Criminal Liability For Falsifying Financial Statements
1. Legal Framework
In China, falsifying financial statements constitutes a serious financial crime under the Criminal Law of the People’s Republic of China. Key provisions include:
Article 164 – Financial Fraud:
Falsifying financial reports to mislead investors, banks, or government authorities.
Article 155 – Fraudulent Issuance of Securities or Financial Products:
False accounting in securities or public investment disclosures.
Article 266 – General Fraud:
Can be applied when falsified statements lead to financial loss or misrepresentation for personal or corporate gain.
Article 391 – Abuse of Power by Company Executives:
Executives who falsify statements to benefit themselves or the company may be liable.
Regulatory Oversight:
China Securities Regulatory Commission (CSRC) and local finance bureaus supervise public companies; criminal liability arises when deception is intentional and causes significant financial harm.
2. Case Studies
Case A: Kangmei Pharmaceutical Co. (2019)
Facts:
The company falsified financial statements, overstating cash balances by over 29 billion Yuan.
Purpose: inflate company valuation and attract investment.
Legal Issues:
Financial fraud (Article 164).
Misrepresentation to investors and regulatory authorities.
Outcome:
Chairman and executives were sentenced to prison terms of 10–15 years.
Fines and asset confiscation were imposed.
Company fined by CSRC for securities law violations.
Significance:
Demonstrates that large-scale falsification in public companies leads to severe criminal penalties.
Case B: Luckin Coffee Accounting Fraud (China, 2020)
Facts:
Luckin Coffee inflated sales by over 2 billion Yuan through falsified invoices and financial statements.
Legal Issues:
Fraudulent misrepresentation to investors.
Falsifying financial records (Article 164).
Outcome:
CEO and other executives were fined and banned from holding senior management positions; criminal prosecution pursued for top executives.
Significant restitution required to investors.
Significance:
Illustrates cross-border financial fraud with falsified statements can trigger both criminal and regulatory consequences.
Case C: China Resources Power Co. (2014)
Facts:
Executives overstated company profits in annual reports to maintain stock price and meet performance targets.
Misstatements involved hidden liabilities and inflated revenue recognition.
Legal Issues:
Intentional falsification of financial statements (Article 164).
Fraud affecting shareholders and market trust.
Outcome:
Senior financial officers received 5–8 years imprisonment.
Company fined and required to correct statements publicly.
Significance:
Shows that falsifying statements to maintain market performance is criminally actionable.
Case D: Dandong Zhongsheng Construction Co. (2015)
Facts:
Construction company overstated accounts receivable to secure loans from banks.
Bank financing decisions were based on fraudulent financial statements.
Legal Issues:
Bank fraud (Article 164).
Misrepresentation of financial status for personal or corporate gain.
Outcome:
CEO and CFO sentenced to 6–10 years imprisonment.
Restitution of loan amounts and seizure of personal assets.
Significance:
Falsification that directly causes financial institutions to incur losses triggers criminal liability.
Case E: Zhejiang Private Lending Company (2017)
Facts:
Company falsified financial statements to attract high-interest deposits from individuals.
Statements overstated profits and underreported liabilities.
Legal Issues:
Fraudulent fundraising (Article 192).
Falsification of financial records (Article 164).
Outcome:
Executives sentenced to 5–12 years imprisonment.
Compensation ordered to affected depositors.
Significance:
Even non-public companies face criminal charges if falsified statements deceive investors or depositors.
Case F: Shanxi Coal Enterprise (2012)
Facts:
Coal company falsified financial statements to cover operational losses.
Overstated revenue to secure bank loans and government subsidies.
Legal Issues:
Financial fraud (Article 164).
Misrepresentation causing loss to financial institutions and government.
Outcome:
Three top executives sentenced to 7–10 years imprisonment.
Substantial fines imposed, and assets confiscated.
Significance:
Highlights that falsifying financial statements to secure loans or government benefits is a criminal offense.
3. Key Takeaways
Criminal liability applies to both public and private companies.
Executives bear primary responsibility, particularly CEOs, CFOs, and accounting managers.
Key criminal charges: financial fraud, general fraud, falsifying records, and abuse of power.
Severe consequences: long-term imprisonment, fines, asset confiscation, and regulatory penalties.
Impact on stakeholders: investors, banks, and government authorities are protected under criminal law.
Intentionality is crucial: mistakes in accounting are not prosecuted; deliberate falsification is.
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