In 2018, SZSE-listed companies registered continued increase in operating revenues and steady operation in general, and displayed sound momentum while pursuing high-quality development. 85.48% of these companies made profits, 54.68% saw year-on-year growth in net profits, and 798 companies achieved more than 20% net profits increase, accounting for 37.01% of the total. Annual reports are a key part of the listed company information disclosure system, and their auditing is both an annual "body check" for those companies and a "major test" for financial regulation. By carefully implementing the work arrangements made by CSRC and focused on improving the quality of listed companies, SZSE centers on information disclosure and strives to comprehensively and properly audit all the annual reports of 2018. So far SZSE has issued nearly 1,000 inquiry letters on the annual reports, totaling more than 10,000 questions, and over 440 inquiry letters were made public. The SZSE spokesperson answered reporters' questions on issues that the market is concerned with.

1. What specific arrangements has SZSE made to well perform the annual report auditing of 2018?

Answer: In 2018, SZSE-listed companies showed some risks due to multiple factors, and the market paid close attention to SZSE's frontline oversight. When reviewing the annual reports, SZSE followed the work requirements of "four reverences" and "coordination", firmly remembered our initial intent and mission, and integrated regulatory efficiency with quality. On the basis of keeping the regulatory arrangements and auditing approaches consistent, we, by identifying risks and stressing inquiries about verity and compliance, urged the listed companies to fully disclose their information and reveal risks, and effectively protected medium and small investors' right to be informed. SZSE earnestly implemented the requirement to focus on the regulation on information disclosure.

First, risk identification and elimination is the solid support. Following the principle of "manage less, manage key areas, manage well", SZSE investigated risk companies and matters, focused on key companies and issues, and conducted targeted regulation according to different situations and with highlights. Regulation is more targeted. We used the classified regulation and evaluation system to classify corporate risks on more than 40 indicators, including corporate governance, standard operation, operating ability, profitability and solvency. Regulation is more forward-looking. We specifically sorted out high-risk matters of listed companies, such as making large provisions for goodwill impairments and sudden change in performance.

Second, classified regulation is the basic approach. By holding regulatory trainings, having talks and issuing letters of attention, SZSE made a point of reminding high-risk companies to carefully compile the annual reports and reveal information. We refined the differentiated auditing mode, exempting those companies with steady performance, standard operation and good information disclosure from the annual report auditing, but carried out "dual auditing + extra auditing by industrial teams" on high-risk companies. We also formed the expert review mechanism in such aspects as accounting, restructuring and corporate governance to strictly control the auditing quality.

Third, regulatory coordination is an important foundation. SZSE improved the "full regulatory chain" from non-field regulation to field inspection. Based on non-compliance leads discovered by a company's regulatory department through non-field regulation, the compliance check department should take the lead or cooperate with relevant securities regulatory bureaus to conduct field inspection to strengthen the weak links and form a closed loop. We intensified regulatory coordination, reported major emergencies in a timely manner and worked with securities regulatory bureaus to take corresponding measures. For instance, while handling embezzlement of funds, multiple measures were adopted in parallel, including inquiry letter issued by SZSE and talks with securities regulatory bureaus, so as to jointly urge majority shareholders to return the funds as soon as possible and protect investors' legal rights and interests.

Fourth, technology-based regulation is an effective means. SZSE continuously improved the annual report auditing aid system, effectively broke down the auditing steps and focuses, and left auditing marks in the whole process, making auditing more standard and effective. The "corporate portrait" intelligent regulation aid system was promoted, and technologies such as industrial analogy, associated analysis and text mining were applied to cross-validate and cross-check the information, find out information anomalies in the annual reports, and enhance the ability of finding clues, making analysis and judgment, and giving pre-warnings.

2. What issues did SZSE focus on in the review of annual reports 2018?

Answer: In the review of annual reports 2018, SZSE focused on six issues:

The first is the authenticity of the performance of listed companies. The capital market is one based on information, and the information about corporate performance is the benchmark for investors to determine a company's investment value. Considering the authenticity of the performance of listed companies as the core of the review, SZSE comprehensively analyzed the financial information through measures including vertical comparison of performance at different times, horizontal comparison of performance in industries, the articulation of accounting titles in the three major financial statements, i.e., balance sheet, income statement and cash flow statement, cross-validation of financial and non-financial information, etc. Anomalies in annual reports were subject to thorough investigation and leads of violations were followed up to provide investors with true and transparent information about listed companies and their compliance.

The second is about violations of laws and regulations such as embezzlement of funds, violations in guarantee, etc. Embezzlement of non-operating capital by majority shareholders and violations in guarantee are the red lines in supervision that should never be crossed. Since 2018, some majority shareholders of listed companies have ignored rules and investors, the cases of “taking advantage of listed companies” have risen, and the methods to do so have become more concealed and complicated. For example, SZSE noticed the high deposits and loans of *ST Kangdexin in review of its 2017 semi-annual report, and sent multiple letters to the company for clarification, including letter of enquiry on annual report, letter of concern, etc. Ultimately, *ST Kangdexin disclosed the fact that all of its capital had been pooled to the account of the controlling shareholder because of the Cooperation Agreement on Cash Administration between the controlling shareholder and a bank. SZSE promptly warned against and corrected the tunneling of controlling shareholders that had already been exposed, and urged the companies concerned to comprehensively investigate the reasons for embezzlement of funds and its impact. Each violation that has been discovered is addressed and strictly combated through a package of timely measures such as letters of concern or enquiry, disciplinary punishment, initiating an investigation, etc. SZSE will continue to pay close attention to cases including high deposits and loans, sudden increase in prepayments, related party transactions with doubtful fairness, etc. and follow up possible leads of securities violations. 

The third is about corporate governance. Judging from practice, the symptom of low-quality information disclosure and poor performance of listed companies is often highly correlated with imperfections in corporate governance and irregularities in their internal operations. SZSE took the review of annual reports as an opportunity to effectively promote the implementation of the newly revised Code of Corporate Governance for Listed Companies, and comprehensively examined the governance of listed companies, focusing on institutional development and the implementation, such as the compliance of dividend distribution schemes, the effectiveness of corporate internal control, and operation of the general meeting, the board of directors and the board of supervisors, fulfillment of responsibilities of the directors, supervisors and senior management, independence of listed companies, related party transactions, and peer competition.

The fourth is about M&A integration and the fulfillment of performance commitments. Reverence of professionalism and emphasis on main business are the foundation for the stable and long-term development of listed companies. In recent years, listed companies of SZSE have improved their quality and performance through mergers and acquisitions. SZSE has also paid close attention to whether the restructuring of companies can lead to effective integration and achieve synergies. First of all, SZSE paid attention to the integration effect, such as whether it can effectively participate in the operation of the general meeting, board of directors and board of supervisors of the underlying assets and the corporate governance, whether the underlying assets face risks of going "out of control". Second, SZSE strengthened the supervision on fulfilment of the performance commitments of the restructured underlying assets, and special attention was paid to enquiries concerning cases of accurate fulfillment of performance commitments and significant decline in performance after the payout period expired, etc. Third, SZSE paid close attention to the impairment of goodwill, and urged companies to conduct disclosure of impairment test information in strict accordance with the provisions of the Accounting Supervision Risk Warning No. 8: Goodwill Impairment. For example, in relation to the provision of large amount of goodwill impairment provision, companies are required to explain the rationality of the parameter selection during the impairment test, whether there is a big difference from the previous period, the specific calculation process and accuracy of the provision for impairment, etc.

The fifth is about information disclosure. SZSE paid attention to whether there was any major difference in performance between performance forecast, preliminary earnings report and annual reports. For example, when the audited net profit disclosed in the annual report of a manufacturing company was down by RMB2.5 billion from its performance forecast, SZSE inquired about the reasons for the serious deviation, whether the accounting was inaccurate, and whether there was a need to retroactively adjust the financial data of the previous year. Meanwhile, SZSE paid attention to the completeness of the information disclosure in annual reports of companies and whether they met the requirements of the disclosure rules. For example, when the income of a company in the film and TV industry from its online TV business, advertising business, and online payment service dropped by more than 30%, SZSE urged the company to make supplementary disclosure of the reasons for the significant change of data in accordance with the relevant provisions of annual reports. Other issues of major concern included whether there was fulfillment of disclosure obligation by replacement of periodic reports with interim reports in relation to related party transactions, litigation, guarantees, government subsidies, etc.

The sixth is the quality of intermediaries' service. Intermediaries, especially auditing institutions, are important "gatekeepers" in the capital market. Whether they have strictly performed their statutory duties such as verification and professional check is of vital importance to the quality of annual reports. At the beginning of 2019, in view of the major risks for companies in its supervision, SZSE issued 181 letters of concern to annual auditors of listed companies, urging the accountants to be diligent and prudent in their practice. Among the nearly 5,000 published questions in more than 440 inquiry letters concerning annual reports, more than 1,300 questions explicitly required intermediaries such as annual auditors, appraisers and independent financial advisers to provide verification opinions. More than 50 leads relating to supervision have been reported concerning doubts about the quality of auditing and appraisal institutions in the annual report review. In addition, SZSE paid special attention to the suitability of the audit opinion category. In particular, for some listed companies that were given qualified opinions due to limited audit scope, their annual auditors were required to further explain whether there was any situation involving replacement of other audit opinions with qualified opinions.

3. According to the review of the annual reports, how do you evaluate the quality of the 2018 annual reports of companies listed in SZSE?

Answer: According to the review results of the 2018 annual reports, the overall quality of information disclosure of listed companies has improved from previous years in respect of the readability and usefulness of information related to operation discussion and analysis, industry and social responsibility.

First, the discussion and analysis of business operation are more realistic. First, the operation in a wider range is covered. For example, a company in the household appliance industry has fully disclosed its independent product research and development, product technology and market performance, transformation of sales channels, industrial Internet innovation practices, and global business layout in 2018. Second, the development outlook is more pragmatic. For example, instead of generalities about its business plan in 2019, a real estate company has disclosed specific goals such as new construction area, completed area and contracted sales amount. Third, the risk warning is more in place. For example, a securities company has considered the increasing concentration in the industry and explained in detail the seven risks the company may face in its business activities and its response in the annual report.

Second, the usefulness of industry information is further enhanced. So far, SZSE has issued 22 industry information disclosure guidelines. Most companies have strictly disclosed the core terms according to the guidelines. The average implementation rate of industry guidelines was 90%, and the average implementation rate in the courier and the film and TV industry guides reached 100%. For example, a film and TV company disclosed in detail its film and television production plan, including the name of the work, the expected release time, the production progress, and the main cast members, which provided more useful and targeted information for investors to understand its basic information.

Third, the content of social responsibility is further enriched. Judging from the disclosure in 2018 annual reports, listed companies have effectively played the role of a "vanguard" in fulfilling social responsibility. The number of companies that disclosed the Corporate Social Responsibility Report in Shenzhen increased from 319 in 2016 to 368 in 2018. In 2018, 503 listed companies in Shenzhen disclosed poverty alleviation information, accounting for 23.47% of the companies that disclosed annual reports. The total amount of poverty alleviation funds and material reached RMB25.906 billion, delivering assistance to over 630,000 people. 677 listed companies disclosed in detail the major pollutants, total emissions, and excessive discharges, etc. in their 2018 annual reports.

4. What other measures will SZSE take to improve the quality of listed companies？

Answer: To improve the quality of listed companies is a primary objective of regulation. We carry out "health examination" of the quality of listed companies by reviewing their annual reports, and will take a variety of measures to help them to improve quality and increase efficiency, and beef up their ability to serve the real economy.

First, we will focus on both supervision and services, conduct special researches, and improve the quality of our services. Based on the annual reports of listed companies, we will carry out over 20 researches, with an emphasis on topics such as development of the technology and innovation industry, support for private enterprises in hardships, reform of state-owned enterprises, shift from old growth drivers towards new ones, and market-based reform with respect to M&As. Through researches, we will fathom out the actual situation of production and operation of listed companies, their explorations in making use of the capital market for transformation and development, and the difficulties and tough problems to be addressed without delay. On this basis, we will put forward the solutions, approaches and paths to facilitate decision-making.

Second, we will lay an equal emphasis on regulation and development, and see that all types of market players fulfill their responsibilities. By reviewing annual reports of listed companies from various angles, we can identify their problems, if any. For companies whose information disclosure is found incomplete and inadequate, we will urge them to meet their obligations of information disclosure, so that investors can be informed of the real situation and make sound investment decisions accordingly. For companies suspected of false and inaccurate statements, we will make further inquiries, require intermediary agencies to verify relevant information, and work with our regional bureaus to conduct spot checks to dive deeper into the issues. As for violations such as misleading guidance and embezzlement of non-operating assets, we have issued 24 notices of violations, and initiated administrative proceedings against nearly 90 violations.

Third, we will pay equal attention to information disclosure and governance, and conduct assessments on self-regulatory rules across the board. Following the principle of market-based regulation and rule of law, we are now assessing the suitability of the system of self-regulatory rules and revising them in an effort to improve the system of regulatory rules, of which the Rules Governing Share Listing and the Guidelines for the Standard Operation of Listed Companies are at the core, the business-specific information disclosure guidelines and industry-specific guidelines are two pillars, and business guides are the foundation. We will advance rule of law in regulation, strengthen compliance in operations, improve constraint mechanisms, underpin the "lifeline" of information disclosure, and corporate governance, and improve the quality of rules.

As a next step, we will make continued efforts to improve the quality of listed companies., earnestly perform our front-line regulatory responsibilities, improve the basic systems, guide listed companies to play a leading role, and urge them and their majority shareholders to safeguard the "four bottom lines" and conform to the "four reverences" requirements, to tell the truth, and to ensure integrity in accounting. We will urge all types of market players to stay true to their founding aspirations and fulfill their responsibilities, purify the market environment, build a sound ecosystem, and work to create a well-regulated, transparent, open, dynamic and resilient multi-layered capital market.