On July 24, the China Securities Regulatory Commission (CSRC) issued an administrative penalty decision (No. 26 of 2026) against PanGu Certified Public Accountants (Special General Partnership) and three certified public accountants. The CSRC investigated the firm's failure to exercise due diligence in providing audit services to Hainan Poly Pharmaceutical Co., Ltd. (formerly stock code 300630, delisted in May 2025). The investigation revealed the following violations:

1. False Statements in the 2021 and 2022 Annual Audit Reports Issued by PanGu

In a separate case, the CSRC found that from 2021 to 2022, Poly Pharmaceutical inflated revenue and profit by fabricating drug sales transactions and accounting for trade businesses where it lacked control using the gross method. This led to false statements in its 2021 and 2022 annual reports. PanGu, as the auditor for these years, issued unqualified audit opinions. The audit fees totaled RMB 2.1 million (excluding VAT). PanGu failed to exercise due diligence during the audit process, resulting in false statements in the reports. The signing CPAs for 2021 were Shi Qilin, Shen Xiaomin, and He Changjian; for 2022, they were Shi Qilin and Shen Xiaomin.

2. Failure to Exercise Due Diligence During the Audit of Poly Pharmaceutical's 2021 and 2022 Financial Statements

a) Failure to Maintain Professional Skepticism Regarding Abnormalities in Poly Pharmaceutical's Software Systems

During the audits, PanGu's working papers recorded information about payments and personnel related to Poly Pharmaceutical's deployment of certain software systems. PanGu failed to maintain reasonable skepticism, did not effectively verify the existence of these systems, and did not obtain sufficient and appropriate audit evidence. A separate CSRC investigation found that Poly Pharmaceutical used two sets of software systems to record financial and business data in 2021 and 2022, with significant discrepancies between the two.

b) Inadequate Audit Procedures for Revenue Recognition

i) Inadequate Procedures for Revenue Recognition

PanGu failed to effectively verify logistics numbers and other information obtained from Poly Pharmaceutical in conjunction with its revenue recognition policies, resulting in insufficient audit evidence. A separate CSRC investigation found that Poly Pharmaceutical fabricated drug revenue of RMB 436 million in 2021 and RMB 456 million in 2022, with the corresponding drugs never being shipped and no actual logistics.

ii) Inadequate Procedures for Revenue Reversal

Poly Pharmaceutical frequently recorded red-ink reversals in its main business revenue account for 2022. Reversals before the release of the 2021 financial statements accounted for about 5% of 2021 revenue, while total reversals for the year accounted for about 23% of 2022 revenue. PanGu failed to maintain professional skepticism about these abnormal large-scale red-ink reversals and did not obtain sufficient and appropriate audit evidence. A separate CSRC investigation found that 37% of Poly Pharmaceutical's fabricated revenue in 2021 was reversed in 2022 via red-ink entries.

c) Inadequate Implementation of Confirmation Procedures

During the 2021 and 2022 audits, PanGu's customer confirmation procedures had the following issues: First, it failed to maintain effective control over the confirmation process. After discovering that the contact information provided by Poly Pharmaceutical for sending confirmations did not match public records, PanGu only made phone calls to verify the contacts provided by Poly Pharmaceutical. This insufficient verification did not uncover inconsistencies between the sent confirmations and the customers' true information, including one fabricated revenue customer. Second, it failed to maintain professional skepticism regarding abnormal return confirmations. Abnormalities in 2021 included return senders sharing names with Poly Pharmaceutical employees, return addresses being residential areas or being smudged, different customers sharing the same return contact information, and the formatting of return confirmations differing from the sent ones. Abnormalities in 2022 included return senders sharing names with Poly Pharmaceutical employees, return addresses being residential areas, and multiple customers' returns being sent from the same address.

PanGu's actions violated several provisions of the Chinese Institute of Certified Public Accountants' auditing standards, including No. 1101, No. 1141, No. 1211, No. 1301, and No. 1312.

The CSRC concluded that PanGu, as the auditor for Poly Pharmaceutical's 2021 and 2022 financial statements, failed to exercise due diligence as required by professional standards, resulting in false statements in the audit reports. This violated Article 163 of the Securities Law and constitutes a situation under Article 213, Paragraph 3. Shi Qilin, Shen Xiaomin, and He Changjian were identified as the directly responsible supervisors.

In their defense submissions, Shen Xiaomin and He Changjian argued that they strictly followed auditing standards, actively cooperated with the regulatory investigation, and that the penalties were excessive. They requested exemption from punishment or a lighter sanction. After review, the CSRC determined that the evidence sufficiently proved the false statements in the audit reports and the failure to exercise due diligence. The CSRC stated that it had fully considered the circumstances mentioned by the parties and found the penalties to be appropriate. Therefore, their defenses were rejected.

Based on the facts, nature, severity, and social harm of the violations, the CSRC decided:

1. To order PanGu Certified Public Accountants (Special General Partnership) to rectify the issue, confiscate audit fee income of RMB 2.1 million, and impose a fine of RMB 4.2 million.

2. To issue warnings to Shi Qilin and Shen Xiaomin and impose fines of RMB 600,000 each.

3. To issue a warning to He Changjian and impose a fine of RMB 300,000.

According to public information, Poly Pharmaceutical was listed in March 2017. Due to financial fraud triggering mandatory delisting for major violations, it was formally delisted from the Shenzhen Stock Exchange on May 22, 2025.