Criminal Liability For Misreporting Corporate Profits
1. Legal Framework
In China, misreporting corporate profits can constitute financial fraud and is criminally prosecutable under several provisions of the Criminal Law of the PRC:
Article 159 – Fraudulent Issuance of Securities or Misrepresentation in Financial Reports
Making false statements in corporate financial reports or securities filings to mislead investors, regulators, or the public.
Article 164 – False Accounting or Fraudulent Financial Reporting
Manipulating accounts to conceal losses, inflate profits, or mislead stakeholders.
Article 263 – Fraud and Misappropriation in Business Operations
Using false financial data to commit fraud or divert corporate assets.
Administrative and Regulatory Laws
The Company Law and Securities Law impose liability for misreporting financial results and allow criminal prosecution for severe violations.
Key Principle: Misreporting corporate profits, whether to investors, regulators, or the public, constitutes fraud or false accounting, leading to criminal liability for executives and accountants involved.
2. Detailed Case Studies
Case 1: Shanghai – Inflated Profits in Publicly Listed Company (2016)
Facts: Executives of a Shanghai-based listed company overstated quarterly profits by 30% to meet investor expectations.
Charges: Fraudulent financial reporting (Article 164), misleading investors (Article 159).
Judicial Reasoning:
Court found intentional inflation of revenue and concealment of losses.
Evidence included falsified invoices and accounting books.
Outcome:
CEO sentenced to 7 years imprisonment, CFO 5 years, fines imposed.
Significance: Highlights liability for misreporting profits to manipulate stock prices.
Case 2: Beijing – Misstatement to Secure Bank Loans (2017)
Facts: Corporate executives exaggerated profits to obtain a large bank loan for expansion.
Charges: Financial fraud (Articles 164 & 263).
Judicial Reasoning:
Misreporting led directly to financial gain through bank lending.
Court emphasized intent to deceive financial institutions.
Outcome:
CEO: 6 years imprisonment, CFO: 4 years, restitution of loaned funds required.
Significance: Misreporting for loan acquisition is considered both fraud and abuse of corporate trust.
Case 3: Guangdong – Concealment of Losses (2018)
Facts: Executives of a manufacturing company hid operating losses over multiple years and inflated profits in financial statements to avoid regulatory scrutiny.
Charges: False accounting, financial statement fraud.
Judicial Reasoning:
Systematic manipulation of ledgers and revenue accounts demonstrated deliberate intent.
Regulatory compliance was deliberately evaded.
Outcome:
CEO: 8 years imprisonment, accounting manager: 5 years, company fined.
Significance: Courts punish prolonged or repeated profit misreporting more severely.
Case 4: Shenzhen – Startup Misreporting Profits for Investor Funding (2019)
Facts: A tech startup claimed high profits to attract venture capital funding, but financial audits later revealed significant losses.
Charges: Fraudulent financial reporting, misrepresentation to investors.
Judicial Reasoning:
Deliberate misstatements designed to secure investment.
Auditors and investors relied on false data.
Outcome:
Founder: 5 years imprisonment, co-founders 3–4 years, ordered to repay investors.
Significance: Misreporting in startups for fundraising purposes carries criminal liability similar to large corporations.
Case 5: Hubei – Publicly Traded Company Hiding Liabilities (2020)
Facts: Executives concealed major corporate liabilities to inflate profits and maintain stock value.
Charges: False accounting (Article 164), securities fraud (Article 159).
Judicial Reasoning:
Deliberate omission of liabilities misled shareholders and regulators.
Court emphasized public trust and capital market integrity.
Outcome:
CEO sentenced to 9 years imprisonment, CFO 6 years, heavy fines, and regulatory sanctions.
Significance: Misreporting corporate profits in publicly traded companies attracts severe penalties due to impact on investors and markets.
Case 6: Zhejiang – Inflated Revenue through Fictitious Sales (2021)
Facts: Executives created fake sales invoices to inflate reported revenue and profits.
Charges: Fraud, false accounting, and misrepresentation to shareholders.
Judicial Reasoning:
Evidence showed invoices were fictitious with no actual sales.
Court considered intent to mislead investors.
Outcome:
CEO: 8 years imprisonment, accounting staff 3–5 years, restitution required.
Significance: Use of fictitious sales is a common method of profit misreporting and attracts strict criminal liability.
Case 7: Tianjin – Misreporting to Avoid Taxation (2022)
Facts: Executives overstated business expenses and misreported profits to reduce tax liability.
Charges: Fraudulent financial reporting, tax evasion.
Judicial Reasoning:
Intentional misstatement for financial benefit and tax avoidance.
Court emphasized harm to public revenue.
Outcome:
CFO: 6 years imprisonment, CEO: 5 years, fines imposed, back taxes collected.
Significance: Misreporting profits for tax avoidance is both criminal accounting fraud and fiscal offense.
3. Observations
Intent is Key: Courts punish deliberate misreporting intended to deceive investors, banks, or regulators.
Severity Depends on Scale: Larger companies, public companies, or prolonged misreporting receive heavier sentences.
Multiple Charges Often Apply: Fraud, false accounting, and securities law violations are frequently combined.
Restitution is Common: Courts require repayment to defrauded investors or recovery of misappropriated funds.
Range of Sentences: Typically 4–9 years imprisonment for executives, longer for severe or repeated offenses.
Conclusion
Criminal liability for misreporting corporate profits in China arises when executives:
Falsify accounting records or profit statements,
Mislead investors, banks, or regulators,
Manipulate stock value or obtain financial gain,
Conceal losses or liabilities.
Courts apply financial fraud and false accounting laws strictly, imposing both imprisonment and financial restitution to deter corporate misconduct.
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