China Listed Companies' Financial Fraud Causes And Treatment

After the Enron Case, the financial fraud becomes the focus of the world capital market. The fraudulent account scandals of the American WorldCom Inc, Xerox Corporation and the Health South caused the investors to suffer massive losses. The disappearance of Yinguangxia, Qiongminyuan and Zhengbaiwen does not indicate the end of the financial fraud of China but just a beginning. Kelon Electrical, Galaxy Technology and Tianjin magnetic card, and other fraud cases occur frequently, so it's apparent that financial frauds of the listed companies are not far from us. Now, with the constantly increasing of the companies of accounting fraud, financial fraud has become a hot economic topic which attracts significant attention.Western accounting academics have achieved great results in the research on financial fraud, covering all fields, which are valuable for our country to prevent financial fraud. The research on influencing factors, early warnings and signs of financial fraud is of great significance for the auditing in our country. However, the research achievements are based on comparatively sound external manager markets and external director markets, without concerning the present economic and legal environment of our country. Therefore, there are some limitations to solve the problems of financial fraud for our country's listed companies. In a word, the research on financial fraud must be on the basis of our country's specific conditions. The accounting profession of our country has made some achievements in accounting irregularities distortion (that is, financial fraud) and the relevant theoretical research, but on the aspects of governance of distorted accounting information and glossed financial statement, we simply list the management tools without considering the practicality under the specific political and economic environment in China. The financial fraud study must touch on the essence of the settlement of fraud, that is, how to solve the problem. Furthermore, it's the standpoint and starting point to solve the problem based on Chinese national conditions in this article.Under the current economic environment of China the cause of the listed companies' financial frauds is the lack of governance mechanisms, mainly for four aspects as follows: the unreasonable corporate governance system, the deficient government supervision, the unscientific audit relationship, and the powerless legal punishment.The essay discusses the causes of financial fraud through the case of Guangdong Kelon. Finally, policy recommendations for the governance of financial fraud are brought forward starting from the accounting incentive and control, as follows: (1)establish an auditing board independent of the directors board to strengthen the independence of the Certified Public Accountants; (2)concentrate the internal supervision rights of the listed companies to the board of supervisors, and coordinate the relationships between the board of supervisors, the independent directors and the board of directors; (3)strengthen the supervision of accounting firms replacement by the implementation of the CPA regular rotation system; (4)set up accounting OMV Committee to solve the overlap accounting supervision problem; (5)perfect the Civil litigation system to increase the fraud audit costs; (6)develop the Act Accounting to improve efficiency and quality of the fraud review.