A Case Study Of Financial Fraud In Small And Medium-sized Board Listed Companies

Financial fraud has always been a tough issue all across the world.China,with an emerging securities market,was no exception.On the one hand,the stock of listed companies has reached a high level in China with the rapid development of securities market in recent years.On the other hand,China was continually facing all kinds of problems among which financial fraud was one of the most significant.In 2019,companies such as KANGMEI pharmaceutical,Furen Medicines Group and H&R CENTURY PICTURES were found guilty of fraud.These purposefully planned frauds seriously damaged the image of corporates and betrayed public trust of their products and services,which not only cost companies themselves a heavy price,but also negatively affected the morality of the whole industry,and hinder investors from making right decisions.In more severe cases,it would shatter investors’confidence to the whole securities market,and exert negative impact on national financial security and the sustainable development of financial market.Accounting firms and securities firms related to those listed companies that had financial fraud problems would also be significantly implicated.At the same time,these fraud actions also consumed massive human and material resources and other economic resources on investigations.If the financial fraud of listed companies is not regulated,it will adversely affect the sustainable development of listed companies and the entire capital market.Therefore,the financial fraud of listed companies is an urgent problem to be solved,and it is also a subject worthy of continuous and in-depth study.In 2019,The Small and Medium Enterprise Board listed company KDX was investigated by China Securities Regulatory Commission because of its consecutive large number of bond defaults.When the fact of its financial fraud was finally confirmed,it was punished by the suspension,which caused an uproar in the industry.This is a representative and typical case of financial fraud for the enormous amount of money that involved,the long duration,and the huge loss of investors.Therefore,this article selected KDX as a case study of financial fraud.This article carries out research in seven parts.The first part introduces the background and significance of the article’s topic selection,and reviews the relevant domestic and foreign literature on the methods,motivations and governance measures of financial fraud,and introduces the definition of financial fraud and equity pledge.Additionally,the principal-agent theory,information asymmetry theory and fraud triangle theory will also be briefly introduced in this part.The second part analyzes and elaborates the overall fraud situation of listed companies on the SME Board based on data.After introducing the financial fraud case of KDX in the third part,the article focuses on the analysis of KDX’s means of financial fraud in the fourth part.The article reports that KDX cooked book fraud by increasing false profits and assets,and the company achieved this kind of fraud by taking capital occupation as the main means of expression.Afterwards,the article analyzes the motivations of fraud based on the triangle theory of fraud in the fifth part.The main reasons for fraud are the operating pressure caused by main business transformation pursued by KDX,the excessive financing demand,the defects of the internal governance structure and the failure of the external audit and supervision led by Ruihua Certified Public Accountants.Based on the above analysis,in the sixth part,the article puts forward some countermeasures against financial fraud from three directions including the company itself,supervision from government or external institutions,and investors.The seventh part is the conclusion and prospect of this article,which is also a summary of the full article.This part puts forward the outlook of the financial disclosure of listed companies and the stable development of the securities market in the future.The innovation of the article lies in the analysis of financial fraud from the whole plate level of the SME Board.In addition,it uses the knowledge of equity pledge to nest into the triangle theory of fraud to explain the causes of fraud of KDX,and proposes countermeasures and suggestions from the perspective of incentives and internal system design.