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No. 20 of 2016 (General Serial No. 251):Audit Results of the Financial Revenues and Expenditures of China Merchants Group Limited for the Year 2014
2017-06-08日   Soure : 【www.9455.com:International Cooperation Department】 :

No. 20 of 2016 (General Serial No. 251

Audit Results of the Financial Revenues and Expenditures of China Merchants Group Limited for the Year 2014

In accordance with provisions of the Audit Law of the People's Republic of China, in 2015, the National Audit Office (CNAO) conducted an audit on the financial revenues and expenditures of China Merchants Group Limited (hereinafter referred to as CMG) for the year 2014. The audit focused on CMG’s headquarter, 8 secondary units including its affiliated China Merchants Property Development Co., Ltd. and China Merchants Industry Group Co., Ltd. (hereinafter referred to as CMP and CMI, respectively), and head office of China Merchants Bank Co., Ltd. (hereinafter referred to as CMB), of which CMG holds share. The audit also extended to relevant matters.

I. Overview

CMG was established in October 1986 and mainly engaged in transportation, financing, real estate etc.. As reflected in its consolidated financial statements, as of the end of 2014, CMG had 573 wholly-owned or controlling subsidiaries and 260 shareholding enterprises. It had a registered capital of RMB14.143 billion, total assets of RMB624.158 billion, total liabilities of RMB362.681 billion, shareholders’ equity of RMB261.477 billion, and asset-liability ratio of 58.11%; realized revenue for the year was RMB93.275 billion, and net profit was RMB27.892 billion; return on equity ratio was 11.85%, and ratio of the value maintenance and increase of state-owned capital was 116.1%.

Xinyongzhonghe Accounting Firm, entrusted by CMG, audited the 2014 consolidated financial statement of the company and issued an audit report with standard unqualified opinion, which was published on ChinaMoney.com.cn.

The audit conducted by the CNAO indicated that CMG has continued to improve strategic management system, strengthen internal control and cost control, coordinate and promote integration and reorganization of transportation industry, advance and optimize production distribution and transformation and upgrading of industrial areas, and stimulate industrial transformation and innovation. The audit also found that CMG had some problems in financial management and accounting, corporate major decision-making and management, development potential, professional ethics, rectification of problems found in previous audits etc..

II. Major Problems Found in the Audit

(I) On financial management and accounting

u From 2009 to 2014, CMG had irregularly accrued an excess of bad debt provision of RMB1.742 billion, among which the amount of 2014 was RMB691 million.

u In 2014, the sub-unit China Merchants Group (Hong Kong) Co., Ltd. irregularly understated RMB572 million investment return from fair value changes of derivative financial liabilities.

u In 2014 when the sub-unit China Merchants Heavy Industries (Jiangsu) Co., Ltd. was acquiring shipyard, RMB94.0044 million failed to be amortized as deferred income as stipulated, and corresponding expenses failed to be recognized as intangible assets.

u From 2010 to 2014, the sub-unit China Merchants Securities Co., Ltd. had disbursed RMB260 million of employee bonus etc. in excess of total wages, among which the amount of 2014 was RMB71 million.

u From 2013 to 2014, CMB had irregularly used RMB139 million rebate from withholding fee of personal income tax and government bond issuance fee for employee benefits, among which the amount of 2014 was RMB46 million.

u From 2007 to 2014, the sub-unit CMP had sold housing property worth RMB45.6844 million to 10 executives of CMG and their relatives without disclosing it in financial statements as stipulated, among which the amount of 2014 was RMB27.0512 million.

u In 2012, the head office of CMB accrued RMB40 million official vehicle reform expenses before the implementation of the reform. It remained in current account by May 2015.

u In 2012, China Nanshan Development (Group) Co., Ltd. (hereinafter referred to as Nanshan Group) and its sub-unit Huanan Building Materials (Shenzhen) Co., Ltd., of which CMG held share, failed to account RMB16.5 million accrued but not yet received dividend as investment income as stipulated.

u From 2007 to May 2015, two enterprises including Nanshan Group had failed to withhold personal income tax on RMB53.116 million of executive wages as stipulated, among which RMB8.995 million was involved in 2014.

u From 2010 to 2014, two enterprises including the sub-unit Zhangzhou China Merchants Wharf Ltd. had irregularly disbursed employee travel expenses etc. totaling RMB6.4773 million, among which the amount of 2014 was RMB1.5994 million.

u From 2007 to July 2015, the sub-unit China Merchants Chongqing Communications Research and Design Institute Ltd. (hereinafter referred to as Chongqing Communications Research Institute) and two other sub-units had privately included RMB5.5128 million in off-book accounts, among which the amount of 2014 was RMB2.9193 million. RMB1.4113 million remained in balance as of July 2015.

(II) On corporate major decision-making and management

u From 2010 to 2014, during the development and management of Zhangzhou Development Zone, CMG had had problems including some land parcels being collected as reserve without having been reported to and approved by local governments or gone through value assessment as stipulated, some parcels being sold at prices below purchase cost, etc.. RMB1.604 billion was involved, among which the amount of 2014 was RMB61 million.

u New loans for small businesses from CMB in 2014 decreased by 57.95% compared to that of the last year, failing to meet relevant regulatory requirements. From 2012 to 2014, CMB had irregularly charged small businesses applying for loans RMB6.3157 million intermediate service fees, among which the amount of 2014 was RMB3.0091 million.

u From 2010 to 2012, CMG had invested in non-core businesses without reporting for approval as stipulated, and had newly built or renovated 4 hotels with an investment totaling RMB2.721 billion.

u In 2010, without going through decision-making process and assessment as stipulated, CMG offered RMB493 million to acquire three foreign cold chain project companies with net assets of RMB149 million. By 2014, RMB172 million impairment provision had been accrued and the operating loss of the 3 companies had reached RMB52.5543 million.

u In 2010, while planning of the project site was to change, and planning and design of the project had not been approved by administrative authorities, CMG irregularly approved a sub-unit to start constructing a warehouse. The construction was halted in July 2011 due to failure to obtain permits for planning and construction. The RMB20.8102 million invested initially faced the risk of loss.

u In 2012, CMB irregularly spent RMB310 million on purchasing high-end clubs, which were intended for product promotion, leisure, entertainment, and other high-end business activities but had not been disposed of or effectively utilized bythe end of 2015.

u From 2010 to 2014, six sub-units including CMI had had problems such as failing to invite bidders for procurement of equipment, materials and services as stipulated, involving RMB59.966 billion, among which the amount of 2014 was RMB17.098 billion.

u From 2010 to 2011, the sub-unit Chongqing Communications Research Institutehad invested in constructions of three municipal BT projects without reporting to CMG for approval as stipulated. Contract value totaled RMB2.71 billion.

u In 2013, the sub-unit China Merchants International made a USD84 million additional investment on a foreign BOT project without reporting to CMG for approval as stipulated.

u In 2013, during the bidding process for three construction projects, the sub-unit China Merchants Shekou Industrial Zone Co., Ltd. (hereinafter referred to as Shekou Industrial Zone) irregularly recommended three bidding candidates to members of the bidding committee. These candidates made it to the bid lottery and won the bid. A total RMB859 million in contract value was involved.

u In 2010, knowing that planning of Qianhai was to change, the sub-unit Shekou Industrial Zone approved construction of the Wutong building project of sub-unit Shenzhen Nanyou Oil (Group) Co. Ltd., whose RMB2.6952 million investment faced the risk of loss after planning changes.

u In 2003, without reporting to the board of directors for examination and approval as stipulated, Nanshan Group approved its affiliated Shenzhen Nanshan Development Industrial Co., Ltd. of cooperative development of real estate projects with RMB783 million total investment; in 2010, it approved its affiliated Yazhi Integrated Housing Co., Ltd. of transferring share of a company the latter held to certain individual at net book value by agreement.

u From August 2010 to April 2014, in the name of cooperative operation, the sub-unit China Merchants Logistics Group Co., Ltd. had offered RMB6.9471 million loans to two enterprises with no road transport qualification for the latter to purchase operating vehicles, and had irregularly run outsourcing transportation business with them, and paid more than RMB320 million freight. Now the companies are being sued because of operation safety accidents of some vehicles and certain legal risks.

u In 2012, knowing that the underground parking lot at Wenhua Square of the zone could not be constructed on schedule, Zhangzhou Development Zone still arranged its subsidiary to pay RMB94 million to developer for some of the parking spaces. Actually, the parking lot had not been started for construction by July 2015; in the same year, it also overpaid RMB4.3288 million compensation for land requisition to another company of the zone and had not recovered it by the end of 2014.

u In 2012, the sub-unit China Investment Management made an additional investment of RMB30 million in a company as fund manager, and failed to achieve the expected return due to insufficient preliminary research. RMB11.275 million investment including principal and interest had not been recovered by July 2015.

u From 2012 to June 2014, the board of directors ofthe sub-unit China Merchants Capital Investment Co., Ltd. had failed to hold regular meetings as stipulated, and had held only one board meeting upon its establishment.

u With regard to informatization development, by the end of 2014, the thirty-two information systems of CMG, whose protection grades were rated as second-class or higher, had failed to be registered at local public security organs as stipulated; an accounting software that CMG used did not participate in the data interface product certification, and had no supervision confirmation of annual product certification; examination and approval procedures of setting up the administrative accounts of the enterprise resource planning system (ERP) of CMP were irregular and faced risks of business information leakage or falsification.

(III) On development potential

u From 2010 to 2014, investment in science and technology by CMG had accounted for only 0.37%, 0.37%, 0.26%, 0.26%, and 0.28% of revenue respectively, and investment in research and development accounted for only 0.29%, 0.35%, 0.20%, 0.24%, and 0.27% of revenue respectively, significantly less than the 2.5% and 1.8% required by regulatory authorities.

u From 2010 to 2014, 29 out of 64special subjects undertaken by Chongqing Communications Research Institute had failed to be completed on time, accounting for 45.31%; the national engineering laboratory project of highway tunnel construction technology, which was approved in 2012 and planned to be completed in 3 years, was slow in implementation. By June 2015, only RMB9.3841 million had been invested, accounting for 12.53% of the total investment.

(IV) On professional ethics

u From 2013 to 2014, in violation of the spirit of the“Eight Rules” of the central government, CMG headquarters had purchased RMB60.3 thousand gift cards, and expended RMB1.0857 million on upscale wine. Its affiliated and shareholding units had spent RMB30.13 million on gift cards and upscale wine,among which the amount of 2014 was RMB22.869 million.

u From 2013 to 2014, in violation of the spirit of the “Eight Rules” of the central government, CMG headquarters had paid RMB75 thousand for management and consumption expenses of golf cards. Its affiliated and shareholding units had paid RMB6.702 million, among which the amount of 2014 was RMB2.0261 million.

u From 2010 to 2014, two executives of Nanshan Group had irregularly held part time posts and earned RMB91 thousand, among which the amount of 2014 was RMB30 thousand.

u From 2012 to 2013, Nanshan Group had purchased two cars for official use in excess of the standard: one was worth RMB1.3576 million and the other RMB1.3491 million.

u In 2013, the sub-unit Shenzhen China Merchants Real Estate Co., Ltd. failed to charge an executive RMB916.4 thousand liquidated damages for delayed payment for house as stipulated in the contract.

u From 2008 to 2009, three executives of CMG had irregularly enjoyed an extra discount of RMB632.6 thousand on top of market discount while purchasing estate developed by Nanshan Group.

(V) Rectification of Problems Found in Previous Audits

u The audit by the CNAO in 2011 pointed out that CMP directly delegated projects to its sub-unit