The watchdog of China's stock market, the China Securities Regulatory Commission (CSRC) was taken to court yesterday by the Henan-based Huawei Accounting Consultation Company.

The company was fined 300,000 yuan (US$36,100) by the CSRC for allegedly failing to detect false financial information in a listed company's books.

The first hearing was held at the Beijing No 1 Intermediate People's Court yesterday but no decision was made.

This is the first time for the CSRC to be prosecuted by an accounting firm for listed companies and the seventh administrative charge against the CSRC since 2001, according to Lin Minhua, chief judge of the administrative division under the court, which has jurisdiction over the CSRC.

"Our client, the Zhengzhou Yutong Coach Stock Company should be fully responsible for the false financial report, not us,'' said the plaintiff's indictment.

The Yutong company colluded with its bank and gave false bank statements to the accounting firm, according to the plaintiff.

CSRC confiscated the Henan Huawei Accounting Consultation Company's alleged "illegal income'' of 300,000 yuan (US$36,100) in 2002, as Huawei did not fulfil its duty in auditing the 1999 yearend report of the listed Yutong Company in 2001, according to sources with the CSRC.

After auditing the financial report the CSRC found that the Yutong Company had placed the figure of its debt at 135 million yuan (US$16 million) less than the real figure to cover up its real financial condition, in an attempt to meet the requirements of issuance.

Huawei applied to the CSRC for administrative re-examination and CSRC made a decision in March, affirming the original punishment.

The Huawei Company launched its lawsuit against the CRSC, as it refused to accept the decision of the administrative body.

The plaintiff also claimed that the fine of 300,000 yuan (US$36,100) was more than the alleged "illegal profits,'' cited by the CSRC. "The real amount is less than 100,000 yuan (US$12,100), as the rest is operation fees and taxes,'' read the indictment.

In its defence statement, the CSRC responded that although it was unaware of the false materials provided by Yutong Company, the plaintiff is in fact responsible as the firm did not pay enough attention to the many questionable details of Yutong's financial statement in its audit.

For example, the bank statement provided by the Yutong company to the plaintiff had obviously been doctored but the plaintiff did not question it and incorporated it directly in its audit, which resulted in the inaccurate audit, according to the defendant.

"The plaintiff cannot be exempted from responsibility for the audit because of the faulty statements of the Yutong Company,'' the defendant argued.

According to the Regulation on Stock Circulation and Transaction Management, accounting firms that prepare inaccurate documents will have their illegal income confiscated and they will be fined.

"So the punishment is proper and the application of law is correct,'' claimed the defence of the accused.

The CRSC has lost two of the six previous lawsuits it has been involved in.

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