


































Economics, Law and Policy 
ISSN 2576-2060 (Print) ISSN 2576-2052 (Online) 

Vol. 7, No. 2, 2024 

www.scholink.org/ojs/index.php/elp 

9 
 

Original Paper 

Research on Legal Issues of Financial Fraud in Listed 

Companies 

Ke Zhang
1
 

1
 School of Marine Law and Humanities, Dalian Ocean University, Dalian, Liaoning, China 

 

Received: July 5, 2024        Accepted: July 15, 2024           Online Published: July 18, 2024 

doi:10.22158/elp.v7n2p9               URL: http://dx.doi.org/10.22158/elp.v7n2p9 

 

Abstract 

In the rapidly developing economy, with the increasing frequency of socio-economic activities, the 

number of listed companies is also growing. As an important part of China's non-state-owned economy, 

the information disclosure of listed companies is particularly important and serves as a crucial 

indicator for small and medium investors. However, in the prosperous market economy, some listed 

companies, in order to attract more investors, resort to financial fraud, such as issuing false invoices, 

creating fictitious transactions or related party transactions, and other means to inflate profits and 

deceive investors’ funds. This undoubtedly undermines China’s socio-economic order and reduces the 

public’s trust in the securities market. Due to the imperfect market economy rules, inadequate legal 

system, and incomplete internal control systems in China, financial fraud occurs very frequently. 

Financial fraud not only harms the interests of small and medium investors but also disrupts the social 

and economic order. Next, this paper will explore the means and motivations of financial fraud to delve 

into the essence of financial fraud. 

Keywords 

Listed Companies, Fraud Governance, Accounts Receivable 

 

1. Introduction 

Financial fraud is the act of altering financial statements to conceal or distort the true operating 

conditions of a company, colluding with external auditors or government inspectors, and using false 

financial statements to deceive users of the statements and the trust and funds of small and medium 

investors. Compared with companies that have not committed financial fraud, companies that have 

committed financial fraud will have significant differences in some financial ratio data. 

 

 



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The sales growth index is a very important symbolic data. When a company’s profitability declines, to 

avoid the risk of delisting, listed companies often engage in financial fraud. That is to say, when a 

company’s profits are decreasing, with high debt and slow profit growth, the company is more likely to 

engage in financial fraud. In today’s various entertainment companies, due to the rapid development of 

ACG and fan culture in previous years, the market has become overheated, and many large and small 

entertainment companies have been established in recent years, resulting in fierce market competition 

and a significant decline in profitability. 

To win the trust of creditors, sometimes to make the accounts look good, they will reduce the quality of 

assets to increase the amount of assets on the books. That is to say, companies with high leverage risk 

and low asset quality are more likely to have financial fraud. For example, many entertainment 

companies nowadays, due to the generalization of entertainment, have expanded the scope of their 

main business operations, and their current ratio and quick ratio are far from excellent. In this case, to 

win the favor of capital, to achieve the purpose of listing or not being delisted, these entertainment 

companies are at risk of financial fraud. 

The accounts receivable turnover rate is a key data point. If a listed company’s assets are mostly 

composed of accounts receivable, it is necessary to consider whether these accounts receivable are 

related to related party transactions. That is to say, when a listed company has too many accounts 

receivable, the possibility of financial fraud is greater. Many entertainment companies have the 

business of selling some figures or toys, and in the entire animation industry chain, the production and 

sales of figures and toys are the main source of profit for domestic entertainment companies. The sale 

of figures has uncertainty. When the animation characters are not popular or are boycotted, it is 

possible to commit fraud by increasing accounts receivable to increase revenue and profits. 

In summary, there are many traces to follow when judging whether a company has financial fraud. 

When conducting external audits, it is necessary to pay attention not only to the data on the financial 

statements but also to the financial ratios related to profitability, solvency, and asset operation. 

Comparing these ratios with those of companies in the same industry or of the same size, if there is a 

significant gap, it is necessary to pay more attention to whether the listed company has engaged in 

financial fraud. 

 

2. Means of Financial Fraud by Listed Companies 

2.1 Fraud through Fictitious Business 

By fabricating sales business, fictitious sales contracts, and issuing false invoices to commit fraud. By 

fabricating sales business, listed companies can inflate sales revenue, thereby achieving the purpose of 

fabricating revenue. Since the net profit obtained by an enterprise can be reflected through the net 

profit margin of operating income, when the net profit is low or the operating income is relatively high, 

there is a possibility of inflating sales revenue. However, after fabricating sales business, the 

corresponding bank deposits or accounts receivable should also change. When recording bank deposits, 



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in fact, this money has not been received. In order to make the accounts look normal, it is also 

necessary to increase some expenditure items, such as procurement business. In addition, in 

manufacturing enterprises, the subject of inventory should also change accordingly. When the 

enterprise’s inventory cannot form a counter price with the payment of fictitious sales business, 

production costs should also change. In some media industries, film and television industries, and other 

light asset industries, due to the different nature of the industry, a project can bring a lot of profit to the 

company. At this time, in order to avoid taxes, enterprises are very likely to commit financial fraud to 

evade taxes. 

2.2 Fraud by Inflating Fixed Assets 

In accounting, the interest on liabilities formed for the purchase or construction of fixed assets should 

be included in the cost of fixed assets. By capitalizing expenses that should be expensed, the 

company’s profit for the year is increased, and the expenses that should be expensed in the current year 

are deferred through depreciation to the following years. 

2.3 Confirming Revenue in Advance and Deferring the Recognition of Expenses 

The transaction is considered complete only when the ownership of the goods is completely transferred. 

Sometimes some listed companies will confirm revenue in advance, even if the ownership of the 

inventory has not been completely transferred, so as to increase profits by increasing income. They will 

also defer the recognition of some expenses that should be recognized in the current period, thereby 

increasing profits by reducing expenses. 

2.4 Under-provision or Non-provision of Bad Debt Provisions 

According to the requirements of accounting, the bad debt provisions made in this year should be 

directly offset against profits. Some listed companies, in order not to make profits negative, will 

under-provision or even not provide bad debt provisions, which will make profits artificially high, 

thereby achieving the company’s goals. 

2.5 Related Party Transactions 

Most listed companies will sign fictitious contracts with their related companies. These contracts are 

usually not signed at market prices, in order to transfer profits to the places they want to transfer, by 

under-recording or concealing accounts payable to increase profits. At the same time, related parties 

will also cooperate to implement this non-existent transaction. This method is often highly covert and 

not easy to be discovered. 

 

3. Analysis of the Motivation for Financial Fraud by Listed Companies 

3.1 Analysis based on the Inner Heart of the Person in Power 

In the audit process, attention should be paid to the company’s equity structure. Sometimes the 

executives hold shares, and since the executives are related to the company’s interests, they will 

restrain financial fraud to a certain extent. However, if the equity is too concentrated in a few people, 

especially in family businesses, it may breed financial fraud for personal or family interests. The 



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management, as the core of financial fraud, is generally a conspiracy of management personnel. The 

management, as the core of the company’s internal, to a certain extent, their power has not been 

effectively constrained. Although it is the financial personnel who carry out some financial fraud 

operations, it is generally impossible to carry out without the authorization or permission of the 

management. As the saying goes: “The higher the official, the more oppressive”. Due to the 

management’s excessive authority, the integrity of the accounting personnel’s professional ethics 

sometimes cannot be maintained. The CFO is the executor of the management’s collective will. 

Financial fraud is not only the personal behavior of the CFO but also the collective behavior of the 

company. The financial fraud of listed companies is a collective crime. 

3.2 Analysis from the Perspective of the External Market 

In the capital market, there are all kinds of financial frauds. In fact, in a market where bad money 

drives out good, it is difficult for listed companies to ensure their own purity. On the books, the 

financial statements of companies that have committed financial fraud are often more perfect than those 

of companies that have not committed financial fraud. Moreover, the investment market is now very 

hot, and we, as leeks, rush to the capital market like moths to a flame. At this time, listed companies 

with a perfect financial statement can win the favor of a large number of investors. In such a market 

where bad money drives out good, the listed companies that can survive better are usually not those 

that are serious about industry, but those that are good at swimming in the financial market. In this 

situation, financial fraud seems to have become a wealth password, in order to deceive the funds of 

small and medium investors, or to deceive the national subsidies, etc. Marx once said: “Capitalists are 

afraid of having no profit or too little profit, just as nature is afraid of a vacuum. Once there is an 

appropriate profit, capital becomes bold. If there is a 10% profit, capital will be used everywhere; with 

a 20% profit, capital can become active; with a 50% profit, capital will take risks; for a 100% profit, 

capital dares to trample on all human laws; with a profit of more than 300%, capital dares to commit 

any crime, even to risk hanging”. Undersuch temptation of interests, coupled with the failure of internal 

control systems and the imperfection of legal supervision systems, and the shareholders’ inability to 

effectively supervise the management due to information asymmetry and free-riding after the 

separation of property rights, are all reasons for financial fraud. 

3.3 Analysis from the Regulatory Level 

Financial fraud is usually an administrative penalty, and there is little involvement in criminal law. 

Because most financial frauds are fakes at various levels and do not involve the scope of “crime of 

disrupting the socialist market economic order” controlled by criminal law, even if financial fraud is 

discovered, compared with the benefits obtained by listed companies over the years, the cost of fraud is 

quite low, and low cost often stimulates the birth of financial fraud. For example, the financial 

inspection rate of IPO is only 5%, and the proportion of financial fraud found is very low. Even if it is 

discovered, it will not bring serious consequences. The current cases of profit manipulation found by 

regulators show that they only give orders to correct and give warning letters, without warning 



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penalties and fines. This has almost no major impact on the refinancing of the company after the fraud, 

nor does it have a great negative impact. Such a low cost can be exchanged for fraudulent listing, and 

can be exchanged for huge benefits in stock reduction, employee equity incentive costs, and other 

aspects. Even if the regulatory side gives the highest penalty, I believe there will still be many 

companies that choose to continue profit manipulation and financial fraud. 

3.4 Lack of Independence of External Audits 

The main work of accounting firms is to be responsible for the annual inspection of enterprises, 

financial statement audit, and capital verification. In the audit process, it may be because of the 

company’s obstruction, or because the project leader and the company’s executives have a close 

connection (audit collusion), which may lead to the audit report issued by the accounting firm lacking 

independence. For example, Zhengzhong Pearl River Accounting Firm has been issuing unqualified 

opinions for many years, and as a professional institution, and has been auditing Kangmei 

Pharmaceutical for so many years, it is impossible to have not found a clue, so it can be seen that 

Zhengzhong Pearl River Accounting Firm lacks professional ethics and independence in this business. 

Therefore, financial fraud not only brings huge economic losses to investors but also damages the 

reputation of securities regulatory departments and accounting firms, and the confidence of investors in 

investment is frustrated, and the normal market competition order is disrupted, resulting in a bad social 

impact. 

 

4. Strategies to Prevent Financial Fraud 

4.1 Building the Ideological and Moral Character and Legal Awareness of Accounting Personnel 

Most accounting personnel have to follow the arrangements of their leaders when working, whether for 

a living or for promotion. Accounting personnel often turn a blind eye to some illegal behaviors within 

the company, and even encourage the momentum of illegal behaviors. Cultivating the legal awareness 

of accounting personnel is to enable them to detect some illegal behaviors in their work, which can help 

relevant authorities to quickly discover and crack down on existing illegal crimes. For example, in the 

“Crime of Issuing Fake VAT Invoices for the Purpose of Defrauding Export Tax Rebates or Tax 

Deductions” in the criminal law, whether it is for oneself, for others, or letting others do it for oneself, 

accounting personnel are indispensable in the process of committing the crime. As the main responsible 

person, they play a role in making false accounts and signing and stamping on invoices, and as the 

main responsible person, they should bear the corresponding criminal responsibility. If there is enough 

legal awareness training for accountants, there may be accountants who dare to report such existing 

crimes, which can avoid national losses and disrupt the social and economic order. 

4.2 Maintain the Independence of External Inspectors 

In the process of discovering financial fraud in listed companies, external inspectors will play a 

significant role. An auditor or inspection agency that does not collude with listed companies is very 

important. It is necessary to maintain the independence of the audit and the purity of the inspection 



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agency, to strictly implement the avoidance system, and to prevent auditors or inspectors from 

colluding with listed companies to commit fraud together. Moreover, in the listed companies that 

commit fraud, it is also necessary to pay more attention to whether the company itself is involved in 

money laundering. After all, a large amount of liquid funds are needed in the process of committing 

fraud. In the process of financial fraud, money laundering may be involved. A lot of black money from 

the seven major upstream crimes of money laundering may be laundered through some companies and 

enterprises through false transactions, etc. It is necessary to strictly inspect the legality of the listed 

companies’ capital sources and the rationality of suspicious funds flowing through various related 

enterprises, whether it is simply for fraud or involving money laundering. At this time, whether the 

auditors, institutions, and inspectors can maintain their independence in the face of huge interests is 

crucial for maintaining the social and economic order. To maintain this independence, it is necessary to 

further improve the internal authority separation system of the audit institution or inspection agency, so 

that the personnel of each position can form effective checks and balances, and achieve complete and 

effective procedures. 

4.3 Improve the Legal System 

4.3.1 Update Laws and Regulations in a Timely Manner 

With the implementation of the new “Securities Law” in 2020, the new securities law has added a new 

Chapter 5, which is the new requirements for information disclosure, and added requirements for the 

quality of information disclosure, which requires truthfulness, accuracy, completeness, simplicity, 

clarity, and easy to understand, without false records, misleading statements, or significant omissions. 

The new requirements for information disclosure are higher for listed companies, not only to be true 

and effective but also to be easy to understand, which is a good thing for small and medium investors. 

The reports are easier to understand for them, which is a good thing, because the financial statements 

that were originally difficult to understand have become easier to understand. Article 80 of the new 

securities law also expands the scope of information disclosure, from the original five to the current 

twelve, and the matters that listed companies must disclose have increased, the quality of accounting 

information is higher, and the disclosure of accounting information is more transparent and timely, 

which is more helpful for ordinary investors to protect their rights and interests. 

4.3.2 Increase the Punishment for Financial Fraud 

The new securities law has also increased the fines for financial fraud behavior, from the original 

600,000 yuan to 10 million yuan. In China’s judicial practice, the chances of top-level cases are 

relatively small. From the original 600,000 yuan to the current 10 million yuan, this amount is a cost 

that listed companies that have obtained more benefits from financial fraud do not care about at all. 

Compared with the punishment for financial fraud in American law, China’s legal punishment for 

financial fraud is far from enough. For listed companies, even the punishment after the implementation 

of the new securities law is still a drop in the bucket. In my view, financial fraud is a very serious 

mistake, which seriously disrupts the social and economic order. The punishment for financial fraud 



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should also play a deterrent role. After all, one of the many functions of the law is to educate, to warn 

and warn ordinary people or violators themselves. Both the original securities law and the new 

securities law do not pose a great threat to listed companies. In addition, for such unit crime behavior, 

not only should the double penalty system be implemented, but restrictions should also be imposed on 

these companies that have been found to have financial fraud in the securities market through laws or 

administrative regulations, rather than just issuing warning letters or orders to correct. 

4.3.3 Accelerate the Application of Big Data in the Daily Business of Listed Companies 

With the advancement of the accounting computerization process, more and more companies choose to 

use financial software to replace manual accounting. The top ten IT information technologies that 

affected Chinese accounting practitioners in 2020 include financial cloud, electronic invoices, 

accounting big data technology, electronic archives, RPA, new generation ERP, etc. The application of 

big data has also reduced the work pressure of accounting personnel and made traditional financial 

fraud behavior face the impact of big data. In the daily management of enterprises, the use of financial 

software can make the company’s transactions controllable, thereby reducing financial fraud behavior. 

With the development of big data, the popularization of specific valuation methods can make each 

inventory have a basis for inquiry. Nowadays, most of the goods’ transportation depends on logistics, 

and combining with logistics information can eliminate some fictitious businesses from the source and 

reduce financial fraud. 

 

5. Discussion 

The prevalence of financial fraud within listed companies poses a significant threat to the integrity of 

China’s securities market and undermines investor confidence. The paper has thoroughly examined the 

various methods of financial fraud, highlighting the need for a robust approach to identify and combat 

these unethical practices. To address this issue, it is essential to enhance the ethical and legal awareness 

among accounting personnel, ensure the independence of external auditors, and continuously update 

and enforce regulations to increase the penalties for financial misconduct. The integration of big data 

into the daily operations of listed companies can also serve as a powerful tool to prevent financial fraud 

by improving transaction traceability and oversight. Ultimately, the paper calls for a concerted effort at 

both the corporate and national levels to foster a market environment that is transparent, regulated, and 

resistant to the corrupting influence of financial fraud. 

 

6. Conclusion 

Although financial fraud is common in listed companies, the behavior of financial fraud seriously 

damages China’s securities market and frustrates the confidence of investors. The methods of financial 

fraud are various, and exploring the methods of financial fraud by listed companies helps to rectify the 

current economic market atmosphere and make the operation of the economic market tend to be 

standardized. This paper believes that in order to rectify financial fraud behavior, it is necessary to 



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strengthen the construction of the ideological and moral character of accounting personnel, the 

cultivation of legal awareness; to maintain the independence of external audits and inspectors; to 

update laws and regulations in a timely manner, and to increase the punishment for financial fraud; to 

accelerate the application of big data in the daily business of listed companies. At the same time, at the 

national macro level, correct guidance should be carried out to minimize the disturbance of financial 

fraud behavior to China’s social and economic order. 

 

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