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Forensics for financial order
http://www.sina.com.cn 2005/04/15 18:14  上海英文星报

  THERE is nothing unusual about a school adding a new course, but when Fudan University announced its "Fraud Auditing and Forensic Accounting" course the media paid immediate attention.

  The course, part of the postgraduate programme of professional accounting at Fudan's School of Management, was launched on March 4. It is the country's only professional course focusing on fraud examination and forensic accounting.

  "The course is very new in this country, but it is very popular in the United States," said Professor Li Ruoshan, who is in charge of the project. A survey launched in the United States at the beginning of this century showed forensic accounting courses - training students in both accounting and law - will be the most heavily subscribed education choices in the 21st century.

  "I believe this major will also become popular in the country in the coming years, that's why we set it up," Li said. "Ever more financial fraud and corruption cases are exposed by the media these days."

  Ugly memories

  People may already have forgotten the "three big fabricated financial report cases" at the beginning of the 1990s, but some of the major financial scandals in the new century shocked the whole country and may still remain fresh in people's minds.

  One was the falsified financial report issued by Zhengzhou Baiwen Co Ltd (Zhengbaiwen) in 2000. Zhengbaiwen enjoyed model status among listed enterprises in the commercial sector, but in fact it had suffered significant operational losses in the 1998-99 period, so it falsified its financial reports to make shareholders believe it was still doing well. Shares lost 98.79 per cent of their value due to the deception.

  In 2001, Yinguangxia, another listed company, fabricated 745 million yuan (US$90.08 million) in fictional profits by counterfeiting purchasing and selling contracts, export declaration statements, value-added tax invoices, financial notes and business revenue reports.

  More recently, at the end of last year, the China Aviation Oil Singapore Co Ltd's gross debts amounted to US$530 million. The company had wrongly judged future oil prices in the fourth quarter of 2003 but attempted not to account for the losses in its quarterly reports.

  Almost at the same time, five high level executives, including Zheng Junhai, board chairman of the Yili Group, a major player in the nation's dairy products market, were arrested after being suspected of misappropriating funds of the listed company.

  "I believe these exposed cases are just the tip of an iceberg," said Li, who began researching the topic of fraud examination in 1995.

  During the first class, Professor Li mentioned a case that occurred two years ago in Shanghai.

  An assistant financial manager at a real estate company in Pudong was found to have misappropriated about 92 million yuan (US$11.12 million) from the company. Most of the money was spent on his girlfriends.

  "I mentioned this case in order to warn everyone in the financial system that a few mistakes can ruin everything," he said.

  The main aim of the course is to teach students about the corporate positions which enable their holders to take advantage of illegal opportunities.

  "According to my understanding, many local enterprises have major problems in the internal control of their financial systems," said Zhu Pin, a graduate of the project who now works as a financial analyst in an international company.

  Zhu said when she worked in a hotel about 10 years ago, the accounts never were correct. "Many senior employees exploited their positions at the hotel, it was an open secret, but no one said anything. It later led to a big financial disaster," she said.

  "Such phenomena are rarer today, but they persist to some extent in some local companies, according to what I have heard from my counterparts in other enterprises," Zhu said.

  "It is widely known that financial staff will change and 'refine' accounts for the boss in some companies. Internal control is really a big problem in local enterprises."

  Simple question

  At the first class of the project this March, Professor Li asked a very simple question of all 69 students, who average 7.4 years of career experience, mostly as financial staff in companies and agencies.

  The question was: "Who is in charge of deposit reconciliation in your company?" Some students, including one working in a foreign-invested company, said it was the teller. But the correct answer should be: The accountant.

  "It is horrible practice to have the teller made responsible for reconciling the accounts, how can one check on one's own work?" Li said.

  As if to underline what Professor Li had said, just two months later, a student told Li of a teller who had misappropriated about 3 million yuan

  (US$363,000) from the company and used it for gambling.

  "That's part of the reason for my participation in this project," said Wang Qiyun, co-partner of the Shanghai Qiuxin Accounting Agency. "Working in a company, one may have narrow vision and fail to notice where potential problems could arise. Here, cases from other companies inspire and educate me," he said.

  "It is not unusual to see a lot of negative things happen when a society is undergoing a process of transition," the professor said.

  China is now transforming from a planned to a market economy, which also involves a transition in profit distribution, according to Li. The original balance of interests is being broken, and those who enjoyed advantageous positions in the old system are unwilling to give up their benefits, a situation causing many problems.

  "In the past, the country cared more about group interests, but nowadays the country is increasingly attentive to individual interests," Li said.

  "One important requirement is to provide more legal protection for individuals in economic life. That's why we need more professionals in the areas of fraud examination and forensic accounting who can help keep order in the market."

  "But this job also involves great risk and difficulty," said Wang, who has eight years of experience working in auditing.

  "Fraud auditing is different from ordinary auditing. The former is based on examining the accounts with clues or suspicions in advance, it is more difficult," Li said. "It even requires a degree of criminological knowledge."

  "Fraud examination is not only a matter of checking figures. It requires a full understanding of the company's business, the behaviour of its opponents in the field, and the whole situation of the business. When all these are in place it may be possible to unearth concealed problems."

  When Wang undertook a fraud examination in a real estate case, his group included more than 10 people working for more than three months. "Everything had to be correct because it related directly to a potential criminal conviction."

  In the theory of fraud auditing, two types of risk are widely recognized. One is "alpha risk", which means fraud is assumed when in fact none has taken place. But this situation is relatively rare, according to Li.

  More important is "beta risk" - where there is unexposed fraud. If this is later discovered auditing staff are put under huge pressure and even face the possibility of legal action against them.


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