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 couldn’t 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.
a 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.
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.
