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The Supreme People¡¯s Court and the Supreme People¡¯s Procuratorate have recently intensified their focus on financial fraud, releasing two batches of typical cases in June 2024 and January 2025. These cases offer valuable insights into the characteristics and underlying causes of financial fraud, while providing essential compliance recommendations for intermediaries such as accounting firms.

Definition and punishment

On 16 August 2024, the Economic Crime Prosecution Department of the Supreme People¡¯s Procuratorate issued the Answers to Questions Related to Handling Financial Fraud Cases. In particular, the seventh section addresses ¡°cross-period manipulation¡±, which refers to companies or enterprises violating accounting standards by confirming revenue, costs, or gains and losses outside the appropriate accounting period, constituting financial fraud. Such practices, if deemed criminal, warrant the pursuit of legal liability under the law.

However, while violations of accounting standards may result in inaccurate financial data, the author notes that not all such violations amount to financial fraud. Financial fraud involves deliberate, dishonest or illegal manipulation of financial reports to inflate revenue, reduce costs or conceal liabilities, thereby misleading investors, creditors and regulators.

Its definition hinges on intent, manipulation of financial data, and the purpose of misleading stakeholders. Not all financial misstatements constitute fraud; the malicious intent of the perpetrator must be considered to distinguish between financial fraud and inaccuracies, ensuring precise accountability.

Characteristics of fraud cases

Financial fraud cases often involve intricate networks of collusion between multiple parties, including companies and intermediaries such as accounting firms, which frequently act as accomplices. Several characteristics define these cases.

Financial fraud cases frequently exhibit intricate criminal networks involving multiple actors, potentially triggering a chain reaction of related offences, commonly referred to as interrelated cases. These cases often extend beyond internal corporate misconduct to include external intermediaries, forming complex interest networks. For instance, a publicly listed company that deliberately provides false financial information during a securities offering may be charged with the crime of fraudulent issuance.

Similarly, intermediaries who knowingly participate or fail to exercise due diligence by issuing false or inaccurate certification documents may face charges such as providing false certifications or issuing certifications with material inaccuracies.

Addressing financial fraud requires co-ordinated efforts across multiple departments. Companies and intermediaries alike are strongly advised to strictly follow the law and uphold professional ethics to avoid severe legal consequences.

Financial fraud methods are often highly concealed, making detection difficult for ordinary investors. Financial information, particularly original accounting records, serves as a critical record of corporate activities and determines a company¡¯s fate. However, such information is typically highly confidential.

Under the Company Law, shareholders must meet specific conditions to access company records, creating significant obstacles for minority shareholders in exercising financial oversight. As a result, they rely on audit firms to serve as gatekeepers. When these firms fail in their duties or collude in fraud, minority investors are left vulnerable.

Root causes of fraud

Poor corporate governance, ineffective decision making and inadequate regulatory mechanisms enable financial fraud. Controlling shareholders or actual controllers often abuse their power to bypass formal procedures for personal gain, harming both the company and its shareholders. Strengthening corporate governance and implementing safeguards against power abuse are critical to mitigating fraud risks.

A lack of independence among intermediaries also exacerbates financial fraud. Although laws mandate independence, objectivity and impartiality, intermediaries often struggle to maintain true independence because of their reliance on corporate clients.

Establishing comprehensive regulatory mechanisms is essential to ensure intermediaries fulfil their supervisory responsibilities. Combating financial fraud effectively requires strengthening corporate governance and safeguarding intermediary independence.

Compliance recommendations

In recent years, intermediaries have frequently been involved in cases of administrative penalties, criminal liability and civil compensation. Lawyers recommend the following compliance measures.

Enhance internal management and quality control. Intermediaries must improve internal management frameworks by clearly defining responsibilities and optimising workflows. Stringent review and verification mechanisms should be established to ensure thorough evaluations of all business activities. Regular internal audits and compliance checks are essential to promptly identify and address potential issues, ensuring effective and compliant management.

Strengthen due diligence and verification. Before accepting engagements, intermediaries should conduct comprehensive due diligence to assess clients¡¯ backgrounds, financial conditions and business models. During engagements, they must rigorously verify the authenticity and accuracy of client-provided information through multiple channels and methods.

Any significant risks or irregularities should be promptly reported to regulators, and appropriate measures must be taken to ensure the accuracy and completeness of issued documents.

Maintain independence and objectivity. Intermediaries must adhere to principles and refuse illegal or non-compliant requests. They should enhance communication and collaboration among intermediaries to uphold fairness, justice and transparency in capital markets. Furthermore, robust mechanisms must be implemented to prevent conflicts of interest, safeguard client confidentiality, and establish effective internal firewalls.

Strengthen training and education for practitioners. Tailored training programmes should be developed to address business needs and risk factors. These programmes should focus on financial fraud detection and compliance requirements, with an emphasis on analysing typical fraud cases to enhance practitioners¡¯ risk awareness and compliance consciousness. Encouraging employees to actively report compliance issues helps establish a strong culture of accountability and ethics within firms.

Cheng Xiaolu is the chair of the Partners¡¯ Meeting at Starrise Law Firm