis of matters, qualified opinions, adverse opinions, and disclaimers of opinion, can be classified as non-standard audit opinions, indicating that the financial report has varying degrees of flaws and problems.
Every year, among the annual reports of many listed companies, there are always a few companies that receive non-standard audit opinions from auditing firms.
According to Yicai's data statistics based on Wind, in the A-share market, over the past five years, more than 400 listed companies have received non-standard audit opinions in one or more years.Wind data shows that in 2022, 195 listed companies received non-standard audit opinions from their auditors; in 2021, 176 listed companies received non-standard audit opinions; in 2020, 177 listed companies received non-standard audit opinions; and in 2019, 195 listed companies received non-standard audit opinions.
In comparison, the number of annual reports with non-standard audit opinions increased in 2023. This specifically includes 28 companies that received an audit report with a disclaimer of opinion, 85 companies with a qualified opinion, and 92 companies with an unqualified opinion with an emphasis of matter paragraph.
Nearly 40% come from companies with risk warnings.
The increase in the number of non-standard audit opinions is due to both the increase in the number of listed companies and the improvement in the quality of duties performed by intermediary institutions.
"As the overall number of listed companies grows larger, the number of non-standard opinions issued will also gradually increase," said Hu Yu.
Tian Lihui, Vice President of Guangxi University and Dean of the Institute of Financial Development at Nankai University, stated that under the guidance of "strong regulation," the responsibilities of audit institutions are further solidified, and the quality of their duties continues to improve, leading to a more rigorous and strict examination of the financial reports of listed companies.
"At the same time, it is also warning listed companies to pay more attention to accounting standards, improve the accuracy and completeness of financial reports, further strengthen corporate governance and internal controls, and reduce the occurrence of issues during the audit process," he said, adding that non-standard audit opinions are a clear bearish signal for listed companies, and investors should pay close attention to this signal.
Specifically, among the 205 listed companies that received non-standard audit opinions, those in the pharmaceutical and biotechnology, food and beverage, construction decoration, computer, machinery equipment, electronics, and electrical equipment industries were relatively more common.
By company attribute, private enterprises are the most numerous, with 143 companies, accounting for 70%. Additionally, there are 33 local state-owned enterprises, 19 public companies, and 4 central enterprises.
By regional division, the number of listed companies with non-standard audit opinions is higher in provinces and cities such as Guangdong, Jiangsu, Zhejiang, Shanghai, Shandong, Beijing, Hunan, and Hubei, all with more than 10 companies, with Guangdong having the highest number at 32.Out of 205 companies, 76 are from special risk warning listed companies, accounting for nearly 37%. A non-standard audit opinion could potentially become the "death warrant" for some of these companies to be delisted.
*ST Zuojiang's auditing firm issued an audit report with a disclaimer of opinion on the company's annual report. The auditing firm stated that as of the end of 2023, Zuojiang Technology had an accounts receivable balance of 302 million yuan, with a bad debt provision of 93.3955 million yuan, and a book value of 208 million yuan.
"For some accounts receivable, we were unable to conduct on-site interviews, nor could we obtain confirmation replies, involving an accounts receivable balance of 201 million yuan, which accounts for 66.73% of the year-end balance of accounts receivable. Due to the significant audit procedures not being effectively executed, we were unable to obtain sufficient and appropriate audit evidence, and thus cannot judge the recoverability of the book value of the aforementioned accounts receivable," wrote the auditing firm.
The company has been under delisting risk warning since May 4, 2023. According to the 2023 annual report, *ST Zuojiang has triggered two delisting conditions, and starting from April 29, 2024, the company has been suspended from trading.
These companies have been "non-standard" for consecutive years.
Among the aforementioned 205 listed companies, 29 have received non-standard audit opinions from auditing firms for five consecutive years, with the majority being risk warning companies, including 14 other risk warnings and 12 delisting risk warnings.
Taking *ST Diwei as an example, since 2019, the company's annual reports have been issued with qualified opinions each year, covering matters such as the adequacy of impairment provisions for receivables, the accuracy of project cost aggregation, and the fairness of equity acquisition transaction prices.
Weiming Pharmaceutical has also received qualified opinions for five consecutive years, involving matters such as the recognition of long-term equity investments and investment income, as well as the determination of the value of assets used by the controlling shareholder to offset debts.
In particular, in December 2019, Weiming Pharmaceutical's former controlling shareholder, Weiming Group, used four drug technologies and 100% equity of Jilin Weiming Company to offset the funds and interest occupied by Weiming Group. This debt offset matter had been accounted for in 2019, and from 2019 to 2022, the annual auditors expressed qualified opinions on the value determination of the debt offset assets in the financial statements of Weiming Pharmaceutical for all years.
It is worth noting that in addition to the audit report of the financial accounting report, the audit report on the internal control of the financial report is becoming increasingly important. To implement the new "Nine National Articles," on April 12, the China Securities Regulatory Commission issued the "Opinions on Strictly Enforcing the Delisting System," which includes long-term consecutive internal control non-standard opinions and other situations into the standardized delisting scenarios.In response to this, Hu Yu said, considering the new "Nine National Articles," the delisting mechanism is also being further improved, with the stock exchange adding new internal control non-standard audit opinion delisting situations. Therefore, it is especially important to be vigilant about the delisting risks of non-standard companies.
In addition to the audit institutions highlighting risk items for investors when the annual reports of listed companies are released, the stock exchange is also simultaneously issuing annual report inquiries to some listed companies with questionable annual reports.