July 12, 2017 2:45 am JST

China government auditor flags dodgy books at key state companies

Naming and shaming the latest tactic in war on corruption

YU NAKAMURA, Nikkei staff writer

China National Petroleum is among the key state enterprises where accounting irregularities have been unearthed. © Reuters

GUANGZHOU -- Around 90% of leading Chinese state enterprises recently scrutinized by the nation's auditor show evidence of improper accounting, according to a new and highly unusual report likely aimed at keeping the government's anti-graft drive fresh in officials' minds.

The National Audit Office delved into financial statements from 20 of the 101 state enterprises directly controlled by the central government, focusing on filings from the year 2015. The records are notoriously difficult for outsiders to access, as many of the companies are core unlisted units of major state-backed business groups.

Improprieties were unearthed at 18 of the 20, including 200.1 billion yuan ($29.4 billion) in revenue inflation over the last several years and roughly 20.3 billion yuan in improperly booked profit. Culprits included China National Petroleum, one of the country's largest oil producers; China National Chemical, or ChemChina, which recently acquired Switzerland's Syngenta, the world's top maker of agrochemicals; and China Baowu Steel Group.

Dongfeng Motor, which operates joint ventures in China with Nissan Motor and Honda Motor, reportedly failed to properly account for around 600 million yuan in transportation subsidies paid to employees in 2015. The company also inflated revenue that year by roughly 400 million yuan using phony transactions with other group units. And between 2001 and 2015, it paid workers around 40 million yuan that had been falsely booked as costs.

Gloves off

The auditor has identified inaccuracies in such companies' books in the past. But the latest report calls out what the office has determined are conscious distortions. Such figures as the overall revenue and profit inflation totals have also been provided to illustrate the broad scope of the issue. For a government office to so plainly expose wrongdoing at state-held companies is a timely reminder of President Xi Jinping's ongoing anti-graft drive, just as the Communist Party prepares to pick new leadership at its twice-a-decade National Congress this fall.

In fact, the party's close involvement in state-owned companies is part of what has made such irregularities common. The so-called central enterprises surveyed are accountable only to the State-owned Assets Supervision and Administration Commission, directly under the State Council. This shields them from outside scrutiny and means in practice that senior corporate officials are selected largely by the party.

While underperforming executives have been known to have pay docked, those who toe the party line can expect to be rewarded. Climbing the Chinese political ladder thus often takes precedence over running a tight corporate ship.

Reforming state enterprises is a key goal of Xi and associates. The new report could aid in this, if at a reputational cost to foreign partners of the publicly shamed businesses. Resentment of powerful entrenched interests is already brewing in China, and only transparency and efficiently run operations can bring relief.

Nissan Motor Co., Ltd.

Japan

Market(Ticker): TKS(7201)
Sector:
Industry:
Consumer Durables
Motor Vehicles
Market cap(USD): 42,963.5M
Shares: 4,220.72M

Honda Motor Co., Ltd.

Japan

Market(Ticker): TKS(7267)
Sector:
Industry:
Consumer Durables
Motor Vehicles
Market cap(USD): 49,927.9M
Shares: 1,811.43M

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