The case of Kangmei Pharmaceutical and their audit failure found from the Shapiro Library.
On October 15, 2018, the media started to raise questions on Kangmei Pharmaceutical’s double
high deposit loan, abnormal gross margin, and high pledge ratio of major shareholders. On
December 28, the China Securities Regulatory Commission (CSRC) announced that it would
investigate the company based on their alleged information disclosure. On April 30, 2019, Kangmei
Pharmaceutical released an accounting error correction announcing, admitting that in 2017, they
overstated their operating revenue of 8.898 billion yuan and increased their cost by 7.662 billion
yuan over their actual. The auditor in this case, Zhengzong Pearl River, who had been auditing the
company for 19 years, said they could not obtain effective audit evidence and issued an audit report
with its opinion reserved for the first time. This caused the value of Kangmei Pharmaceutical’s stock
to plummet and 22 people responsible for the error were punished accordingly. They had concealed
accounting bookkeeping, faked accounting content, forged large certificates of deposit and bank
statements. They also constructed inconsistent transactions and non-existent virtual transactions,
and forging things like sales vouchers. One of the largest fraud cases in China in modern history.
c c c c c c c c c c c There were several audit failures that occurred here. There were several internal control
failures such as the two largest shareholders, Ma Xingtian and Xu Dongjin, holding shares that
dwarfed all other shareholders. The existence of a dominant share phenomenon is not conducive to
the sustainable development of Kangmei Pharmaceutical’s future. This is since these two
shareholders may have a more invested interest in increasing their share size rather than helping
the business grow properly. The audit failure that was the most prevalent was a lack of the auditor’s
independence from the organization. They lacked this professional quality, and this resulted in the
final audit failure. One way to avoid this is to have strict implementations of recusal systems in the
organization so that it ensures that the CPA and the audited entity have no conflict of interest. This
increases the auditor’s impartiality and allows them to provide more accurate audits. They must
also learn new auditing methods and standards to help them improve the auditing process. This
confirms my opinion on the current climate of auditing as no matter how skilled an auditor you are,
there will always be other auditors or companies that will forgo independence in favor of mutual
benefits.
The article that I chose was one from KPMG where their chief audit strategy officer was interviewed
on the trends shaping the future of audit. One of the key words that stuck out to me in his excerpt
was where he said that clients are ready and waiting for us to become next-gen auditors. This hare
and turtle race between becoming this level of auditor and keeping up with the technology that
surpasses us daily is scary.
It is no surprise that the pandemic brought in new ways of navigating the workforce and creative
new paths to getting the audit process completed. The top trends that Fuller pointed out that are
here to stay are:
technology and data
operating models
a total upskills of the audit professional
demand for assurance services
This article confirmed my beliefs on where audit is headed. I fear technology to the extent that this
article brings up, us having to compete/keep up with technologies advancements in our fields.
While technology can be and is a huge help in data retrieval, larger sample sizing, and faster
research it can also be what is working against us in understanding it quick enough. The amount of
information that technology can process is loads beyond what the human brain can at any point, so
how do we keep up? There will always be the need to apply real time logic and economic factors to
scenarios that technology will not always be able to do. That is where an auditor I believe can make
a real difference long term. Link to article listed in references.
References:
X. Wei and X. Li, "Research on the impact of audit failure on corporate performance based on
multiple regression model: Take Kangmei Pharmaceutical as an example," 2021 2nd International
Conference on Big Data Economy and Information Management (BDEIM), 2021, pp. 140-143, doi:
10.1109/BDEIM55082.2021.00037.
Farrell, J. (2021, March 19). Trends shaping the future of Audit. KPMG US. Retrieved October 24,
2022, from https://info.kpmg.us/news-perspectives/advancing-the-profession/trends-shaping-the-
future-of-audit.html
