A Case Study Of Financial Fraud Induced By Merger And Acquisition Performance Commitments

In the context of the rapid development of China’s market economy,rapid expansion by way of mergers and acquisitions has become a major way of development for modern companies.2021 In May,the SFC issued a note on the handling of financial fraud by listed companies since 2020,stating that the percentage of fraud cases involving mergers and acquisitions and restructuring was as high as 40%,with performance commitments becoming a new motive for fraud.In the M&A process,M&A parties often sign performance commitment clause agreements with target companies to reduce M&A risks and highlight the reasonableness of high valuations.However,in recent years,the rise in M&A activity has been accompanied by high valuations,high premiums,high performance commitments and refusal to honour commitments,and the performance commitment system has created new risks under the pressure of high performance.Performance commitments,as an effective form of contract,play an important role in enhancing the value of a company.However,many companies have used various means to fulfil performance promises in order to avoid equity compensation or cash compensation,etc.,in the event of failed performance promises,leading to surplus management and even financial fraud,which has caused serious damage to the rights and interests of small and medium-sized investors and also seriously affected the normal operation of the securities market.This thesis takes the case of He Ying Company,which committed financial fraud for more than two years in order to achieve its performance promises,inflating profits by a total of RMB 300 million.Through the case study,this paper explores the motivation and mechanism of fraud induced by performance commitments,and reveals the means of fraud in the process of mergers and acquisitions of Chinese enterprises through fictitious revenue,early recognition of revenue,double recognition of revenue,signing of "yin-yang contracts",and inflating revenue through percentage of completion.This paper analyses the case studies,firstly,to analyse the triggering factors,secondly,to provide statistics on the means,secondly,to elaborate on the economic consequences and finally,to summarise the mechanism.The paper concludes that:(1)the failure of the M&A party to make prudent acquisitions is a major cause of M&A failure;(2)the failure of the M&A party to make a reasonable assessment of the acquiree has led to the phenomenon of "high valuation,high profit forecast and high compensation",which constitutes the pressure of financial fraud induced by performance commitments;(3)Performance commitments set for too short a period,inadequate internal control oversight,inadequate supervision of performance commitments by the SFC and failure of auditors to maintain sufficient professional scepticism constitute opportunities for performance commitments to induce financial fraud;(4)More attention should be paid to the previous moral character of the managers of the enterprise,and if there is also previous fraudulent behaviour,this indicates that there are problems with the professional ethics of the management and constitutes an attitude and excuse for fraud triggered by performance commitments;(5)The phenomenon of "precise compliance" in performance pledges is likely to involve financial fraud.At the same time,in response to the conclusion,put forward relevant recommendations,this paper hopes that through the analysis of specific case studies,can play a role in regulating financial fraud through performance pledges.