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April 17, 2014

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Big state-owned firms disguise party expenses but most toe the line

MANY Chinese state-owned enterprises that were under fire last year for exorbitant entertainment expenses (“reception” fees) hid the item in their latest financial results, renewing public concerns over their sincerity to cut extravagance.

China Railway Construction Corp Ltd. (CRCC), one of the country’s largest construction companies, spent 837.5 million yuan (US$135.1 million) on receptions in 2012. The company was punished following public outrage over the alleged abuse of state assets.

Last year, China launched a major campaign against corruption, official extravagance, and waste, including lavish banquets, receptions and gift giving. State-owned enterprises (SOEs) are included.

‘Management fees’

In its 2013 financial report released in late March, the company canceled the “receptions” item in its accounting statement.

Meanwhile, the item named “management fees,” which included the sub-item “receptions” in the 2012 report, surged by nearly 2.2 billion yuan last year.

In CRCC’s 2012 report, “management fees” encompassed seven sub-items, including “salary,” “R&D,” “depreciation of fixed assets,” “receptions,” “travel,” “administration,” and “others.” In addition to canceling “receptions,” the company combined “travel” and “administration,” cutting the sub-items to five.

The less detailed accounting statement sparked speculation among Chinese Internet users that part of the expense hike under “management fees” may be the money the railway construction company spent on receptions last year.

“I don’t believe the once huge reception fees suddenly disappeared. They must be hidden somewhere in other accounting items,” said a microblogger posting under the name “Banxiazhimu.”

The company attributed the hike to rising costs in R&D and salaries. It declined to comment on why it did not release reception expenditures.

China Communications Construction Company Ltd and the Power Construction Corp of China also failed to release reception expenses.

The three companies were the top reception spenders in 2012.

According to calculations by stock market portal iFinD, 64 listed companies, mostly state-owned, hid reception expenses in their financial reports published over the past few days.

Jia Mingrui, an accountant with Huatai Securities, said blurring of accounting statements doesn’t violate related laws, but opening detailed information to the public is a business norm among listed companies.

“A financial report without enough details is useless to investors and the public,” Jia said. Li Jin, chief researcher with China Enterprise Research Institute, said hiding reception fees is unwise.

“SOEs should actively respond to public concerns. The blurring, if deliberate, will weaken their sincerity in following frugality calls and undermine people’s right to know,” said Li.

More transparency

Reception fees include spending on catering, gifts and tickets to tourist spots in the course of normal business activities. But in some cases, off-the-books income or even bribery are classified under the vague category.

After the railway construction company’s soaring reception fees were exposed by media last May, an investigation found that its spending on receptions was generally in accordance with regulations.

However, the investigation exposed problems such as non-standardized invoices, a lack of strictness in expense reimbursement, and issues in accounting classification.

“SOEs are different from governments, and it’s natural for them to have such spending. But it doesn’t mean that they are allowed to waste money,” said Wen Zongyu, a senior researcher with the Ministry of Finance.

The CRCC case resulted in 57 people being criticized, eight punished and one transferred to judicial authorities for prosecution. After that, many public companies became cautious about reception fees.

As a result, spending on receptions has generally declined. So far, 1,049 listed companies have reported a total of 6.1 billion yuan in reception fees in 2013, about 2.8 billion less than in 2012.

The reception fees of Minmetals Development Co Ltd declined sharply by 33.8 million yuan last year, down 54.2 percent from 2012. At the same time, its net profits rebounded from heavy losses to a 279 million yuan gain.

Xu Baoli, a senior researcher with the State-owned Asses Supervision and Administration Commission, said some SOEs took extravagance for granted, and unchecked reception spending revealed a lack of supervision.

Li echoed Xu, saying that authorities should step up supervision of state-owned enterprises and work to regulate the release of information.

“Transparency is the basis of public supervision,” said Li.




 

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