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YINGUANGXIA: AN EPITOME OF CORPORATE
GOVERNANCE FLAWS IN CHINA
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As a previous star on the Shenzhen Stock Exchange, Guangxia (Yinchuan) Industry Co. Ltd
or Yinguangxia (“YGX”) had once shown China’s former president, Jiang Zemin, shaking
hands with YGX’s executives in its quarterly report of 2000. Such a portrayal had
successfully convinced many small public investors of the company’s trustworthiness. 1
However, what lay beneath the glittering surface was a different reality. In August 2001,
Caijing,2 a local Chinese financial magazine, disclosed the then biggest economic scandal in
the country’s history. It was reported that this high-tech biopharmaceutical company and its
wholly owned subsidiary in Tianjin might have falsified a huge profit in order to appear as a
top winner in the Chinese bourses. The allegation soon set off an extensive investigation by
the China Securities Regulatory Commission (“CSRC”), which suspended the company’s
share trading and discovered an overstatement of profits amounting to approximately US$93
million for the period from 1998 to 2001. Though YGX could retain its listing status after
undertaking several business restructuring measures, the damage to its reputation was almost
instantly reflected in its deteriorating stock value. Meanwhile, YGX’s auditor, the
Zhongtianqin Accounting Firm (“ZTQ”), was charged with negligence for issuing seriously
distorted audit reports over the years. Consequently, four executive officers at YGX and two
certified public accountants (“CPAs”) at ZTQ were found guilty and were jailed and fined.
China’s Ministry of Finance revoked the licence of what was then the largest auditing firm in
China. Due to the auditing firm’s involvement in the YGX scandal, the reputation of more
than 60 other listed clients of ZTQ was indirectly tarnished.3
No
Although punitive actions had been taken, the end of the YGX scandal raised doubts over...