China’s Central State-owned Enterprises Rack Up 200bn Yuan in False Revenue

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China’s National Audit Office has revealed widespread fabrication of performance results amongst the vast majority of the country’s leading state-owned enterprises, which one expert say is driven by the stringent nature of assessment measures.

Figures released by NAO at the end of last week indicate that 18 SOE’s have used fabricated business, artificial increases in transaction links as well as adjustments to financial reports to falsely raise revenues by 200.16 billion yuan, as well as raise profits by 20.295 billion yuan over the past several years.

This means that falsified revenue and profits have accounted for 0.8% and 1.7% of total revenue and profits respectively during the period of the NAO survey.

NAO’s survey covered a total of 20 central SOE’s, meaning that overwhelming majority of government companies survey had engaged in revenue falsification.

Illegal purchases and sales are reportedly the most common means of inflating revenues, with five central SOE’s using this method to add a total of 20.67 billion yuan in earnings.

Companies involved in this form of earnings inflation since the turn of the decade include Baosteel, China Huaneng Group, China Minmetals and Sinosteel, whose subsidiaries used the method to falsify 300 million yuan in revenue in 2015.

Another method employed by Chinese companies to falsify earnings is “fictitious business,” with a renewable energy subsidiary of Power Construction Corporation of China  using fake wind turbine sales to increase revenue and costs by 147 million yuan and 145 million yuan respectively  in 2015.

Kuang Boshan, an expert on state-owned enterprise reforms, said to National Business Daily that the falsification of earnings was closely related to the pressure place on management by annual performance assessments, as well as the need to protect the income levels of staff.

China’s “Central Enterprise Leadership Management Performance Assessment Measures” provides for the annual assessment of management results, as well as assessment of the performance of managers for the full period of their appointment.

The assessment results are divided into the four grades of A,B, C and D, and serve as a key basis for determining the remuneration of SOE executives as well as appointment and dismissal decisions.

The Assessment measures place a heavy focus on profit targets, using them as a primary determining of total salaries.

“If the enterprise revenue scope isn’t maintain, the total salary allocation will be impacted, and staff remuneration also isn’t guaranteed” said Kuang.

 

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