The Court of First Instance has imposed 13-year disqualification orders against three former senior executives of China Candy Holdings Limited (the “Company”)[1] after finding that they were involved in a scheme to overstate the Company’s cash balances and conceal the misstatements through falsified accounting records and banking documents.

The Court found that the Company’s reported cash and bank balances were overstated by approximately RMB38 million (as of 30 June 2016) to RMB43 million (as of 31 December 2016), representing up to 97% of the Company’s purported cash position. The Court described the evidence as overwhelming and found that the overstatements were deliberate, involving a scheme of falsified vouchers, bank slips and bank statements, some of which were provided to the Company’s auditors, rather than the result of accounting error.

None of the three Respondents participated in the proceedings or attended the trial. The Court was prepared to draw adverse inferences from their non-participation, although it noted that the documentary evidence already provided overwhelming support for the SFC’s case.

In determining the appropriate period of disqualification, the Court observed:

“What we are concerned with in this case is a scheme which was designed to circumvent ordinary oversight of auditing. Ordinarily, external auditors act as gatekeepers by independently evaluating and ensuring the accuracy of a company’s financial information. In this case, however, the Overstatements were not identified by [the auditor] precisely because it, too, was provided with falsified financial information by the Respondents on at least two occasions.”

Takeaways

The decision illustrates the SFC’s continued focus on financial reporting integrity, the gatekeeping role of auditors and director accountability.

First, the SFC remains willing to pursue Securities and Futures Ordinance (Cap. 571) section 214 proceedings where financial reporting misconduct is alleged, particularly where senior management is directly involved.

Secondly, attempts to manipulate or undermine the audit process are likely to be treated as a serious aggravating factor. The judgment reinforces the importance of maintaining the integrity of information provided to auditors, regulators and the market.

Thirdly, the case demonstrates the effectiveness of document-driven regulatory investigations. The SFC was able to use independently obtained banking records to test the accuracy of the Company’s accounting records and auditor materials. The decision illustrates the extent to which modern regulatory investigations are driven by documentary evidence and third-party records, allowing regulators to reconstruct transactions and challenge management explanations using independent sources.

See full judgment at HCMP 572/2022

[1] The Company’s shares were listed on the Growth Enterprise Market of The Stock Exchange of Hong Kong Limited on 11 November 2015 (former stock code: 8182). The listing of its shares was cancelled with effect from 31 December 2019.