A CASE STUDY IN THE USE OF KNI
IN ECONOMIC ACCOUNTABILITY
AUDIT OF SOE LEADERS
National Audit Office of China
February 25, 2014
Background Information
In 2013, CNAO has carried out 12 audit projects, specilized in
economic accountability audit on the leaders of State-Owned
Enterprises.
Problems founded during the audit include:
•200 decisions were made in violation of rules, 30% of total
amount audited.
•200 decisions were related to the amount of 100 billion RMB,
resulted in the loss or potential loss of 10 billion RMB.
Four Main Measures
 Middle-tenure, or so-called on-the-term audit were
spread to a wider range on the leaders of State-Owned
Enterprises.
 Doubtful problems guided, focusing on important issues.
50 clues of economic cases were reported to relavant
departments in 2013.
Four Main Measures
 14 economic accountability audit appraisal systems were
established in 14 industries, pilotting in 2013 audit
projects.
 IT audit was stressed. Databases of 41 state-owned
enterprises were set up, containing financial data and
business data.
Six categories of KNI in audit
1.Overall financial conditions during the term
2.Implementation of Macro economic policies
3.Major economic decisions
4.Corporate governance and internal control
5.IT system construction and operation status
6.The honesty and integrity of leaders
Background of the case study
 S, the legal representative of Group B was appointed as the
chief manager since 2003. In 2011, S was designated
chairman of the board, in charge of overall operation of
Group B.
 Approved by the State Council, Group B was established as
a mega central enterprise group in 1999. Till the end of
2012, the registered capital has reached 20 billion RMB,
containing 40 wholly-owned or holding companies, and 11
listed corps.
 Till the end of 2012, several industrial sections have been
established, such as viechle industry, new energy industry,
and equipment manufacturing industry.
Background of the case study
 According to the current industrial distributio, key audit
areas were set as follows: headquarter of Group B, new
energy company TW, car manufacturing company CA,
occupying 72% of the total Group B assets.
Audit focus and detailed indicator
1.Whether the finaicial status was real, legal and effective?
 Indicators：main financial indicators, main busuness
income, profit distribution, taxation, owner's equity.
(see forms below)
Audit Focus 1
Year
Indicator
Total Assets
Operating Revenues
Total Profit
Net Profit
Value Added
Return on Equity （
%）
Assets Liabilities
Ratio （%）
2002（
Before
the term
）
2008
2009
2010
2011
2012
Audit Focus 2A
2 Whether decisions were made in accord with macro
economic policies?
 Independent innovation policy
1. Whether newly-invested projects were in accord with the
industrial policies and relevant ratios?
2. Research input ratio
3. Research input increment ratio
4. Independent research and development input ratio
Audit Focus 2B
 Independent innovation policy
5. Emission of Chemical Oxygen Demand(COD) and SO2
(emission reduction indicator)
6. comprehensive energy consumption per 10,000 RMB
output (energy conservation index)
7. Industrial concentration ratio of car industry (qualitative
indicator)
Audit Focus 2C
 Independent innovation policy
8. Main potential risk of middle-term and long-term development
(qualitative indicator, including factors that may influence future
developments, such as capital, resources, strategic management,
and environment protection)
9. Safety and security indicators, such as death toll and death
reduction ratio per year, security target completion ratio, reflecting
the achievement of the certain period of the leaders.
10. Realization rate of middle-term and long-term development
strategy, reflecting the achievement during the past period.
Audit Focus 3
3.Whether major economic decisions were compliant,
scientific and effective?
 The amount of pieces of regulations on the management
of major economic decision-making
 The amount of important economic decisions and relevant
amount of money
 The ratio of decisions violating regulations
 The ratio of funds resulted by noncompliance decisions
 The achievements resulted by major economic decisions
 The loss or potential loss resulted by economic decisions
Audit Focus 4
4.Whether the internal control was compliant and effective?
 The pieces of regulations, issued during the term, on the
internal control and corporative management.
 The implementation status of internal control regulations,
the ratio of excution.
 The number of affiliated companies, the number of
hierarchies
 The ratio of major decisions approved by the board
Audit Focus 5
5. IT construction and operation status
 The ratio of IT system failure
 The loss resulted by IT system failure
 The times of malicious hacks and relevant loss
Audit Focus 6
6.The honesty and integrity of leaders
 Pay attention to whether the legal representative S did any
activities that violated regulations and disciplines.
 Audit on the problems that mentioned above.
Doubtful points and audit findings 1
1.Flase recording in financial revenues and expenditures, which
influenced the authenticity of financial statements.
 Doubtful points: whether sales revenues was real, whether
sales confirmation was accurate, whether the accounting was
compliant, whether false trasaction and procurement existed,
whether unhappened cost was recorded to the financial
statement, whether revenue was adjusted not by transaction
occurred but because of appraisal.
 Therefore, following accounting subjects were streessed in
audit: agency fee in 2012 of Group B, Advertisement fee,
research fee, and so on.
Doubtful points and audit findings 1
1.Flase recording in financial revenues and expenditures, which
influenced the authenticity of financial statements.
Audit findings：
 Less calculation in cost through false transactions
(unhappened but recorded) and pre-confirmaiton of sales.
 Legal reprensentative S of Group B should bear leadership
responsibility.
Doubtful points and audit findings 2
2.Some investment decisions were not in accord with industrial
macro-policies, which may bring loss.
 Projects and investments were launched in new energy
industry though lacking of professional knowledge, efficient
research and feasibility survey.
 New investment was added under the worsening condition of
market depression.
 No effective and timely measures were taken to reduce the
pressure, and finally the risk was out of control.
Doubtful points and audit findings 3
3.Major economic decisions were made in violation of relevant
procudures and regulations.
 Three aspects:
project investment, capital operation, and assets disposal.
Audit findings:
 The procedure of project investments was not obey rules;
 Affiliated companies made uncompliant investment and false
capital increasement;
 Affiliated companies made uncompliant guarantees and loans.
Doubtful points and audit findings 4
4.Corporate governance structure was neither integrated nor
scientific
Audit Findings：
 Till the end of 2012, management hierarchy of Group B has
reached 5 levels.
 The headquarter of Group B was lacking of management and
control on the 5th level companies.
 Several level II and level III companies did not set up Board of
Directors, thus corporate governace structure needed to
improved.
Conclusions and thoughts
 We should carry out audit in line with relevant laws,
regulations, and national policies.
 We should clearly define responsibilities, make objective
and comprehensive evaluations of auditees, and highlight
the features of economic accountability audit.
 We should focus on corporate governance and internal
control, promote management ability, and improve core
competitiveness.