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No. 19 of 2014 (General Serial No. 193):Audit Results of the Financial Revenues and Expenditures of China Metallurgical Group Corporation for the Year
2014-07-24日   Soure : :

In accordance with the provisions of the Audit Law of the People’s Republic of China, in 2013, the National Audit Office of China (CNAO) conducted an audit on the financial revenues and expenditures of China Metallurgical Group Corporation (hereinafter referred to as MCC) for the year 2012. The audit focused on MCC’s head office and 15 of its affiliated enterprises including Metallurgical Corporation of China, Ltd., China 22MCC Group Corporation Ltd. (hereinafter referred to respectively as MCCLTD and 22MCC) and others, and conducted extended audits on relevant matters.

I. Background and Audit Evaluation

MCC was established in July 1994, with a registered capital of 8.46 billion yuan. It has 545 wholly owned and controlled subsidiaries, is mainly engaged in engineering contracting, equipment manufacturing, resources development, real estate development and other businesses.

As shown in its consolidated financial statements, at the end of 2012, MCC had total assets of 336.51 billion yuan, total liabilities of 287.69 billion yuan, owners' equity of 48.82 billion yuan, current year operating income of 231.91 billion yuan, net profit of -9.84 billion yuan, asset-liability ratio of 85.5% and -18% return on equity

Beijing Xinghua Certified Public Accountants Co., Ltd. audited the Group's consolidated financial statements for the year 2012 and issued a standard and unqualified audit report.

The CNAO’s audit findings showed that, MCC was basically able to implement the state’s macroeconomic policies; its financial statements for the year 2012 on the whole relatively truly reflected the corporate financial position and operating results. The audit also found that MCC had some problems of irregularities in accounting, major economic decision-making and internal management.

II. Major Problems Discovered in the Auditing

A. Problems in accounting and financial management.

1. In 2012, MCC and 7 of its affiliated units including 22MCC under-acknowledged 258 million yuan of project revenue, under-withdrew 136 million yuan of project costs (expenses), resulting in understating 122 million yuan in current year profits.

2. As of the end of 2012, MCC failed to carry out accounting treatment of relevant project debt in accordance with provisions, resulting in inflating 373 million yuan of assets, 339 million yuan of debt and 34 million yuan of owners’ equity.

3. From 2012 to June 2013, its affiliated 22MCC and 12 of the latter’s subsidiary units extracted 86.6684 million yuan of funds through fictitiously issuing invoices for services rendered or directly entering into account books the preliminary statements of subcontracted services, mainly for the payment of employee wage subsidies and bonuses.

4. In 2012, 3 of its affiliated units including MCC Construction Research Institute Co., Ltd. (hereinafter referred to as MCC CRI) purchased 1.8709 million yuan of shopping cards in the name of office expenses, mainly for issuing employee benefits and gifts.

5. In 2012, 3 of its affiliated units including China 20MCC Group Corporation Ltd. (hereinafter referred to as 20MCC) in addition to wages payable to employees, charged 14.8666 million yuan of transportation fee subsidies and holiday benefit expenditures to other accounting items.

6. From 2012 to June 2013, 3 subsidiary units of its affiliated 22MCC irregularly set up 556,900 yuan of “private coffers”.

B. Problems in implementation of the state’s economic policies and corporate major economic decision-making.

1. From December 2007 to December 2012, its affiliated 22MCC’s subsidiary Tanghai Jinxiong Realty Co., Ltd. irregularly invested 576 million yuan and leased 1,640 mu (109.3 hectares) of land to build a championship 18-hole golf course and supporting facilities.

2. From December 2007 to July 2011, its affiliated MCC CRI’s subsidiary MCC Realty (Fujian) Co., Ltd. (hereinafter referred to as MCC Fujian Realty) invested 84.88 million yuan and occupied 860 mu (57.3 hectares) of agricultural land to build a golf course.

3. From December 2008 to December 2012, the Tangshan Caofeidian Forum permanent site supporting facilities construction project implemented by 22MCC, and the Xiamen City Haixi International Town project implemented by MCC Fujian Realty contained irregularly built villa-type real estate.

4. From August to November 2007, without the approval of the Board of Directors, and without carrying out asset valuation of the private enterprise consortium Tangshan Hengtong Group in accordance with provisions, MCC together with Tangshan Hengtong Group and a natural person co-founded MCC Hengtong Cold Rolling Technology Co., Ltd. (hereinafter referred to as MCC Hengtong), and subsequently MCC invested a cumulative 7.783 billion yuan of funds. In March 2012, when the SASAC approved the transfer of all state-owned property in MCC Hengtong without compensation to the China National Travel Service (HK) Group Corporation, the net assets of the enterprise was worth only 562 million yuan, resulting in a loss of 7.221 billion yuan.

5. In November 2003, from July to August 2006 and in February 2008, without conducting feasibility studies in accordance with provisions, without study by the Group’s Board of Directors, and without submitting to the Development and Reform Commission for approval, MCC in cooperation with Pakistan Mineral Development Co., Ltd., Xiaoye Trading Company of the United States and Cape Lambert Company of Australia respectively, developed 3 overseas mines; by the end of 2012, the cumulative investment was 770 million yuan, 1.44 billion yuan and 3.356 billion yuan respectively, with losses of 520 million yuan, 273 million yuan and 2.3 billion yuan respectively.

6. In November 2007, after the merger and acquisition of Huludao Nonferrous Metals Group Co., Ltd., MCC continued to push forward the "copper reconstruction” project that the former began construction in June of that year, and had invested 892 million yuan by the time it was completed in March 2010 (94% of the investment occurred after the merger), but at the end of 2012, the project had not yet been put into production.

7. From February to March 2013, when the minimum reference price of the nickel ore market was 220 yuan per tonne, its affiliated International Economic and Trade Co., Ltd., without self testing or commissioning a third party to conduct testing, sold the entire 48,000 tonnes of nickel ore which it purchased in 2008 for 55.3469 million yuan, at prices of 55 yuan or 58 yuan per tonne, receiving 2.3226 million yuan in income, resulting in a loss of 53.0243 million yuan.

8. In 2012, MCC's "comprehensive energy consumption per 10,000 yuan of product value (current price)" increased 2.33% over that of 2009, failing to achieve the target of a decrease of 7.82% set by the SASAC. From 2010 to 2012, MCC’s "state-owned assets value maintenance and appreciation ratio" only achieved 79.86%, failing to meet the target of 126.03% set by the SASAC.

C. Problems in internal management.

1. Governance at affiliated enterprises.

(1) From 2012 to June 2013, some construction subsidiaries of its affiliated 22MCC colluded with other enterprises to submit accompanying bids, and succeeded in winning 2.292 billion yuan of projects.

(2) From 2008 to 2012, Beijing Xin’an Real Estate Development Co., Ltd. and Beijing Huayuan Hotel Co., Ltd., both subsidiaries of its affiliated MCC Realty Group Co., Ltd. (hereinafter referred to as MCC Realty) had projects with contracts amounting to 191 million yuan that failed to conduct open tender in accordance with provisions; Nanjing Linjiang Old Town Reconstruction Investment Co., Ltd. signed a fictitious energy saving solutions consulting services contract to pay 8.1498 million yuan in compensation fees for raising funds to purchase land. Meanwhile, since June 2007, MCC Realty’s overseas subsidiary Xinyue Investment Co., Ltd. failed to be included in the consolidated financial statements.

(3) As of the end of 2012, 339 million yuan of assets of its affiliated MCCLTD were being used by 20MCC for long periods without compensation; 22MCC had 60 vehicles registered under the names of individuals, with a total original asset value of 10.9287 million yuan.

2. Information technology management.

(1) As of the end of 2012, among MCC head office and 60 of its second and third level subsidiaries spot checked in the audit, the data output interface of 6 kinds of financial software used by 45 enterprises failed to comply with requirements of the "Financial IT Accounting Software Data Interface"(GB/T24589-2010) standards; financial accounting systems used across provinces failed to be filed with the Ministry of Public Security for information system security level in accordance with provisions.

(2) ERP systems purchased by its affiliated MCCLTD for 4 of its subsidiaries with an investment of 15.81 million yuan in 2009 have yet to be put into use.

(3) MCC failed to establish software asset management systems, information system security level protection systems and information technology performance appraisal systems in accordance with provisions; and its financial company failed to conduct information system audits in accordance with provisions on the funds network operation systems and financial systems that it uses.

III. Audit Measures and Rectification

With respect to the audit findings, the CNAO in accordance with law has submitted an audit report and issued audit decisions. MCC will announce the specifics of its rectification to the public. Leads to suspected economic violations of law and discipline by relevant personnel found in the audit have been transferred to relevant departments for further investigation.