Financial Fraud, Audit Failure, and Regulatory Implications under the Registration-Based System: A Case Study of Zeda Yisheng

Abstract

As the most emblematic case of financial fraud on the STAR Market following the implementation of the registration-based system, the Zeda Yisheng incident involved comprehensive accounting fraud throughout the IPO process by the prospective listed company, ultimately resulting in the mandatory revocation of its listing status by regulatory authorities. This case extends beyond the company itself to involve multiple types of securities intermediaries. More critically, it exposes numerous loopholes in the STAR Market's listing review process and the practice of certified public accountants, providing a valuable reference case for analyzing false accounting disclosures and inadequate auditing in China's A-share securities market. This paper takes the Zeda Yisheng violation case as its research subject, employing a case study methodology to systematically trace the chronological development of its financial fraud and its core operational techniques. It examines the specific mechanisms used to inflate main business revenue under fabricated business scenarios and, based on the securities regulatory authorities' penalty decision, delves into the underlying reasons why the audit firm failed to exercise due professional care. This detailed examination of the case not only enriches the theoretical framework and empirical evidence in detecting accounting fraud in securities markets but also offers valuable insights for improving the oversight of securities intermediaries' professional conduct, refining the exit mechanisms for listed companies, and strengthening investor protection systems. Analysis reveals that Zeda Yisheng deliberately constructed a fraudulent chain involving fabricated contracts, false documents, and circular fund flows to intentionally inflate revenue scale and profit metrics during the reporting period. The auditors' failure to properly execute key verification procedures—such as examining purchase and sales contracts and verifying original documents like waybills—was the fundamental factor leading to the misrepresentation in the audit opinion. The strict legal punishment in this case and the subsequent settlement of the investor class action lawsuit fully demonstrate the regulatory authorities' firm stance on cracking down on securities violations and ensuring the orderly operation of the capital market. It also sends a crucial warning to all market participants that they must adhere to compliance standards.