Sinosteel Corp., a Fortune Global 500 company, was found to have been defrauded of billions of dollars by its partners.
According to a report by the National Auditing Office of China published on May 20, 8.8 billion yuan (US$1.4 billion) was taken by Sinosteel’s partners. The potential financial loss was deemed to be “shocking.”
Sinosteel is a state-owned enterprise managed by China’s State-owned Assets Supervision and Administration Commission (SASAC). It is the raw materials supplier and product agent for China’s major steel producers, and has business relationships with many global enterprises. Sinosteel’s 2010 revenues were reported to be 186 billion yuan (US$28.7 billion), ranking it as No. 352 among Fortune Global 500 companies in 2010.
According to the 21st Century Business Herald, over 10 billion yuan (US$1.5 billion) in funds were wrongfully taken from Sinosteel—4 billion yuan by Shanxi Province’s Zhongyu Co., and 6 billion yuan by Zongheng Steel Group (Zongheng) in Hebei Province.
In a May 28 article on caixun.com, an online provider of international business news in China, it was reported that an independent Sinosteel board member discovered that Zhongyu and Zongheng had conducted many suspicious transactions with Sinosteel. For example, internal profits that should have been offset were not, losses were not recorded, and sales were inflated. In 2009, Zhongyu’s losses even appeared in Sinosteel’s records as profits.
In addition to the funds taken by partners, Sinosteel’s financial problems include inflated revenues, financial and trading losses, and illegal investments, according to the National Auditing Office’s May 20 disclosure.
Sinosteel’s CEO Huang Tianwen was removed from office on May 13.
In 2003, Sinosteel’s assets were less than 10 billion yuan (US $1.2 billion in 2003). By 2010, its total assets had mushroomed to over 180 billion yuan (US$27.7 billion).
In October 2010, a post on a popular Chinese online bulletin board—bbs1.people.com.cn—stated that double-counting in its accounting was a “public secret” at Sinosteel. According to the post, Sinosteel inflated its sales figures by selling the same product to its different subsidiaries. For example, product was sold to one of its subsidiaries, and then sold to another of its subsidiaries, before it reached the client—the intercompany revenues and expenses were not offset in consolidation.
The multiple bookings resulted in quick sales increases. Sinosteel’s revenue of 164 billion yuan (US$24 billion) when it became a Fortune Global 500 company was actually only about 40 billion yuan (US$6 billion), the auditors found.
Re-Evaluate China’s GDP
“False accounting is a very serious problem for a large enterprise such as Sinosteel. The high-level staff at this state-owned enterprise and [governmental] audit firms are bound to have conspiracies. If bribery is investigated, a wider range of issues will surely be identified,” said professor Frank Xie at the University of South Carolina—Aiken’s School of Business.
Xie added, “We have reasons to suspect that other state-owned enterprises in China have the same problems.” Since China’s GDP is closely related to the performance of large state-owned enterprises, the GDP figure may be inflated.
“The world should call for a reevaluation of China’s GDP growth numbers,” he recommended.
Read the original Chinese article
