Trial of Compensation Cases for Civil Tort Involving Accounting Firms Engaging in the Audit Business

 2018-08-13  294


· Document Number:Judicial Interpretation No. 12 [2007] of the Supreme People’s Court

· Area of Law: Accounting Civil Law

· Level of Authority: Judicial Interpretation

· Date issued:06-11-2007

· Effective Date:06-15-2007

· Issuing Authority: Supreme People's Court

· Status: Effective

 

Announcement of the Supreme People's Court of the People's Republic of China
The Several Provisions of the Supreme People's Court on the Trial of Compensation Cases for Civil Tort Involving Accounting Firms Engaging in the Audit Business, which were adopted at the 1428th meeting of the Judicial Committee of the Supreme People's Court on June 4, 2007, are hereby promulgated and shall come into force as of June 15, 2007.
June 11, 2007
Several Provisions of the Supreme People's Court on the Trial of Compensation Cases for Civil Tort Involving Accounting Firms Engaging in the Audit Business
(Adopted at the 1428th meeting of the Judicial Committee of the Supreme People's Court on June 4, 2007 Judicial Interpretation No. 12 [2007] of the Supreme People's Court)
For the purpose of correctly hearing the compensation cases for civil tort involving accounting firms engaging in the audit business and protecting the public interests and the lawful rights and interests of the parties concerned, these Provisions are formulated in accordance the General Rules on the Civil Law of the People's Republic of China, the Law of the People's Republic of China on Certified Public Accountants, the Company Law of the People's Republic of China, the Securities Law of the People's Republic of China and other laws, and by taking the judicial practices into account.
Article 1 Where an interested party in interest lodges a lawsuit in the people's court for civil compensation on the grounds that an accounting firm has issued a false report for its engagement in the audit business as described in the Law on Certified Public Accountants and that the false report has incurred any loss to it, the people's court shall accept the lawsuit in pursuance of law.
Article 2 With regard to a natural person, legal person or any other organization that suffers any loss due to reasonable reliance upon or use of the false report issued by an accounting firm in doing a deal with the audited entity or in carrying out trading activities relating to the stocks or bonds of the audited entity, he or it shall be determined as an interested party as prescribed in the Law on Certified Public Accountants.
The audit report with any false record, misleading statement or serious omission, which is issued by an accounting firm in violation of the relevant laws and regulations, the practicing guidelines and rules worked out by the Chinese Institute of Certified Public Accounts and Approved by the finance department of the State Council, as well as the principle of good faith and fairness, shall be determined as a false report.
Article 3 If the interested party directly brings an action against the accounting firm rather than lodges a lawsuit against the audited entity, the people's court shall inform it that it should litigate against the accounting firm and the audited concurrently. If it refuses to litigate against the audited entity, the people's court shall notify the audited entity to participate in the litigation as a codefendant.
If the interested party lodges a lawsuit against any branch of the accounting firm, the people's court may list the accounting firm as a codefendant to participate in the lawsuit.
If the interested party alleges that any capital contributor of the audited entity makes any fake capital contribution or spirits away the registered capital and fails to replenish the registered capital afterwards, the people's court may list this capital contributor as a third party to participate in the litigation.
Article 4 Where an accounting firm engaging in the audit business issues a false report, which results in losses to the party interest, it shall bear the liability for compensation unless it can prove that it is not at fault.
When the accounting firm proves that it is at fault, it may submit to the people's court the practicing guidelines, rules, the working paper for audit relating to this case, etc.
Article 5 Where a certified public accountant engaging in audit business is under any of the circumstances, if he issues a false report which results in losses to the interested party, it shall be determined that the accounting firm and audited entity shall bear several and joint liabilities for the compensation.
(1) It maliciously colludes with the audited entity;
(2) Although knowing that the accounting treatment made by the audited entity regarding any important matter is contrary to the relevant provisions of the state, it fails to give a clear indication as such;
(3) Although knowing that the accounting treatment made by the audited entity will directly impair the interests of the interested party, it conceals it or makes a false report;
(4) Although knowing that accounting treatment made by the audited entity will lead to misunderstanding by the interested party, it fails to give a clear indication as such;
(5) Although knowing that the important items of any financial statement of the audited entity contain any false content, it fails to give a clear indication as such;
(6) It does not refuse the audited entity's hint of making a false report.
If the audited entity commits any of the acts as described in Items (2) through (5) of the preceding Paragraph, if the certified public account should know it under the practicing guidelines and rules, the people's court shall regard him as in the knowledge.
Article 6 If an accounting firm engaging in audit business issues a false report and causes losses to the interested party, the people's court shall determine its liability for compensation according to the seriousness of its fault.
Where a certified public accountant fails to keep necessary professional prudence, if he is under any of the following circumstances and produces any false report, the people's court shall determine that the accounting firm is at fault:
(1)Violating the provisions of Items (2) or (3) of Article 20 of the Law on Certified Public Accountants;
(2)The certified public accountant who is responsible for the audit practices with the professional level which is lower than that of an ordinary member of the sector;
(3)There is any obviously careless omission in the audit plan he makes;
(4)Failing to ute the necessary audit procedures under the practicing guidelines and rules;
(5)When he finds any trace of errors or fraudulent act, he fails to confirm or eliminate it by necessary audit procedures;
(6)Failing to reasonably employ the principle of importance as required in the practicing guidelines and rules;
(7)Failing to obtain adequate audit proofs through necessary investigation methods according to the audit requirements;
(8)Although knowing that he lack the ability to judge the specific audited objective which has significant impact on the overall conclusion, it fails to directly reach an audit conclusion without seeking the expert opinions;
(9)Making a wrong judgment about or assessment of the audit proofs; or
(10)Committing other acts in violation of the working procedure as prescribed in the practicing guidelines and rules.
Article 7 If the accounting firm can prove the existence of any of the following circumstances, it does not have to bear civil liability for compensation:
(1)It has already followed the working procedure as prescribed in the practicing guidelines and rules and has kept the required professional prudence, but it still fails to find the errors in the accounting materials audited by it;
(2)The financial entity or any other entity provides any false or untrue certifications document, on which the audit business must rest, or the accounting firm fails to find the falsehood or untruth thereof though it keeps necessary professional prudence;
(3)It has given a warning to the audited entity and has given a clear indication in the audit report;
(4)It has already made a check by following the capital verification procedures and has issued a report, but the entity spirits away the capital after the registration of capital;
(5)It issued a false report for any capital contributor who failed to make capital contribution or failed to make enough capital contribution at the time of registration, but the capital contributor has replenished enough capital after the registration.
Article 8 If the interested party knows the report issued by the accounting firm is untrue, but it still uses it, the people's court may mitigate the compensation liability of the accounting firm in light of the concrete circumstances.
Article 9 The counting firm's indications that “This report is intended merely for use in the annual inspection”, “This report is intended merely for use in the industrial and commercial registration” and other similar expressions in a report can not be regarded as a reason for exemption of its liability.
Article 10 When the people's court determines the compensation liability of the accounting firm on the basis of the severity of its fault in pursuance of Article 6 of these Provisions, it shall do as follows:
(1)It shall first let the audited entity to compensate for the losses of the interested party. Where a capital contributor of the audited entity makes any false capital contribution or untrue capital contribution or spirits away the capital and fails to replenish enough capital afterwards, if the property of the audited entity after enforcement according to law is still insufficient to compensate for the losses, the capital contributor shall bear the supplementary compensation liability to the extent of the amount of the false capital contribution or untrue capital contribution or capital spirited away.
(2)If the property of the audited entity and the property of the capital contributor are still insufficient to compensate for the losses after the mandatory execution according to law, the accounting firm shall bear the compensation liability to the extent of the untrue audit amount.
(3)The accounting firm's compensation liability for one or several parties in interest shall be limited to the audited untrue amount.
Article 11 If the accounting firm and any branch thereof are codefendants, the accounting firm shall bear several and joint liability for the compensation which its branch shall bear.
Article 12 If no judgment has been made about the disputes over the compensation involving an accounting firm, the people's court shall not add the accounting firm as an enforcee.
Article 13 These Provisions shall be implemented as of the date of promulgation. Any relevant provisions hitherto promulgated by this Court regarding the civil liabilities of accounting firms which conflict with these Provisions shall not be applicable any longer.
Where a final instance ruling has been made prior to the promulgation of the present Provisions and any party concerned pleads for trying or it is decided according to the trial supervision procedures to retry a compensation case for civil tort involving an accounting firm, the present Provisions shall not apply.
For the compensation cases for civil tort involving an accounting firm at the stage of the first or second instance after the present Provisions are promulgated, the present Provisions shall apply.