A Study On The Financial Restatements In Chinese Listed Companies

The prosperity of capital market represents the development of the country’s economy, which relates enterprises and investors through corporate financial statement. The financial accounting figures shown in a statement quantifies the work and achievement of one company. Depend on this, investors can make their investment decision.In recent years, the fake accounting information exists mostly in the form of financial report restatement, which means that because of major mistakes or omissions, the public corporation restates the prior annual financial report through announcing an interim report in a way of supplement or amendment. The original role of financial restatement system is to reflect corporate finance more real. However, more and more companies regard financial restatement as a device to justify significant accounting accident. Under the disorder, it is necessary to standardize financial restatement.The disorder of financial restatement has caused series negative impacts, which includes the loss of capital marked, and bring some adverse economic consequences to the public company. Taking financial restatement as a method of manipulating profit reflects the flaw and inefficiency of corporate governance. In addition, financial restatement lowers the quality of accounting information, and then impacts the efficiency of capital market.Overall, the establishment of financial restatement system in our country is later than others, and there are some drawbacks and limits. Researches on financial statement in China mostly focus on theories in term of the motivation, corporate governance, market reaction and so on. A part of scholars have taken empirical investigations depend on data collection of financial restatement. Due to the lack of database about financial restatement, data used in prior empirical studies are collected and processed manually and these conclusions are biased to some extent. In addition, there are few studies that analyze the problem of financial restatement from a case analysis. Therefore, there is a niche in case study of financial restatement.In this research, normative study and case analysis will be both adopted. Firstly, researches on financial restatement are reviewed generally. Secondly, an attempt will be made to find some statistics about financial restatement of public companies in China, which will be used to summarize the common when financial statements happens. At last, the case of Shenzhen International Enterprise Co.Ltd.(00056) that were announced in recent year will be analyzed deeply as a case of financial restatement in China, which is expected to make some practical contribution to perfect financial restatement system in our country.According to the research ideas, this paper is divided into six parts, each part of the specific content is as follows:Part one introduction. This part briefly introduces the three stages that the financial restatement system in China experienced. Research methods and process will be put forward additionally.Part two literature review. Taking financial restatement as the keyword, this study retrieves the literatures publish in those core journals that related to financial restatement, and reviews these studies from different dimensions, including the motivation, its relationship with corporate governance, market reaction, as well as its relationship with inner control and independent auditing. It is not very long that scholars draw their attention on financial restatement. Therefore, theories in this field are not matured or systematic. In addition, most researches focus on the motivation, market reaction, and the relationship between financial report and independent auditing. Empirical investigation is mainly adopted among financial-statement related studies, and many of them are about the market reaction of financial restatement. However, there is not a database of financial restatement, and as a result, data used for investigation is collected manually. Moreover, the statistical sample is easily influenced by subjective factors, which will result in a limitation.Part three theoretical basis of financial restatement. According to the US Accounting Principles Board and "Enterprise Accounting Criterion No.28-Accounting policy change, accounting estimation change, and accounting errors correction", this study defines the concept of financial restatement. It refers that to ensure the reliability and reality of financial information, the company restates the errors or omissions in the financial statement that published previously, in the form of announcing temporary supplement or amendment bulletins, or publishing accounting error correction bulletins. The agency theory based on information asymmetry perspective explains the moral hazard and adverse selection problem of public corporation. Under this perspective, the public company, which is the information maker, is likely to seek for undue interests through disclosing false accounting information. Therefore, listed companies would use financial restatement as a financial fraud method through manipulating accounting errors. Under the perspective of the efficient market hypothesis, the market reaction caused by financial restatement can be analyzed through investigating the fluctuation in stock prices, which is caused by bulletins related with financial restatement.Part four analysis of public company financial restatement. The financial restatement bulletins from2010to2012that published by companies listed in Shenzhen main board are set as the sample data. As shown in the statistic analyses of overall situation, industry distribution, disclosure pattern and profit, the proportion of financial restatement is high within Shenzhen main board. In addition, the situation of financial restatement is widely spread across industries, and is obvious in the manufacturing. As for the reasons of financial restatement, the most usual one is the change of accounting policy, the change of accounting estimation, accounting errors and the supplement for non-adequate disclosure. Another reason is the mistake made by the staff during the process of data entry, calculation, or statistics. In2007, although the situation of financial restatement of sample companies was better due to the promotion of the new accounting standards, the general situation was still not optimistic, and there were still a lot of companies announced financial restatement.Part five case analysis. Taking the financial restatements announced by*ST Shenzhen International Enterprise Co.,Ltd.(00056) between2008and2012as the research target, this study analyses several aspects involving the motivation, influences and the range.Part six the sixth part:conclusion and hints. According to case analysis, the restatement is partly due to the implement of new accounting standards. However, the main motivation of financial restatement of the target company is to manipulating profit and avoiding delisting. In addition, the drawbacks of the financial restatement system provide the case company justified opportunities to handling profit. From this aspect, the financial restatement system in our country still needs significant improvement.At last, some flaws of the system of financial restatement are suggested in this research. Meanwhile, some suggestions are also proposed based on the situation of the US.The main contributions are:(1)Collects the financial restatement. data of Shenzhen Exchange main board and then carries on statistical analyses, and points out the drawbacks of financial restatement system.(2)In this study, financial restatement is deeply investigated through case study, which reveal the problems existing in the financial restatement system to a further step. Based on this, some proposals are suggested.But as the perfect and existing financial restatement database has not set up in our country. In the process of writing, the two hundreds of datas can only be collected manually. I have a lot of work to do bout the later induction and analysis. Especially at present in our country, the ways of information disclosure about financial restatement are not ruled on a unified format, most are disclosured by the way of foot-notes to financial statements. I have some own subjectivity in the process of data classification inevitablely. Limited to the author’s own academic level, less financial restatement related references and the uses of methods in case analysis and normative analysis aren’t good enough,this article also has many disadvantages.