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No.8, 2008 (General Serial No.32) Audit Findings on Assets and Liabilities, Profit and Loss of China Development Bank, Agricultural Bank of China, Chi
2009-02-06日   Soure : :

Audit Findings on Assets and Liabilities,

Profit and Loss of China Development Bank,

Agricultural Bank of China, China Everbright Bank Co. Ltd.,

Former PICC Holdings Co. and Former China

Reinsurance (Group) Corporation Ltd. in 2006

(Announced on September 5, 2008)

Contents

1.       Audit Findings on Assets and Liabilities, Profit and Loss of China Development Bank in 2006

2.       Audit Findings on Assets and Liabilities, Profit and Loss of China Agricultural Bank in 2006

3.       Audit Findings on Assets and Liabilities, Profit and Loss of China Everbright Bank Co. Ltd. in 2006

4.       Audit Findings on Assets and Liabilities, Profit and Loss of Former PICC Holdings Co. in 2006

5.       Audit Findings on Assets and Liabilities, Profit and Loss of Former China Reinsurance (Group) Corporation Ltd. in 2006

Audit Findings on Assets and Liabilities, Profit and

Loss of China Development Bank in 2006

In compliance with the provisions of the Audit Law of the People’s Republic of China, the National Audit Office of China (CNAO) from September to December 2007 audited the assets and liabilities, profit and loss of the head branch and some branches and sub-branches of China Development Bank (referred to hereafter as CDB) in 2006.

1.       The Basic Situation and Overall Assessment

The audit findings indicated that in recent years CDB has earnestly carried out the state industrial policies, actively played the role of a policy bank and achieved relatively good economic and social effect.

(1)    CDB made investment mainly in the infrastructure of the state, basic and pillar industries and supported a great number of focal construction projects of the Three Gorges, national oil reserves, South-to-North Water Diversion, West-to-East gas transportation, the Qinghai-Tibet Railway, five-vertical and seven-horizontal national trunk highways, Beijing Olympic Games projects and the Heilongjiang commodity grain base, etc. According to the statistics, of the balance of its loans at the end of 2006, loans for infrastructure construction amounted to 980.755 billion yuan, representing 49% of the total and loans for basic and pillar industries stood at 720.554 billion yuan, accounting for 36% of the total.

(2)    In coordination with the development strategy of the state to develop the west region, revive the old industrial base of the Northeast and “going out”, CDB boosted support of the strategy with credit fund. At the end of 2006, the balance of its loans to the central and western regions and the old industrial base of the Northeast represented 50% of the total balance of loans and the balance of its loans to the “bottleneck” areas in social development and the areas of people’s livelihood such as medium and small-sized enterprises, agriculture, rural areas and farmers, county and township economy, medical facilities, education and environmental protection amounted to 80.053 billion yuan, playing a positive role in facilitating coordinated economic and social development.

(3)    Its business performance has tangibly improved. The CDB statements showed that at the end of 2006, its total assets stood at 2,271.2 billion yuan, a growth of 21.88% than at the end of the previous year. It made 29.3 billion yuan of profit for the whole year, a 14.71% increase than the previous year. Its net return on assets was 13.54%. Its capital adequacy ratio reached 8.05% and the principal business indicators such as the recovery efficiency of loan principal and interest, non-performing loan ratio and coverage rate of non-performing assets remained at the advanced levels of its counterparts in the industry at home.

CDB made active preparations for the change in system and transformation.

The audit found, however, that in the transformation process of commercialization hidden risks existed in the medium and long-term credit operations of CDB and that efforts should be made to avert them. There were some weak links in its operations and management and irregularities existed in some subsidiary units that required correction and improvement.

2.       Main Audit Findings

(1)    Risks existed in the medium and long-term credit operations. By the end of 2006, the CDB statements indicated that the balance of various loans stood at 2,001.54 billion yuan of which the balance of medium and long-term loans was 1,906.9 billion yuan, accounting for 95.27% of the total. Meanwhile, in the 786.2 billion yuan of off-the-statement assets of the bank, a big part was medium and long-term assets. The audit found that some subjects of medium and long-term loans did not meet the requirement for them and that in terms of mortgage and security too much dependence was laid on local finance in some loans. And there was the problem of non-standardization in some medium and long-term loans. These problems warranted attention and should be addressed in the transformation process of commercialization.

(2) There were weak links in credit management.

One, the assessment and examination of loans were inadequate and supporting fund for some projects was not sufficient in some projects. In recent years, inadequate assessment and examination in some CDB branches led to the granting of loans to investment projects whose supporting fund was not in place, which involved relatively big risks. For example, when an expressway company limited in Henan applied for 819 million yuan of loan for expressway construction projects with the Henan Branch of CDB, in order to “meet” the requirement for capital fund in loan granting, from December 2004 to September 2006, the company, in collusion with the project inspection unit and the undertaking enterprise, drafted false “closing account of project progress” to deceptively increase project capital fund. By the end of June 2007, only 8% of the capital fund of the project had been allocated.

Two, post-loan supervision was relatively weak and some loans were misappropriated for other purposes by clients. The phenomenon of inadequate post-loan supervision and misappropriation of loans by clients existed in all the CDB branches and sub-branches under the audit. For instance, of the 858 million yuan of emergency loan randomly checked this time, a total of 322 million yuan was found to be misappropriated for other purposes. Among this, of the 100 million yuan of emergency loan for combating bird flu granted to a group company limited in Shandong Province in 2004, 40 million yuan was used as guarantee money of acceptance for signing and discounting acceptance bill without truthful trade background in contravention of the rules for a certain associated enterprise. Of the 30 million yuan of emergency disaster relief loan granted in 2006 to a certain company in Cangnan County, Zhejiang Province, 1.25 million yuan was deceptively claimed by five village cadres and deposited in their private bank accounts.

(3) The problem of operating in contravention of the regulations existed in some branches and sub-branches. The audit discovered a total of 9.104 billion yuan of loans that had been granted against the rules. This was mainly reflected in putting credit fund into stock market, real estate market and the industries and fields restricted by the state. For example, from December 2005 to the end of 2006, the Shanxi Provincial Branch of CDB, in cooperation with a commercial bank, lent one billion yuan of off-the-statement joint loan to a company. Due to inadequate examination by CDB, 110 million yuan of the loan was used as investment in a small coal mine which had been ordered by the department in charge to stop production for overhauling because of a mine disaster. From 2005 to 2006, the Yunnan Provincial Branch of CDB granted accumulatively 600 million yuan of soft loans to two steel companies which contravened the industrial investment policy, land examination and approval procedure and environmental protection policy of the state.

(4) Problems of cases of suspected illegalities and crime and serious breaches of discipline. Seven cases involving clues to illegalities and crime and serious breaches of discipline were discovered in this audit and were transferred to the judiciary and supervisory agencies. In the above clues to the cases, persons outside the bank were mainly implicated in obtaining loans through vicious fraud with some cases involving staff of the bank. For instance, from 2002 to the end of 2006, a certain group in Henan, through false capital injection, falsifying bank certificates of indebtedness, deceptively reporting on project capital fund, obtained more than three billion yuan of loans from CDB. In the process of loan examination and granting, individual staff members of CDB were suspected to have received commercial bribes of that group.

3.       Audit Decisions and Recommendations

In regard to the above problems, CNAO issued audit report and audit decisions in accordance with law. The problems of operating in contravention of the rules, risks in the medium and long-term credit loans and weak links in the examination and assessment and post-loan supervision of the credit business were referred to the China Banking Regulatory Commission for handling. Punishments were meted out in compliance with law in regard to the problems of contravening regulations on financial revenue and expenditure and CDB was requested to investigate and affix the responsibilities of the relevant personnel. The clues to suspected violation of law and commission of crime were referred to the judiciary for investigation and handling.

In view of the problems found in the audit, CNAO suggested that the relevant supervisory department boost supervision on the loans granted through various ways by banks to local governments, the reform of transformation of commercialization of CDB be pushed forward steadily and prudently and that effective precautions be taken against risks in medium and long-term loans. CNAO recommended that mechanism be earnestly developed in the period of transformation of commercialization, laws and regulations be further perfected so that the transition of CDB from a policy bank to a commercial one would be smoothly realized through setting up corporate governance agencies, improving internal restraining mechanisms and bettering operational and management systems. CDB should, in accordance with the requirement of commercialized operations, earnestly enhance risk management, improve internal control regimes, transform operational concept and enhance the sense of operating legally.

4.       Implementation of Audit Decisions and Recommendations

The major leaders of CDB attached great importance to this audit and addressed the problems revealed in it in a timely manner and achieved preliminary result.

During the audit, CDB offered actively its coordination, urged the branches to conduct special checks and provided guidance and did a good job in self-examination and addressing the problems. It straightened out and recovered 7.808 billion yuan of fund involved in the cases of contravention of regulations found in the audit and actively eased operational risks. It disciplined 22 people responsible for the problems (including 10 people of the rank of bureau) with two people removed from their posts, two people suspended from work, 18 people criticized through a circular. In view of the weak links in the operations and management discovered in the audit, CDB further improved the two-tier risk prevention system for the head branch and branches and perfected the risk management mechanism of the branches and sub-branches. It actively pushed forward the reform of the examination and assessment system, issued the method and system of industrial examination and assessment and stepped up post-loan management to ease loan risks.

After the audit, in order to further implement the audit opinions and reinforce risk management, CDB took 2008 as the Year of Management and launched the following major work: enhancing post-loan management and the development of related systems, stepping up the monitoring of the use of project fund, introducing whole-process and entire-coverage internal checking of credit operations, establishing an office for ensuring the legality of all operations, setting up the regime of weekly reporting on the risk management situation, bettering risk management process of the branches and sub-branches and comprehensively initiating preparations for the carrying out of the New Basel Capital Accord.

Audit Findings on Assets and Liabilities,

Profit and Loss of Agricultural Bank of China in 2006

In accordance with the stipulations of the Audit Law of the People’s Republic of China, from March to July 2007, CNAO conducted an audit of the assets and liabilities, profit and loss of the head branch and some of the branches and sub-branches of Agricultural Bank of China (referred to hereafter as ABC) in 2006.

1.       The Basic Situation and Overall Assessment

The audit findings indicated that in recent years ABC has actively met the requirements of the Central Committee of the Communist Party of China and the State Council on  deepening the reform of the state-owned commercial banks, in complying with the requirements for it of serving “agriculture, rural regions and farmers”, reforming its entire system, commercialized operations and being listed at an opportune time, studied in depth the effective way to attain the objectives of “being oriented to agriculture, rural regions and farmers” and “realizing commercialized operations”, earnestly made adequate preparations for reform of joint stock system and actively pushed forward various business operations. The financial statements of ABC showed that at the end of 2006, its total assets grew by 12.01% than at the end of the previous year and that the balances of loans and deposits increased respectively by 310.1 billion yuan and 693.5 billion yuan than at the beginning of the year. The growth of the deposits ranked the first among the banks in the country. For the whole year, the bank made 58.264 billion yuan of operational profit, an increase of 37% than the previous year. Its revenue in the banking card operations was in the front rank of the industry.

However, the audit found that some irregularities and weak links existed in the operations and management of ABC which warranted correction and improvement. 

2.       Main Audit Findings

(1) The problem of operating in contravention of the regulations by some grass-roots branches and sub-branches was relevantly salient and this audit revealed 24.306 billion yuan of fund was involved in the cases of breaching the regulations by ABC.

One was to grant loans in violation of the regulations. The problem mainly lay in the inadequate management of private consumption loan of some branches and sub-branches and they lent out big quantities of falsified private mortgage loans. For example, by the end of 2006, of the 1.05 billion yuan balance of private vehicle consumption loans granted by the Heilongjiang Provincial Branch of ABC, the balance of non-performing loans amounted to 1.026 billion yuan, representing 97.7% of the total. Of the sum, random checking of 222 million yuan loans revealed that all of them were falsified private mortgage loans obtained through false receipts and deceptively increasing cost of vehicle purchases.

Two was to undertake settlement operations in contravention of the regulations. The major problems were to open and use banking accounts against the rules, withdraw big-volume cash and conduct transfers of account in breaching the regulations. For instance, in 2006, the Guye Sub-branch of Tangshan city, Hebei Province, in the name of transport charges and material cost, withdrew in 30 transactions 95.2495 million yuan of cash for a loan enterprise.

Three was that some branches and sub-branches, for the interest of individuals or small groups, carried out business operations in violation of the rules and seriously damaged the interest of the state and the bank. For example, in April 1999, the Liaoning Provincial Branch of ABC set up, in violation of the regulations, Liaoning Xinjia Consultancy Co. Ltd., with evaluation of enterprise credibility and asset appraisal as its major business. From 2000 to 2004, the company gave the above ABC branch 10.4612 million yuan of earned credibility evaluation charges to be used for staff welfare and bonuses.

(2) Problems of suspected illegalities and crimes. This audit revealed and referred to the judiciary a total of 23 clues to suspected illegalities and crimes with 5.672 billion yuan of fund involved. For instance, from March 2004 to July 2006, Zheng Fenglai, vice governor of the ABC Jinzhou Municipal Branch, Liaoning Province, and Liu Fude, chief of ABC Heishan Sub-branch, through means of loans and false discounting, misappropriated accumulatively 3.1 billion yuan of bank fund and lent the fund to some private enterprises and individuals for their use. In July 2006, they, without authorization, granted these enterprises and individuals 218 million yuan of loans to be used for paying back the misappropriated fund. At the time of the audit, 189 million yuan of the above loans had not been recovered after the deadline with 6.54 million yuan of interest owed.

(3) Weak links existed in the operations and management. One was that basic management was not standardized. Problems of non-standardization existed in a series of basic management such as bookkeeping operations and archive management that warranted urgent addressing and correction. Two was that there were problems of incomplete clearing up of the entities set up by ABC and no all-round and truthful reflection of their assets and liabilities was available. Three was that the accountability system was not enforced vigorously and there were inadequate investigation and affixing of responsibilities of those breaching the regulations and their untimely handling.

3.       Audit Decisions and Recommendations

In regard to the above problems, CNAO issued audit report and audit decisions. The problems of ABC operating in contravention of the regulations and non-standardized management were referred to the China Banking Regulatory Commission for handling. Audit sanctions were imposed in compliance with law to deal with the irregularities in financial revenue and expenditure and ABC was required to investigate and affix the responsibilities of those implicated in the problems. The clues to suspected breaches of law and commission of crime were referred to the judiciary for investigation and handling.

In view of the problems found in the audit, CNAO suggested that ABC, through setting up corporate governance structure, improving the internal restraining mechanism and perfecting operational and management mechanism, thoroughly solve the deep-rooted flaws in the systems. Meanwhile, ABC should further check the true situation of the quality of assets, make effective preparations for the stock holding reform and accelerate the steps of the reform. It should reinforce the education in monetary professional ethics and the development of enterprise culture, boost the sense of abiding by the regulations, awareness of risks, sense of responsibility and sense to prevent crime, improve and perfect the mechanism of supervision and restraint of governors at various levels and set up and improve the accountability system. It should also refine the internal management, perfect the internal control system and ensure the effective abiding by of the systems.

4.  Implementation of Audit Decisions and Recommendations

ABC attached great importance to the problems revealed in the audit, convened numerous special meetings to discuss measures to address them and, following the principle of addressing the problems during the audit and letting problem correction facilitate work, earnestly did a good job in rectifying the problems exposed in the audit. One was to overhaul in an all-round manner the current systems and further standardize the business operation procedures. Two was to address more vigorously the problems found in the audit. For example, in view of the problem of a big number of falsified mortgages in private consumption loans, ABC set up centers for examination and approval of private consumption loans at the tier-two branches and at the same time strove more vigorously to recover non-performing private loans. Three was to step up efforts to prevent cases of crime, enhance the rotation of posts for staff, checking of work of the staff and the setting up of centers of account checking. At the same time five professional supervision and checking teams were organized to undertake all-round checking of the internal control system and security of the cashbox. Four was to perfect the risk management system, integrate the risk management functions of various departments and employ An Yong Co. as its professional security consultant, promote the development of internal evaluation program and enhance the ability to prevent risks. Up till now ABC has disciplined 1,125 people (times) responsible for the problems. 

Audit Findings on Assets and Liabilities,

Profit and Loss of China Everbright Bank Co. Ltd. in 2006

In compliance with the provisions of the Audit Law of the People’s Republic of China, from March to June 2007, the National Audit Office of China (CNAO) performed an audit of the assets and liabilities, profit and loss of the head branch and some branches and sub-branches of China Everbright Bank Co. Ltd. (referred to hereafter as Everbright Bank) in 2006.

1.       The Basic Situation and Overall Assessment

The audit findings indicated that in recent years Everbright Bank constantly stepped up its efforts at reform, adjusted the structure of assets, lay emphasis on product innovation, gradually enhanced its ability to manage risks and improved its financial situation.

(1)    Its scope of business continually expanded and the ratio of non-performing loans somewhat decreased. According to the accounting statements of Everbright Bank, from 2004 to 2006 its total assets grew by 42.5%, the total of loans increased by 31.34% and the total volume of deposits climbed up 35.94%. Since 2005, the bank, through reforming the system of examination and approval of credit granting and perfecting the policy on loan orientation, reduced its ratio of non-performing loans from 10.19% to 7.58%, a decrease of 2.61 percentage points.

(2)    The returns of business operations somewhat improved and the structural adjustment produced result. The accounting statements of Everbright Bank indicated that from 2004 to 2006, the total annual profit of the bank went up from 1.813 billion yuan to 4.488 billion yuan. The rate of net return of total assets rose from 0.35% to 0.47%. The profit for each share went up from 0.18 yuan to 0.34 yuan. The ratio between the operational cost and the revenue went down from 24.25% to 21.21%. Non-interest revenue grew by 101.85% and its share in the total revenue increased from 3.17% to 4.28%.

(3)    The bank kept expanding its business space and some of its operations boasted market advantages. In recent years, its operations of Yangguang (sunshine) financing, investment banking and financial agency witnessed a rapid development and enjoyed some advantages among its counterparts in the industry. In May 2007, the balance of Yangguang (sunshine) financing surpassed 60 billion yuan. The market share of its structural financing products reached 70%. For the two consecutive years of 2005 and 2006, the consignees of short-term financing bonds numbered the first among the counterparts in the sector in the country. In 2006, the volume of non-tax revenues and direct transfer payments of central government finance, which were collected or served by the bank as agent, ranked the first in the whole industry.

But the audit found that there were some problems of irregularities and weak links in the operations and management of Everbright Bank which should be corrected and improved.

2.       Main Audit Findings

(1)      The bank granted 10.868 billion yuan of loans in contravention of the regulations.     Of the sum, more than half was real estate loans granted against the regulations and credit fund provided directly or indirectly to the stock market. For instance, in March 2006 the Hualin Sub-branch of Everbright Bank in Fuzhou granted a real estate development company, which had not obtained the planning permit of construction engineering and permit of construction, 250 million yuan of loan for real estate development. From June to September 2003, the Dongshan Sub-branch of Everbright Bank in Guangzhou, by the means of falsifying enterprise financial data, imitating the signature of the legal person of an enterprise and in the name of granting loans to three enterprises, provided 130 million yuan of credit fund to a certain securities company. 

(2) Conducting deposit and settlement operations in violation of the regulations involving 2.461 billion yuan. Problems of attracting deposits by high interest rates and breaching the regulations in settlement operations existed in some branches and sub-branches. For example, in 2006 the business office of the head branch of Everbright Bank conducted 25 newly-added or mature financial operations of foreign currency companies with the fund amounting to the equivalent of 1.22 billion yuan. Of them, 17 operations with the fund reaching the equivalent of 1.138 billion yuan were performed following the break-even and fixed-rate of return principle and the return rates were all higher than those of deposits of the same duration and categories. For another example, from 2005 to 2006, the Hexing Sub-branch, Heilongjiang Provincial Branch of Everbright Bank, making use of the basic settling account of a shop and in the name of travel expenses, provided eight clients with 13.14 million yuan in violation of the regulations.

(3)  Engaging in bill business in violation of the regulations led to 993 million yuan of advances. For example, in 2005 the Taiyuan Branch of Everbright Bank, in contravention of the regulations, discounted commerce acceptance worth 187 million yuan for three private enterprises which had provided false value-added tax receipts and transaction contracts, leading to 120 million yuan of non-performing assets.

(4) Problems of breaching regulations on financial revenue and expenditure involved 115 million yuan. Of the sum, 56.8286 million yuan was reimbursed with false receipts, accounting discrepancies accounted for 53.6953 million yuan and 4.4966 million yuan of fund was kept out of book. Investigation found that the lion’s share of the fraudulently claimed fund with false receipts was spent on bonuses and welfare and part of it on “public relations” in marketing. For instance, since 2003 the Guangzhou Branch of Everbright Bank used more than 5,000 false receipts and deceptively claimed more than 30 million yuan of cash. The chief of office of the Wuyang Sub-branch of the bank branch directly bought from illegal merchants false receipts and reimbursed 320,000 yuan of cost with them.

(5) Weak links existed in its operations and management. One, the “three checks” (checks before the granting, in the process and after the granting of loans) were not adequately made, leading to bigger credit risks. For example, due to insufficient post-loan checking, a company in Wuhan, after obtaining 100 million yuan of circulating fund loan from the Wuhan Branch of Everbright Bank, in June 2006 transferred 97 million yuan from the sum to a securities company for transactions in securities. Two, responsibilities for problems were not duly investigated and dealt with and the phenomenon of substituting fines for punishments was salient. Three, there were weak links in the management of deposit operations. For instance, since 2002 the Shenzhen Branch of Everbright Bank, by granting loans of extra credit quota, it is changing the above-quota loans into fixed-term deposits, then using the deposits as security of hypothecation for the above-quota loan, falsely increased deposits by 5.681 billion yuan accumulatively. Four, problems of non-standardization existed in financial management and accounting which were mainly keeping housing fund on account for a long time and inadequate clearing up of self-set up entities. Five, some branches and sub-branches, in order to attract clients and expand business, offered clients financial services for their business operations which ran counter to the relevant laws and regulations of the state.

Moreover, the audit referred to the judiciary eight clues to cases of various suspected illegalities and crimes and 14 people implicated in the cases.

3.       Audit Decisions and Recommendations

In regard to the above problems, CNAO issued audit report and audit decisions in compliance with law and referred the problems of business operations in violation of the regulations, weak links and risks in part of business management to the China Banking Regulatory Commission for handling. Audit sanctions were meted out for irregularities in financial revenue and expenditure in accordance with law and Everbright Bank was requested to investigate and affix the responsibilities of the people concerned. The clues to cases of suspected illegalities and crime were referred to the judiciary for investigation and handling.

In view of the problems found in the audit, CNAO suggested that Everbright Bank should, taking the financial restructuring as an opportunity, further deepen the internal reform in compliance with the requirements of the modern enterprise system, perfect credit operation management in terms of system and technicalities and enhance the management and supervision of the grass-roots units. It should improve the performance evaluation and financial management mechanisms, step up the management of charges and increase transparency of reimbursement of expenses and use of fund. The bank should also boost the development of enterprise culture, enhance the sense of operating in strict compliance with law, the sense of risks and sense of responsibility and preserve the state, social and public interests while making commercial profit.

4.       Implementation of Audit Decisions and Recommendations

Everbright Bank conducted self-examination prior to the audit and corrected the major problems found in the self-examination. The bank set big store by the problems exposed in the audit, launched a whole-process, all-round campaign of correction and achieved preliminary result. The bank criticized those responsible for loan granting in contravention of the regulations, settled the problematic operations in a timely manner and took measures to recover non-performing assets and control credit risks. With regard to the problems of deposit and settlement operations breaching the rules, the bank, criticizing those responsible, perfected the related system in a timely manner. For engaging in bill business in violation of the regulations, the bank, on the one hand, stepped up the examination of their truthful trade background, on the other, recovered more vigorously the advances of the bank. For the problem of contravening the regulations on financial revenue and expenditure, corrective measures were taken to adjust accounting books, recover out-of-book fund and sanction the personnel responsible for the problem. 449 people (times) were already disciplined of whom 14 were leading cadres of branches who were respectively relieved of posts, dismissed from posts or demoded.

Audit Findings on Assets and Liabilities,

Profit and Loss of Former PICC Holdings Co. in 2006

In accordance with the stipulations of the Audit Law of the People’s Republic of China, from March to July, 2007 the National Audit Office of China (CNAO) audited the assets and liabilities, profit and loss of the former PICC Holdings Co. (which in June 2007 changed its name to People’s Insurance Company [Group] of China, referred to hereafter as People’s Insurance Co. [Group]) and its subsidiaries PICC Property and Casualty Company Limited (referred to hereafter as PICC Property and Casualty Co.) and the PICC Asset Management Company Limited (referred to hereafter as PICC Asset Management Co.) in 2006.

1.       The Basic Situation and Overall Assessment

The audit findings indicated that in recent years the former PICC Holdings Co. preliminarily set up a modern corporate governance structure, both its ability to resist risks and investment returns were increased, continued to maintain a dominant position in the domestic non-life insurance market and played relatively well the functional role of insurance in disaster relief, economic compensation and stabilizing society. The combined accounting statements of the company showed that at the end of 2006 the total assets of the former PICC Holdings Co. stood at 98.013 billion yuan, a 13.32% growth than at the end of the previous year and that 290 million yuan of profit was made for the whole year.

But the audit found that the management of some branches and sub-branches of subsidiary companies of former PICC Holdings Co. was relatively extensive, that some problems of irregularities existed in business operations and financial accounting and that there were some weak links and non-standardized behavior in business operations and management that should be addressed and improved.

2.       Main Audit Findings

(1)     Problems of contravening regulations in business operations and management involved 1.082 billion yuan. The major problems were: One, PICC Property and Casualty Co., in contravention of the regulations, cut back premium rates or accepted insurance at discounts, returned premium in disguise in the name of service charges, enlarged the scope of compensation expenditure and performed out-of-book operations, all of which involved 368 million yuan. For example, from 2003 to 2004, the Nanxun Sub-branch, Zhejiang Province of PICC Property and Casualty Co., by keeping revenue of premium out of the books, conducted out-of-book operations and made 47.8836 million yuan of revenue which was used to pay 24.6204 million yuan of service charges and 20.7841 million yuan of compensation. That sub-branch also disbursed 16.097 million yuan of compensation and loss outstanding out of its books. By April 2007, 93.98 million yuan of liabilities still existed arising from the above out-of-book operations. Two, there were problems of breaching financial regulations involving 23.0163 million yuan of fund. For instance, from 2004 to 2006 PICC Asset Management Co. used 6.8432 million yuan from 12.588 million yuan of enterprise-supporting fund appropriated by a department to directly offset operational cost and distribute to individuals. Three, People’s Insurance Company of China (predecessor of PICC Holdings Co., referred to hereafter as PICC) from November 2002 to the end of June 2004 handed over 500 million yuan of treasury bond to Hantang Securities Co. for operations. Later as that securities company was cleaned off according to law, 356.533 million yuan of treasury bond faced the risk of loss. Four, the Shenzhen Branch of PICC in September 2002 transferred, in contravention of the regulations, 6.1346 million legal person shares of a certain company it held to the trade union.

(2)     Weak links existed in its operations and management. One, its share in the property insurance market declined, ratio of capital immobilization went up and its profitability was to be stepped up. Two, the internal control system was inadequate and there were loopholes in the risk prevention mechanism. The audit found that the handling and management of the existing financial assets of PICC and the entities it had set up were not standardized, loopholes existed in the management of the computer information system of the PICC Asset Management Co. and that there was the problem of not abiding by the existing regulations in some branches and sub-branches (For example, in 2006 the Changchun Branch of the PICC Asset Management Co., without going through the normal procedure of cancellation of insurance policy and its return, but through directly altering data, cancelled 61.88 million yuan of due premium.)

3.       Audit Decisions and Recommendations

In regard to the above problems, CNAO issued audit report and audit decisions in accordance with law. The problems of operating in contravention of the regulations and non-standardized management were referred to the Ministry of Finance and the China Insurance Regulatory Commission for handling and PICC was requested to earnestly correct them. For the problem of violating the financial regulations, Peoples’ Insurance Co. (Group) was required to seriously address it, hand in fine, adjust relevant account, recover the fund illegally kept or deposited and investigate and affix the responsibilities of the related personnel. The clues to suspected illegalities and crime were referred to the judiciary for investigation and handling.

In view of the problems found in the audit, CNAO suggested that People’s Insurance Co. (Group) further enhance the awareness of risk and, while actively opening up new business, make serious efforts to prevent and ease out operational risks and strictly standardize operational actions. The company should further improve governance structure, step up internal management such as the development of information system, production cost control and financial accounting and strengthen the implementation of the regulations and systems. People’s Insurance Co. (Group) should take effective measures to further reinforce the scientific nature of the performance evaluation system, change the growth pattern and increase its all-round competitiveness.

4.       Implementation of Audit Decisions and Recommendations

People’s Insurance Co. (Group) conducted self-examination during the audit and corrected the problems found in the self-examination. The company attached great importance to the problems found in this audit and earnestly discussed and took measures for their correction. With regard to the problem of contravening the regulations in business operations, the seriously investigated and disciplined those people who bore the responsibilities, improved business operation procedures and internal control mechanism and boosted the accountability system. For the problems in the links of acceptance of insurance and compensation of PICC Property and Casualty Co., People’s Insurance Co. (Group) initiated a special correctional campaign for operating legally, took measures to speed up the development of the information system, emphatically overhauled the relevant operational and management fields and stepped up the management and control of the crucial links of acceptance of insurance and compensation. It standardized the financial system and procedure for paying service charges, explored, implemented and improved the provincial-level, financial concentrated computation model and took back to the provincial branches of the company the right to examine and approve the returning of premium. In regard to treasury bond risks, PICC Property and Casualty Co. and PICC Asset Management Co. actively took various measures of response to ensure asset preservation and PICC Property Casualty Co. set aside a full sum of fund to be prepared for reduction of value.

Audit Findings on Assets and Liabilities, Profit and

Loss of Former China Reinsurance (Group) Corporation in 2006

In accordance with the stipulations of the Audit Law of the People’s Republic of China, from March to June 2007 the National Audit Office of China (CNAO) conducted an audit of the assets and liabilities, profit and loss of the former China Reinsurance (Group) Corporation ( which in October 2007 changed its name to China Reinsurance (Group) Holdings Company Limited, referred to hereafter as China Reinsurance [Group]) and its six subsidiaries China Property and Casualty Reinsurance Company Limited (referred to hereafter as CPCRC), China Life Reinsurance Company Limited (referred to hereafter as CLRC), China Continent Property and Casualty Insurance Limited, China Insurance News Company Limited (referred to hereafter as CINC), China Reinsurance Asset Management Company Limited and Huatai Insurance Agency & Consultant Service Ltd. in 2006.

1.       The Basic Situation and Overall Assessment

The audit findings showed that in recent years China Reinsurance (Group), in the process of putting in capital and system transformation, actively expanded market, gradually improved corporate governance structure, constantly strengthened the capacity of independent innovation and product research and development and somewhat raised the level of management. The combined accounting statements of the group (excluding those of CPCRC, CLRC and CINC) indicated that at the end of 2006, its total assets stood at 26.488 billion yuan, an increase of 35% than at the end of the previous year. 209 million yuan of profit was made for the whole year of 2006.

But the audit found that some problems of breaching the regulations and weak links existed in the operations and management of China Reinsurance (Group), that its profitability was to be boosted and that there were some risks in its solvency that warranted addressing and improvement.

2.       Main Audit Findings 

(1)    The problems of breaching the regulations in the operations and management involved 1.271 billion yuan. The major problems were: One, in April 2000, China Reinsurance (Group) (at the time China Reinsurance Co.), in violation of the regulations, entrusted treasury bond worth 316 million yuan to a subsidiary economic entity for financing and stock transactions which led to the loss of 37 million yuan. Two, reduction of premium and payment of service charges, in contravention of the regulations, amounted to 196 million yuan. For example, in 2006 a subsidiary company of China Reinsurance (Group), breaching the stipulation of the state that the total service charges of insurance brokerage should not be more than 8% of total premium, paid, above the prescribed standard, 100 million yuan of service charges. Three, problems of violating the rules in financial revenue and expenditure involved 22 million yuan. The problems mainly were disbursement, in violation of the rules, of supplementary pension insurance (annuity) and distribution of bonuses and allowances. Moreover, the audit found that China Reinsurance (Group), contravening the regulations, paid insurance commissions to individuals and units without proper intermediary credentials.

(2)    There were problems of weak links and non-standardization in the operations and management. One, its profitability in insurance operations remained to be enhanced. A major part of profit of China Reinsurance (Group) in 2006 came from the returns from investment of insurance fund and its profitability in insurance business was inadequate. Two, there were certain risks in its solvency. For instance, according to the principle of prudent operations of insurance companies, in 2006 the way the reinsurance liability reserves were withdrawn was not adequate in two subsidiary companies of China Reinsurance (Group). In 2006, the premium revenue of property insurance of the head branch of China Reinsurance (Group) and its subsidiary companies did not comply with the stipulation in the Insurance Law of the People’s Republic of China that “The premium retained by a company shall not be more than four times the total of its actual fund plus public accumulation fund” and that there were potential risks in their solvency. Three, the phenomenon of non-standardized accounting existed.

3.       Audit Decisions and Recommendations

In regard to the above problems, CNAO issued audit report and audit decisions in accordance with law. The problems of operating in contravention of the regulations, weak links and non-standardization were referred to the China Insurance Regulatory Commission for handling and China Reinsurance (Group) was requested to address and correct them earnestly in compliance with the state laws and regulations. China Reinsurance (Group) was required to adjust the relevant account to rectify the problems of breaching regulations on financial revenue and expenditure.

In view of the problems exposed in the audit, CNAO suggested that China Reinsurance (Group) further enhance its reinsuring capacity and, in accordance with Some Opinions of the State Council on the Reform and Development of the Insurance Industry, give full play to the role of reinsurance in dispersing insurance operational risks. The group should improve legal person governance structure in strict compliance with the requirement of the Company Law of the People’s Republic of China and governance of modern enterprises, set up and improve a fair, rational distribution and stimulating mechanism, enhance the awareness of operating legally and effectively raise the levels of business operations and management. The group should transform its operational mode, make full use of its advantages in talent and fund, constantly boost the capacity to develop and innovate in products and increase its all-round competitiveness.

4.  Implementation of Audit Decisions and Recommendations

China Reinsurance (Group) set big store by the problems found in the audit, earnestly formulated a plan to address them and actively cleared up and corrected them. At present, the group disciplined seven people responsible for the problems. Of them three were dismissed from posts, four were given economic punishment. At the same time, the group, in view of the weak links in the business operations and management, stepped up budget management, performance evaluation, and development of mechanisms concerning human resources, information release and internal control and preliminarily set up a collectivization management system. It further straightened out operational mechanism in accordance with the requirement of a listed company, optimized operational procedures, adjusted business structure and raised management level. The group enhanced personnel training and constantly cultivated and raised the awareness of the staff of operating legally and enhanced its professionalism. It actively studied and explored the development mode of new products and promoted and perfected the insurance market.